10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

o Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the transition period from                     to                    

Commission File Number: 0 – 13305

PARALLEL PETROLEUM CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

1004 N. Big Spring, Suite 400
Midland, Texas	79701
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (432) 684-3727

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

Common Stock, $.01 par value
Common Stock Purchase Warrants
Rights to Purchase Series A Preferred Stock
(Title of Class)

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o      No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o       No þ

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

Yes þ      No o

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ      Accelerated Filer o      Non-Accelerated Filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

     The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant as of February 21, 2007 was approximately $668,471,227 million, based on the closing price of the common stock on the same date.

     At February 21, 2007 there were 37,547,010 shares of common stock outstanding.

FORM 10-K

PARALLEL PETROLEUM CORPORATION

TABLE OF CONTENTS

Item No.	Page
PART I
Item 1. Business		1
Item 1A. Risk Factors		13
Item 1B. Unresolved Staff Comments		23
Item 2. Properties		23
Item 3. Legal Proceedings		25
Item 4. Submission of Matters to a Vote of Security Holders		26
PART II
Item 5. Market for Registant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		27
Item 6. Selected Financial Data		28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		44
Item 8. Financial Statements and Supplementary Data		47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		47
Item 9A. Controls and Procedures		47
Item 9B. Other Information		49
PART III
Item 10. Directors, Executive Officers and Corporate Governance		50
Item 11. Executive Compansation		54
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		79
Item 13. Certain Relationships and Related Transactions, and Director Independence		81
Item 14. Principal Accountant Fees and Services		84
PART IV
Item 15. Exhibits and Financial Statement Schedules		85
Bylaws
Purchase Warrant Agreement
First Amendment to Warrant Agreement
1998 Stock Option Plan
Incentive and Retention Plan
Guaranty
Third Amended and Restated Pledge Agreement
Second Lien Guarantee and Collateral Agreement
Consent of BDO Seidman, LLP
Consent of Cawley Gillespie & Associates, Inc.
Certification of Principal Executive Officer Pursuant to Section 302
Certification of Principal Financial Officer Pursuant to Section 302
Certification of Principal Executive Officer Pursuant to Section 906
Certification of Principal Financial Officer Pursuant to Section 906

 (i)

Cautionary Statement Regarding Forward -Looking Statements

     Some statements contained in this Annual Report on Form 10-K are “forward-looking statements”. These forward-looking statements relate to, among others, the following:

• our future financial and operating performance and results;

• our business strategy;

• market prices;

• sources of funds necessary to conduct operations and complete acquisitions;

• development costs;

• number and location of planned wells;

• our future commodity price risk management activities; and

• our plans and forecasts.

     We have based these forward-looking statements on our current assumptions, expectations and projections about future events.

     We use the words “may”, “will”, “expect”, “anticipate,” “estimate”, “believe”, “continue”, “intend”, “plan”, “budget”, “future”, “reserves” and other similar words to identify forward-looking statements. These statements also involve risks and uncertainties that could cause our actual results or financial condition to materially differ from our expectations. We believe the assumptions and expectations reflected in these forward-looking statements are reasonable. However, we cannot give any assurance that our assumptions and expectations will prove to be correct or that we will be able to take any actions that are presently planned. All of these statements involve assumptions of future events and risks and uncertainties. Risks and uncertainties associated with forward-looking statements include, but are not limited to:

• fluctuations in prices of oil and natural gas;

• demand for oil and natural gas;

• losses due to potential or future litigation;

• future capital requirements and availability of financing;

• geological concentration of our reserves;

• risks associated with drilling and operating wells;

• competition;

• general economic conditions;

• governmental regulations;

• receipt of amounts owed to us by purchasers of our production and counterparties to our derivative contracts;

• decisions to either enter into derivative contracts or not;

• events similar to September 11, 2001;

• actions of third party co-owners of interests in properties in which we also own an interest;

• fluctuations in interest rates;

• weaknesses in our internal controls; and

• the inherent variability in early production tests.

 (ii)

     For these and other reasons, actual results may differ materially from those projected or implied. We believe it is important to communicate our expectations of future performance to our investors. However, events may occur in the future that we are unable to accurately predict, or over which we have no control. We caution you against putting undue reliance on forward-looking statements or projecting any future results based on such statements.

     Before you invest in our common stock, you should be aware that there are various risks associated with an investment. We have described some of these risks in other sections of this Annual Report on Form 10-K and under Item 1A. Risk Factors, beginning on page 13.

 (iii)

PART I

ITEM 1. BUSINESS

About Our Company

     Parallel Petroleum Corporation, or “Parallel” and its subsidiaries are engaged in the acquisition, development and exploitation of long life oil and natural gas reserves and, to a lesser extent, the exploration for new oil and natural gas reserves. The majority of our current producing properties are in the:

• Permian Basin of west Texas and New Mexico;

• Fort Worth Basin of north Texas; and

• the onshore gulf coast area of south Texas.

     In 2006, we spent approximately $195.4 million on oil and natural gas related capital expenditures, an increase of approximately 153 % over that expended in 2005 (See Note 3 to the Consolidated Financial Statements). This amount includes approximately $23.4 million of acquisition costs for additional interests we acquired in our Harris San Andres properties in January 2006. We had previously acquired interests in these same properties in November 2005 for approximately $20.8 million. Also included in our 2006 capital expenditures is $6.1 million for additional interests acquired in our Barnett Shale gas project.

     Throughout this report, we refer to some terms that are commonly used and understood in the oil and natural gas industry. These terms are:

• Bbl or Bbls — barrel or barrels of oil or other liquid hydrocarbons;

• Bcf — billion cubic feet of natural gas;

• BOE — equivalent barrel of oil or 6 Mcf of natural gas for one barrel of oil;

• MBbls — thousand barrels of oil or other liquid hydrocarbons;

• MBoe — thousand barrels of oil equivalent;

• MMBbls — million barrels of oil or other liquid hydrocarbons;

• MMBoe — million barrels of oil equivalent;

• MMBtu — million British thermal units;

• Mcf — thousand cubic feet of natural gas; and

• MMcf — million cubic feet of natural gas.

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

     Our executive offices are located at 1004 N. Big Spring, Suite 400, Midland, Texas 79701. Our telephone number is (432) 684-3727.

Available Information

     You may read and copy any materials we file with, or furnish to, the Securities and Exchange Commission at the SEC’s public reference facilities at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers, including Parallel, that file electronically with the SEC.

(1)

     Our website address is http://www.plll.com. Information on our website or any other website is not incorporated by reference into this Annual Report on Form 10-K and does not constitute a part of this Annual Report on Form 10-K.

     We make available free of charge on our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

     We will provide electronic or paper copies of our SEC filings free of charge upon request made to Cindy Thomason, Manager of Investor Relations, cindyt@plll.com, 1-800-299-3727.

Developments in 2006; 2007 Capital Budget

     On August 16, 2006, we sold 2,500,000 shares of our common stock in a public offering at a price of $25.25 per share. Gross cash proceeds were approximately $63.1 million, and net proceeds were approximately $60.3 million. The proceeds were used for general corporate purposes, including debt repayment and the acceleration of our drilling and completion operations in core areas of our operations, including our Barnett Shale and New Mexico Wolfcamp gas projects and our oil properties in the Permian Basin of west Texas.

     Our 2007 capital investment budget for properties we owned at February 15, 2007 is estimated to be approximately $155.6 million, which includes $14.0 million for the purchase of leasehold and seismic in our areas of activity. The budget will be funded from our estimated operating cash flows and our bank borrowings. If our cash flows and bank borrowings are not sufficient to fund all of our estimated capital expenditures, we may fund any shortfall with proceeds from the sale of our debt or equity securities, reduce our capital budget or effect a combination of these alternatives. The amount and timing of our expenditures are subject to change based upon market conditions, results of expenditures, new opportunities and other factors.

Proved Reserves as of December 31, 2006

     Cawley Gillespie & Associates, Inc., our independent petroleum engineers, estimated the total proved reserves attributable to all of our oil and natural gas properties to be approximately 28.7 MMBbls of oil and approximately 58.9 Bcf of natural gas as of December 31, 2006.

     Approximately 75% of our proved reserves are oil and approximately 51% are categorized as proved developed reserves.

About Our Strategy and Business

     From 1993 until mid 2002, our activities were concentrated in the onshore gulf coast area of south Texas. In June 2002, we reexamined and revised our business strategy. We shifted the balance of our investments from properties having high rates of production in early years to properties with more consistent production over a longer term. We now emphasize reducing drilling risks by dedicating a smaller portion of our capital to high risk projects, while reserving the majority of our available capital for acquisition, exploitation, enhancement and development drilling opportunities. Obtaining positions in long-lived oil and natural gas reserves is given priority over properties that might provide more cash flow in the early years of production, but which have shorter reserve lives. Our risk reduction efforts also include emphasizing acquisition possibilities over high risk exploration projects.

     Since the latter part of 2002, we have reduced the emphasis on high risk exploration efforts and we now focus primarily on established geologic trends where we can better utilize the engineering, operational, financial and technical expertise of our entire staff. Although we expect to continue participating in exploratory drilling activities from time to time, reducing financial, reservoir, drilling and geological risks and diversifying our property portfolio are the principal criteria in the execution of our business plan.

     In summary, our current business plan:

• focuses on projects having less geological risk;

• emphasizes acquisition, exploitation, development and enhancement activities;

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• includes the utilization of horizontal and fracture stimulation technologies on certain types of reservoirs;

• focuses on acquiring producing properties; and

• expands the scope of our operations by diversifying our exploratory and development efforts, both in and outside of our current core areas of operation.

     An integral part of our business strategy includes exploitation and enhancement activities. Exploitation and enhancement activities include:

• operational enhancements, such as surface facility reconfiguration, and the installation of new or additional compression equipment;

• workovers;

• well recompletions;

• behind-pipe recompletions;

• refracing (restimulating a producing formation within an existing wellbore to enhance production and add reserves);

• installation of injection wells and related facilities;

• development well drilling (infill drilling);

• cost reduction programs; and

• secondary recovery operations, including waterfloods.

     When we initiate exploitation and enhancement activities on our existing producing properties, we first establish and maintain an ongoing program of oil and natural gas well reviews with the objective of maximizing the production from existing wells. Oil and natural gas wells usually generate their highest volumes during the earlier stages of production after which production begins to decline. Enhancement and remedial work can be undertaken to restore varying amounts of lost production or reduce the rate of production decline.

     Our approach to producing property acquisitions, and the size and timing of any acquisition, is dependent upon market conditions in the domestic oil and natural gas industry. Generally, during periods of moderate to high prices for oil and natural gas, we believe that oil and natural gas acquisition opportunities are not as favorable to a prospective purchaser as they are when market conditions are depressed.

     Producing properties that we identify and attempt to acquire will include properties that have proved undeveloped and behind-pipe reserves, operational enhancement potential, long-lived reserves, multiple pay-zone exploitation and development drilling opportunities. We believe that selecting and acquiring producing properties having these characteristics will diversify and improve the overall quality of our property portfolio.

     Although purchases of producing properties involve less risk than drilling, there is a risk that estimates of future prices or costs, reserves, production rates or other criteria upon which we have based our investment decision may prove to be inaccurate.

     In addition to acquisitions of producing properties, our business strategy also includes seeking opportunities to negotiate and enter into “work to earn”, joint venture and similar agreements with third parties for development operations on producing properties.

     Our sources for possible acquisitions of leases and prospects include independent landmen, independent oil and natural gas operators, geologists and engineers. We also evaluate properties that become available for purchase. If our review of an undeveloped lease or prospect or a producing property indicates that it may have geological characteristics favorable for 3-D seismic analysis, we may decide to acquire a working interest in the property or an

(3)

option to acquire a working interest. In the case of producing properties, we also seek properties that we believe are underperforming relative to their potential. To reduce our financial exposure in any one prospect, we generally enter into co-ownership arrangements with third parties. These arrangements are common in the industry and enable us to participate in more prospects and share the drilling and related costs and dry-hole risks with other participants. From time to time, we sell prospects to third parties or farm-out prospects and retain an interest in revenues from these prospects.

     As we have in the past, we continue to:

     (1) Use Horizontal Drilling and Fracture Stimulations - We believe the use of horizontal drilling and fracture stimulations have enabled us to develop reserves economically such as our Barnett Shale and Wolfcamp gas projects.

     (2) Use Advanced Technologies - We believe the use of 3-D seismic surveys, horizontal drilling, fracture stimulation and other advanced technologies are useful risk management tools that help reduce the normal drilling and operations risks associated with our day-to-day activities. We believe that our use of these technologies in exploring for, developing and exploiting oil and natural gas properties can:

• reduce drilling risks;

• lower finding costs;

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

• increase the probability of locating and producing reserves that might not otherwise be discovered.

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

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

     (3) Serve as Geophysical Operator - We prefer to serve as the geophysical operator for projects located in areas where we have experience using 3-D seismic technology. By doing so, we control the design, acquisition, processing and interpretation of 3-D surveys and, in most cases, determine drilling locations and well depths. The integrity of 3-D seismic analysis in our projects is enhanced by emphasizing quality controls throughout the data acquisition, processing and interpretation phases.

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

     (4) Conduct Exploratory Activities - Although we do not emphasize exploratory drilling to the extent we have in the past, when we do undertake exploratory projects, we will continue to focus on prospects:

• having known geological and reservoir characteristics;

• being in close proximity to existing wells so data from the existing wells can be correlated with seismic data on or near the prospect being evaluated; and

• having a potentially meaningful impact on our reserves.

(4)

Drilling Activities in 2006

     The following table shows our gross and net wells drilled, by geographic area, during 2006.

					Number of Wells
			Number of		Drilling or		Gross
	Depth		Gross		Waiting on Completion		Productive		Gross
Area	Range (feet)		Wells Drilled		at December 31, 2006		Wells		Dry Wells
North Texas
Barnett Shale		7,000 - 8,000		13		2		11		0
Permian Basin of west Texas and New Mexico
Carm-Ann/Means		4,000 - 4,500		15		2		13		0
Harris		4,000 - 4,500		30		3		27		0
Fullerton		4,000 - 5,000		6		0		6		0
Wolfcamp Gas		4,300 - 4,500		59		16		42		1
Diamond M (Deep )		6,500 - 7,000		2		0		2		0
Onshore Gulf Coast of Texas		—
Frio/Yegua/Wilcox		5,000 - 10,000		4		0		2		2
Cotton Valley		16,000 - 18,000		1		1		0		0
Utah		4,000 - 5,000		1		0		0		1
				131		24		103		4

Drilling and Acquisition Costs

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

	Year Ended December 31,
	2006		2005		2004		2003		2002
	($ in thousands)
Proved property acquisition costs	$	27,370	$	23,763	$	39,763	$	2,209	$	48,044
Unproved property acquisition costs		30,058		11,743		7,400		3,831		2,295
Exploration costs		71,003		15,455		6,794		3,240		1,291
Development costs		66,965		26,390		13,954		5,650		9,308
	$	195,396	$	77,351	$	67,911	$	14,930	$	60,938

Current Drilling Projects

     Summarized below are our more significant current projects, including our capital budget for these projects in 2007:

     Resource Natural Gas Projects

     We have two resource natural gas projects in varying stages of development. They are the Barnett Shale gas project in the Fort Worth Basin of north Texas and the Wolfcamp gas project in the Permian Basin of New Mexico. These resource natural gas projects generated approximately 34% of our fourth quarter 2006 daily production (2,055 BOE per day) and represented approximately 9% of our total proved reserve value as of December 31, 2006.

     We have budgeted approximately $125.4 million for these two resource natural gas projects in 2007 for the drilling and completion of approximately 86 new gross wells, leasehold acquisition, pipeline construction and pipeline compression.

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Fort Worth Basin of North Texas and Permian Basin of New Mexico

     • Barnett Shale Gas Project, Tarrant County, Texas – This project generated approximately 17% of our fourth quarter 2006 daily production (1,013 BOE per day) and represented approximately 4% of our total proved reserve value as of December 31, 2006.

     Our leasehold position in the Barnett Shale gas project includes approximately 19,000 gross (5,100 net) acres. We have budgeted approximately $49.0 million for this project in 2007 for the drilling and completion of 34 new gross wells, pipeline construction and leasehold acquisition. As of January 25, 2007, there were 5 drilling rigs running and 2 wells awaiting completion and pipeline connection in the Barnett Shale gas project.

     • Wolfcamp Gas Project, Eddy and Chavez Counties, New Mexico – This project generated approximately 17% of our fourth quarter 2006 daily production (1,042 BOE per day) and represented approximately 5% of our total proved reserve value as of December 31, 2006.

     Our New Mexico Wolfcamp gas project consists of three areas of mutual interest in which the primary target is the Wolfcamp formation at a depth of approximately 4,500 feet. Our leasehold position in the project includes approximately 152,000 gross (63,000 net) acres. We anticipate participating in the drilling of approximately 52 horizontal wells in New Mexico during 2007. If all of these wells are drilled, we will serve as operator of 40 wells, and 12 will be non-operated. We have budgeted approximately $76.4 million for this project in 2007 to fund the drilling and related leasing and infrastructure activity.

     Permian Basin of West Texas

     The Permian Basin of west Texas generated approximately 55% of our fourth quarter 2006 daily production (3,358 BOE per day) and represented approximately 87% of our total proved reserve value as of December 31, 2006. Our significant producing properties in the Permian Basin of west Texas are described below.

     • Fullerton San Andres Field, Andrews County, Texas – This non-operated property generated approximately 25% of our fourth quarter 2006 daily production (1,544 BOE per day) and represented approximately 33% of our total proved reserve value as of December 31, 2006.

     We have budgeted approximately $1.2 million to fund 18 re-fracs in 2007. Our average working interest in the Fullerton properties is approximately 82%.

     • Carm-Ann San Andres Field / N. Means Queen Unit, Andrews & Gaines Counties ,Texas – These properties generated approximately 9% of our fourth quarter 2006 daily production (560 BOE per day) and represented approximately 14% of our total proved reserve value as of December 31, 2006.

     We have budgeted approximately $8.1 million for the Carm-Ann/N. Means Queen properties in 2007 for 16 re-fracs and 12 new infill wells. Our average working interest in these properties is approximately 77%.

     • Harris San Andres Field, Andrews and Gaines Counties, Texas – These properties represented approximately 10% of our fourth quarter 2006 daily production (608 BOE per day) and represented approximately 23% of our total proved reserve value as of December 31, 2006.

     We have budgeted approximately $8.5 million for the Harris San Andres properties in 2007 for 16 re-fracs and 12 new drills.

     • Diamond M Canyon Reef Unit, Scurry County, Texas – This property generated approximately 5% of our fourth quarter 2006 daily production (301 BOE per day) and represented approximately 8% of our total proved reserve value as of December 31, 2006.

     A total of $6.5 million has been budgeted in 2007 to fund the workover of 6 wells, the drilling of 9 new wells, the processing and interpretation of a new 3-D seismic survey and associated equipment upgrades. Our average working interest in these properties is approximately 66% above the contractual base volumes associated with our work-to-earn arrangement with Southwestern Energy Company.

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     Onshore Gulf Coast of South Texas

     • Yegua/Frio/Wilcox Gas Project, Jackson, Wharton and Liberty Counties, Texas – This project generated approximately 10% of our fourth quarter 2006 daily production (629 BOE per day) and represented approximately 3% of our total proved reserve value as of December 31, 2006.

     We have budgeted approximately $1.7 million for the Yegua/Frio/Wilcox gas project in 2007 for the drilling and completion of 2 wells.

     Other Projects

     • Utah/Colorado CBM (Coal Bed Methane) Gas/Conventional Oil and Natural Gas Projects, Uinta Basin – This project does not yet contribute to our current daily production or reserve value.

     As of December 31, 2006, our leasehold acreage position in this project was approximately 160,000 gross (152,000 net) acres. It is a multiple zone project consisting of both oil and natural gas targets at a depth of less than 6,000 feet. Seismic and geological data evaluation on this project continues.

     We have budgeted approximately $3.9 million for the Utah/Colorado CBM gas project in 2007 for drilling and completion of 2 wells and the acquisition of additional 3-D seismic surveys and additional leasehold.

Oil and Natural Gas Prices

     The average wellhead prices we received for the oil and natural gas we produced in 2006, 2005 and 2004 are shown in the table below.

	Average Price Received for the
	Year Ended December 31,
	2006		2005		2004
Oil (Bbl)	$	59.86	$	51.78	$	39.05
Natural gas (Mcf)	$	6.19	$	8.54	$	5.85

     The average price we received for our oil sales at February 1, 2007 was approximately $54.49 per Bbl. At the same date, the average price we were receiving for our natural gas was approximately $6.27 per Mcf.

     There is substantial uncertainty regarding future oil and natural gas prices and we can provide no assurance that prices will remain at current levels. We have entered into derivative contracts in an attempt to reduce the risk of fluctuating oil and natural gas prices.

Employees and Consultants

     At February 1, 2007, we had 41 full time employees. Mr. Cambridge, Chairman of the Board of Directors, serves in the capacity of a consultant and not as a full-time employee. We also retain independent land, geological, geophysical, engineering, drilling and financial consultants from time to time and expect to continue to do so in the future. Additionally, we retain contract pumpers on a month-to-month basis.

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

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Wells Drilled

     The following table shows certain information concerning the number of gross and net wells we drilled during the three-year period ended December 31, 2006.

	Exploratory Wells (1)								Development Wells (2)
Year Ended	Productive				Dry				Productive				Dry
December 31,	Gross		Net		Gross		Net		Gross		Net		Gross		Net
2006		5.0		2.87		3.0		1.42		122.0		68.4		1.00		0.08
2005		21.0		5.32		6.0		0.64		48.0		27.5		—		—
2004		17.0		1.68		4.0		0.95		50.0		31.8		—		—

(1)	An exploratory well is a well drilled to find and produce oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a known reservoir.
(2)	A development well is a well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

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

     At February 1, 2007, we were participating in the completion of 8 gross (3.53 net) wells, 6 gross (1.60 net) wells were awaiting completion and 9 gross (3.04 net) wells were in process of drilling.

Volumes, Prices and Lifting Costs

     The following table shows certain information about our oil and natural gas production volumes, average sales prices per Mcf of natural gas and Bbl of oil and the average lifting (production) cost per BOE for the three-year period ended December 31, 2006.

	Year Ended December 31,
	2006		2005		2004
	(in thousands, except per unit data)
Production, Prices and Lifting Costs:
Oil (Bbls)		1,137		923		729
Natural gas (Mcf)		6,539		3,592		2,690
BOE		2,227		1,522		1,177
Oil price (per Bbl)(1)	$	59.86	$	51.78	$	39.05
Natural gas price (per Mcf)(1)	$	6.19	$	8.54	$	5.85
BOE price(1)	$	48.73	$	51.57	$	37.55
Average Lifting Cost (including production taxes) per BOE	$	9.91	$	9.24	$	8.06

⁽¹⁾ Average price received at the wellhead for our oil and natural gas.

     In 2006, approximately 51% of the volume of our production was oil and 49% was natural gas. The majority of the oil production is from our Permian Basin longer-lived oil assets. The majority of the natural gas production is from our Barnett Shale and Wilcox assets.

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     The following table summarizes our revenues by product sold for each year in the three year period ended December 31, 2006.

	2006			2005			2004
	($ in thousands)
Oil revenue	$	68,076		$	47,800		$	28,455
Effect of oil hedges		(11,512	)		(12,139	)		(7,458	)
Natural gas revenue		40,461			30,690			15,735
Effect of natural gas hedges		—			(201	)		(895	)
	$	97,025		$	66,150		$	35,837

     Our oil sales in 2006 represented approximately 63% of our combined oil and natural gas revenues (not considering the effect of hedging) for the year ended December 31, 2006, as compared to 61% in 2005, and 64% in 2004.

Markets and Customers

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

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

	2006			2005			2004
Allegro Investments, Inc.		(1)			14	%		22	%
Conoco, Inc.		20	%		12	%		(1)
Texland Petroleum, Inc.		30	%		40	%		43	%
Tri-C Resources, Inc.		12	%		(1)			(1)
Dale Op erating Comp any		10	%		(1)			(1)

⁽¹⁾ Less than 10%.

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

     Our future ability to market our oil and natural gas production depends upon the availability and capacity of natural gas gathering systems and pipelines and other transportation facilities. We are not obligated to provide a fixed or determinable quantity of oil and natural gas under any existing arrangements or contracts.

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

Office Facilities

     Our principal executive offices are located in Midland, Texas, where we lease approximately 22,200 square feet of office space at 1004 North Big Spring, Suite 400, Midland, Texas 79701. Our current rental rate is $16,650 per month. The lease expires on February 28, 2010.

     We have two field offices and storage facilities. These two offices are located in Andrews and Snyder, Texas. The current monthly rental rate is $750 for the Andrews office and $1,200 for the Snyder office. The Andrews office lease expires December 1, 2007. The Snyder office lease expires upon the cessation of production from the Diamond “M” area wells.

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Competition

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

     We are also affected by competition for drilling rigs and the availability of related equipment. With relatively high oil and natural gas prices, the oil and natural gas industry typically experiences shortages of drilling rigs, equipment, pipe and qualified field personnel. Although we are unable to predict when or to what extent our exploration and development activities will be affected by rig, equipment or personnel shortages, we have recently experienced, and continue to experience, delays in some of our planned activities and operations because of these shortages.

     Intense competition among independent oil and natural gas producers requires us to react quickly to available exploration and acquisition opportunities. We try to position for these opportunities by maintaining:

• adequate capital resources for projects in our core areas of operations;

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

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

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

• leasehold prospects under which oil and natural gas reserves may be discovered or developed;

• drilling rigs and related equipment to explore for such reserves; and

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

Oil and Natural Gas Regulations

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

• price controls;

• taxes; and

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

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

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

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

• the unitization of pooling of oil and natural gas properties;

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

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

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

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

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

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

Environmental Regulations

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

• require prior governmental authorization for certain activities;

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

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

• provide significant penalties for noncompliance.

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

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cost to comply with applicable regulations that require a response to the discharge, such as claims by neighboring landowners, regulatory agencies or other third parties for costs of:

• containment or cleanup;

• personal injury;

• property damage; and

• penalties assessed or other claims sought for natural resource damages.

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

•	Water. The Oil Pollution Act, or OPA, was enacted in 1990 and amends provisions of the Federal Water Pollution Control Act of 1972 (FWPCA) and other statutes as they pertain to prevention of and response to major oil spills. The OPA subjects owners of facilities to strict, joint and potentially unlimited liability for removal costs and certain other consequences of an oil spill, where such spill is into navigable waters, or along shorelines. In the event of an oil spill into such waters, substantial liabilities could be imposed upon us. States in which we operate have also enacted similar laws. Regulations are currently being developed under the OPA and similar state laws that may also impose additional regulatory burdens on us.
	The FWPCA imposes restrictions and strict controls regarding the discharge of produced waters, other oil and gas wastes, any form of pollutant, and, in some instances, storm water runoff, into waters of the United States. The FWPCA provides for civil, criminal and administrative penalties for any unauthorized discharges and, along with the OPA, imposes substantial potential liability for the costs of removal, remediation or damages resulting from an unauthorized discharge. State laws for the control of water pollution also provide civil, criminal and administrative penalties and liabilities in the case of an unauthorized discharge into state waters. The cost of compliance with the OPA and the FWPCA have not historically been material to our operations, but there can be no assurance that changes in federal, state or local water pollution control programs will not materially adversely affect us in the future. Although no assurances can be given, we believe that compliance with existing permits and compliance with foreseeable new permit requirements will not have a material adverse effect on our financial condition or results of operations.
•	Solid Waste. We generate non-hazardous solid waste that fall under the requirements of the Federal Resource Conservation and Recovery Act and comparable state statues. The EPA and the states in which we operate are considering the adoption of stricter disposal standards for the type of non-hazardous waste we generate. The Resource Conservation and Recovery Act also governs the generation, management, and disposal of hazardous wastes. At present, we are not required to comply with a substantial portion of the Resource Conservation and Recovery Act requirements because our operations generate minimal quantities of hazardous wastes. However, it is anticipated that additional wastes, which could include wastes currently generated during operations, could in the future be designated as hazardous wastes. Hazardous wastes are subject to more rigorous and costly disposal and management requirements than are non-hazardous wastes. Such changes in the regulations may result in us incurring additional capital expenditures or operating expenses.
•	Superfund. The Comprehensive Environmental Response, Compensation, and Liability Act, sometimes called CERCLA or Superfund, imposes liability, without regard to fault or the legality of the original act, on certain classes of persons in connection with the release of a hazardous substance into the environment. These persons include the current owner or operator of any site where a release historically occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of our ordinary operations, we may have managed substances that may fall within CERCLA’s definition of a hazardous substance. We may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites where

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we disposed of or arranged for the disposal of these substances. This potential liability extends to properties that we owned or operated as well as to properties owned and operated by others at which disposal of our hazardous substances occurred.

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

ITEM 1A. RISK FACTORS

     The following should be considered carefully with the information provided elsewhere in this Annual Report on Form 10-K in reaching a decision regarding an investment in our common stock.

Risks Related to Our Business

The volatility of the oil and natural gas industry may have an adverse impact on our operations.

     Our revenues, cash flows and profitability are substantially dependent upon prevailing prices for oil and natural gas. In recent years, oil and natural gas prices and, therefore, the level of drilling, exploration, development and production, have been extremely volatile. Any significant or extended decline in oil or natural gas prices will have a material adverse effect on our business, financial condition and results of operations and could impair access to future sources of capital. Volatility in the oil and natural gas industry results from numerous factors over which we have no control, including:

• the level of oil and natural gas prices, expectations about future oil and natural gas prices and the ability of international cartels to set and maintain production levels and prices;

• the cost of exploring for, producing and transporting oil and natural gas;

• the level and price of foreign oil and natural gas transportation;

• available pipeline and other oil and natural gas transportation capacity;

• weather conditions;

• international political, military, regulatory and economic conditions;

• the level of consumer demand;

• the price and the availability of alternative fuels;

• the effect of worldwide energy conservation measures; and

• the ability of oil and natural gas companies to raise capital.

Significant declines in oil and natural gas prices for an extended period may:

• impair our financial condition, liquidity, ability to finance planned capital expenditures and results of operations;

• reduce the amount of oil and natural gas that we can produce economically;

• cause us to delay or postpone some of our capital projects;

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• reduce our revenues, operating income and cash flow; and

• reduce the recorded value of our oil and natural gas properties.

     No assurance can be given that current levels of oil and natural gas prices will continue. We expect oil and natural gas prices, as well as the oil and natural gas industry generally, to continue to be volatile.

We must replace oil and natural gas reserves that we produce. Failure to replace reserves may negatively affect our business.

     Our future performance depends in part upon our ability to find, develop and acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves decline as they are depleted and we must locate and develop or acquire new oil and natural gas reserves to replace reserves being depleted by production. No assurance can be given that we will be able to find and develop or acquire additional reserves on an economic basis. If we cannot economically replace our reserves, our results of operations may be materially adversely affected and our stock price may decline.

We are subject to uncertainties in reserve estimates and future net cash flows.

     There is substantial uncertainty in estimating quantities of proved reserves and projecting future production rates and the timing of development expenditures. No one can measure underground accumulations of oil and natural gas in an exact way. Accordingly, oil and natural gas reserve engineering requires subjective estimations of those accumulations. Estimates of other engineers might differ widely from those of our independent petroleum engineers, and our independent petroleum engineers may make material changes to reserve estimates based on the results of actual drilling, testing, and production. As a result, our reserve estimates often differ from the quantities of oil and natural gas we ultimately recover. Also, we make certain assumptions regarding future oil and natural gas prices, production levels, and operating and development costs that may prove incorrect. Any significant variance from these assumptions could greatly affect our estimates of reserves, the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery, and estimates of the future net cash flows. Some of our reserve estimates are made without the benefit of a lengthy production history and are calculated using volumetric analysis. Those estimates are less reliable than estimates based on a lengthy production history. Volumetric analysis involves estimating the volume of a reservoir based on the net feet of pay and an estimation of the productive area.

     The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net cash flows from our proved reserves on prices and costs in effect on the day of estimate. However, actual future net cash flows from our oil and natural gas properties also will be affected by factors such as:

• actual prices we receive for oil and natural gas;

• the amount and timing of actual production;

• supply and demand of oil and natural gas;

• limits of increases in consumption by natural gas purchasers; and

• changes in governmental regulations or taxation.

     The timing of both our production and our incurrence of expenses in connection with the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general.

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Competition in the oil and natural gas industry is intense, and many of our competitors have greater financial, technological and other resources than we do.

     We operate in the highly competitive areas of oil and natural gas acquisition, development, exploitation, exploration and production. The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. We face intense competition from independent, technology-driven companies as well as from both major and other independent oil and natural gas companies in each of the following areas:

• seeking to acquire desirable producing properties or new leases for future exploration;

• marketing our oil and natural gas production;

• integrating new technologies; and

• seeking to acquire the equipment and expertise necessary to develop and operate our properties.

     Many of our competitors have financial, technological and other resources substantially greater than ours, and some of them are fully integrated oil and natural gas companies. These companies may be able to pay more for development prospects and productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Further, these companies may enjoy technological advantages and may be able to implement new technologies more rapidly than we can. Our ability to develop and exploit our oil and natural gas properties and to acquire additional properties in the future will depend upon our ability to successfully conduct operations, implement advanced technologies, evaluate and select suitable properties and consummate transactions in this highly competitive environment.

We do not control all of our operations and development projects.

     Substantially all of our business activities are conducted through joint operating agreements under which we own partial interests in oil and natural gas wells.

     At December 31, 2006, we owned interests in 489 gross (376.42 net) oil and natural gas wells for which we were the operator and 936 gross (317.03 net) oil and natural gas wells where we were not the operator. Included in these wells are 383 gross (162.43 net) wells which are shut in or temporarily abandoned and 222 gross (120.61 net) injection wells.

     Whether or not we hold a majority working or operating interest in our oil and natural gas projects, we may not be in a position to remove the operator in the event of poor performance and we may not have control over normal operating procedures, expenditures or future development of underlying properties. The failure of an operator of our wells to adequately perform operations, or an operator’s breach of the applicable agreements, could reduce our production and revenues. The success and timing of our drilling and development activities on properties operated by others therefore depends upon a number of factors outside of our control, including the operator’s:

• timing and amount of capital expenditures;

• expertise and financial resources;

• inclusion of other participants in drilling wells; and

• use of technology.

Our business involves many operating risks, which may result in substantial losses, and insurance may be unavailable or inadequate to protect us against these risks.

     Our operations are subject to hazards and risks inherent in drilling for, producing and transporting oil and natural gas, such as:

• fires;

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• natural disasters;

• explosions;

• pressure forcing oil or natural gas out of the wellbore at a dangerous velocity coupled with the potential for fire or explosion;

• weather;

• failure of oilfield drilling and service equipment and tools;

• changes in underground pressure in a formation that causes the surface to collapse or crater;

• pipeline ruptures or cement failures;

• environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases; and

• availability of needed equipment at acceptable prices, including steel tubular products.

Any of these risks can cause substantial losses resulting from:

• injury or loss of life;

• damage to and destruction of property, natural resources and equipment;

• pollution and other environmental damage;

• regulatory investigations and penalties;

• suspension of our operations; and

• repair and remediation costs.

     We do not insure against the loss of oil or natural gas reserves as a result of operating hazards or insure against business interruption. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operations.

The oil and natural gas industry is capital intensive.

     The oil and natural gas industry is capital intensive. We make substantial capital expenditures for the acquisition, exploration for and development of oil and natural gas reserves.

     Historically, we have financed capital expenditures primarily with cash generated by operations, proceeds from bank borrowings and sales of our equity securities. In addition, we have sold and may consider selling additional assets to raise additional operating capital. From time to time, we may also reduce our ownership interests in our projects in order to reduce our capital expenditure requirements.

     Our cash flow from operations and access to capital is subject to a number of variables, including:

• our proved reserves;

• the level of oil and natural gas we are able to produce from existing wells;

• the prices at which oil and natural gas are sold; and

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

     Any one of these variables can materially affect our ability to borrow under our revolving credit facility.

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     If our revenues or the borrowing base under our revolving credit facility decreases as a result of lower oil and natural gas prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to undertake or complete future drilling projects. We may, from time to time, seek additional financing, either in the form of increased bank borrowings, sale of debt or equity securities or other forms of financing and there can be no assurance as to the availability of any additional financing upon terms acceptable to us.

There are risks in acquiring producing properties, including difficulties in integrating acquired properties into our business, additional liabilities and expenses associated with acquired properties, diversion of management attention, increasing the scope, geographic diversity and complexity of our operations and incurrence of additional debt.

     Our business strategy includes growing our reserve base through acquisitions. Our failure to integrate acquired businesses successfully into our existing business, or the expense incurred in consummating future acquisitions, could result in unanticipated expenses and losses. In addition, we may assume cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions. The scope and cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition.

     We are continually investigating opportunities for acquisitions. In connection with future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Our ability to make future acquisitions may be constrained by our ability to obtain additional financing.

     Possible future acquisitions could result in our incurring additional debt, contingent liabilities and expense, all of which could have a material adverse effect on our financial condition and operating results.

The marketability of our natural gas production depends on facilities that we typically do not own or control.

     The marketability of our natural gas production depends in part upon the availability, proximity and capacity of natural gas gathering systems, pipelines and processing facilities. We generally deliver natural gas through natural gas gathering systems and natural gas pipelines that we do not own. Our ability to produce and market natural gas on a commercial basis could be harmed by any significant change in the cost or availability of such systems and pipelines.

If we default under either our revolving credit facility or our term loan facility, the lenders could foreclose on, and acquire control of, substantially all of our assets.

     The lenders under our two credit facilities have liens on substantially all of our assets. Additionally, both credit facilities restrict our ability to obtain additional financing, make investments, lease equipment, sell assets and engage in business combinations. We are also required to comply with certain financial covenants and ratios under these facilities. As a result of the liens held by our lenders, if we fail to meet our payment or other obligations under either credit facility, including our failure to meet any of the required financial covenants or ratios, the lenders would be entitled to foreclose on substantially all of our assets and liquidate those assets.

We are subject to many restrictions under our two credit facilities.

     As required by our revolving credit facility and term loan facility with our bank lenders, we have pledged substantially all of our producing oil and natural gas properties as collateral to secure the payment of our indebtedness. Both credit facilities restrict our ability to obtain additional financing, make investments, lease equipment, sell assets and engage in business combinations. We are also required to comply with certain financial covenants and ratios. Although we were in compliance with these covenants at December 31, 2006, in the past we have had to request waivers from our banks because of our non-compliance with certain financial covenants and ratios. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants under either credit facility could result in a default under both credit facilities, which could cause all of our existing indebtedness to be immediately due and payable.

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     Our revolving credit facility limits the amounts we can borrow to a borrowing base amount, determined by the lenders in their sole discretion, based upon projected revenues from the oil and natural gas properties securing our loan. The lenders can unilaterally adjust the borrowing base and the borrowings permitted to be outstanding under the revolving credit facility. Any increase in the borrowing base requires the consent of all lenders. If all lenders do not agree on an increase, then the borrowing base will be the lowest borrowing base determined by any lender. Outstanding borrowings in excess of the borrowing base must be repaid immediately, or we must pledge other oil and natural gas properties as additional collateral. We do not currently have any substantial properties that are not pledged and no assurance can be given that we would be able to make any mandatory principal prepayments required under the revolving credit facility.

Our producing properties are geographically concentrated.

     A substantial portion of our proved oil and natural gas reserves are located in the Permian Basin of west Texas and eastern New Mexico. Specifically, at December 31, 2006, approximately 92% of the discounted present value of our proved reserves were located in the Permian Basin. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production from these wells due to mechanical problems, damages to the current producing reservoirs, significant governmental regulation, including any curtailment of production, or interruption of transportation of oil or natural gas produced from the wells.

Our derivative activities create a risk of financial loss.

     In order to manage our exposure to price risks in the marketing of our oil and natural gas, we have in the past and expect to continue to enter into oil and natural gas price risk management arrangements with respect to a portion of our expected production. We use derivative arrangements such as swaps, puts and collars that generally result in a fixed price or a range of minimum and maximum price limits over a specified time period. Certain derivative contracts may limit the benefits we could realize if actual prices received are above the contract price. In a typical derivative transaction utilizing a swap arrangement, we will have the right to receive from the counterparty the excess of the fixed price specified in the contract over a floating price based on a market index, multiplied by the quantity identified in the derivative contract. If the floating price exceeds the fixed price, we are required to pay the counterparty this difference multiplied by the quantity identified in the derivative contract. Derivative arrangements could prevent us from receiving the full advantage of increases in oil or natural gas prices above the fixed amount specified in the derivative contract. In addition, these transactions may expose us to the risk of financial loss in certain circumstances, including instances in which:

• the counterparties to our future contracts fail to perform under the contract; or

• a sudden, unexpected event materially impacts oil or natural gas prices.

     In the past, some of our derivative contracts required us to deliver cash collateral or other assurances of performance to the counterparties in the event that our payment obligations exceeded certain levels. Future collateral requirements are uncertain but will depend on arrangements with our counterparties and highly volatile oil and natural gas prices.

We are subject to complex federal, state and local laws and regulations that could adversely affect our business.

     Extensive federal, state and local regulation of the oil and natural gas industry significantly affects our operations. In particular, our oil and natural gas exploration, development and production are subject to stringent environmental regulations. These regulations have increased the costs of planning, designing, drilling, installing, operating and abandoning our oil and natural gas wells and other related facilities. These regulations may become more demanding in the future. Matters subject to regulation include:

• permits for drilling operations;

• drilling bonds;

• spacing of wells;

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• unitization and pooling of properties;

• environmental protection;

• reports concerning operations; and

• taxation.

     Under these laws and regulations, we could be liable for:

• personal injuries;

• property damage;

• oil spills;

• discharge of hazardous materials;

• reclamation costs;

• remediation and clean-up costs; and

• other environmental damages.

     Failure to comply with these laws and regulations also may result in the suspension or terminations of our operations and subject us to administrative, civil and criminal penalties. Further, these laws and regulations could change in ways that substantially increase our costs. Any of these liabilities, penalties, suspensions, terminations or regulatory changes could make it more expensive for us to conduct our business or cause us to limit or curtail some of our operations.

Declining oil and natural gas prices may cause us to record ceiling test write-downs.

     We use the full cost method of accounting to account for our oil and natural gas operations. This means that we capitalize the costs to acquire, explore for and develop oil and natural gas properties. Under full cost accounting rules, the capitalized costs of oil and natural gas properties may not exceed a ceiling limit, which is based on the present value of estimated future net revenues, net of income tax effects, from proved reserves, discounted at 10%, plus the lower of cost or fair market value of unproved properties. These rules generally require pricing future oil and natural gas production at unescalated oil and natural gas prices in effect at the end of each fiscal quarter, with effect given to cash flow hedge positions. If our capitalized costs of oil and natural gas properties, as adjusted for asset retirement obligations, exceed the ceiling limit, we must charge the amount of the excess against earnings. This is called a ceiling test write-down. This non-cash impairment charge does not affect cash flow from operating activities, but it does reduce stockholders’ equity. Generally, impairment charges cannot be restored by subsequent increases in the prices of oil and natural gas.

     The risk that will be required to write down the carrying value of our oil and natural gas properties increases when oil and natural gas prices decline. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves.

     We did not recognize an impairment in 2006. We cannot assure you that we will not experience ceiling test write-downs in the future.

Terrorist activities may adversely affect our business.

     Terrorist activities, including events similar to those of September 11, 2001, or armed conflict involving the United States may adversely affect our business activities and financial condition. If events of this nature occur and persist, the resulting political and social instability could adversely affect prevailing oil and natural gas prices and cause a reduction in our revenues. In addition, oil and natural gas production facilities, transportation systems and storage facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our operations is destroyed or damaged. Costs associated with insurance and other security

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measures may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.

We are highly dependent upon key personnel.

     Our success is highly dependent upon the services, efforts and abilities of key members of our management team. Our operations could be materially and adversely affected if one or more of these individuals become unavailable for any reason.

     We do not have employment agreements or long term contractual arrangements with any of our officers or other key employees. In periods of improving market conditions, our ability to obtain and retain qualified consultants on a timely basis may be adversely affected.

     Our future growth and profitability will also be dependent upon our ability to attract and retain other qualified management personnel and to effectively manage our growth. There can be no assurance that we will be successful in doing so.

Part of our business is seasonal in nature.

     Weather conditions affect the demand for and price of oil and natural gas and can also delay drilling activities, temporarily disrupting our overall business plans. Demand for oil and natural gas is typically higher during winter months than summer months. However, warm winters can also lead to downward price trends. As a result, our results of operations may be adversely affected by seasonal conditions.

Our oil and natural gas operations are subject to many inherent risks.

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

     Our operations are subject to all of the operating hazards and risks normally incident to drilling for and producing oil and natural gas. These hazards and risks include, but are not limited to:

• encountering unusual or unexpected formations and pressures;

• explosions, blowouts and fires;

• pipe and tubular failures and casing collapses;

• environmental pollution; and

• personal injuries.

     Any one of these potential hazards could result in accidents, environmental damage, personal injury, property damage and other harm that could result in substantial liabilities to us.

     As is customary in the industry, we maintain insurance against some, but not all, of these hazards. We maintain general liability insurance and obtain Operator’s Extra Expense insurance on a well-by-well basis. We carry insurance against certain pollution hazards, subject to our insurance policy’s terms, conditions and exclusions. If we sustain an uninsured loss or liability, our ability to operate could be materially adversely affected.

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

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Failure to maintain effective internal controls could have a material adverse effect on our operations.

     Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these assessments. Effective internal controls are necessary for us to produce reliable financial reports. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial reports, our business decision process may be adversely affected, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the price of our stock could decrease as a result.

Restrictive debt covenants could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.

     Our revolving credit facility and second lien term loan facility contain a number of significant covenants that, among other things, restrict our ability to:

• dispose of assets;

• incur additional indebtedness;

• use our retained earnings and net income for payment of dividends on our common stock;

• create liens on our assets;

• enter into specified investments or acquisitions;

• repurchase, redeem or retire our capital stock or other securities;

• merge or consolidate, or transfer all or substantially all of our assets and the assets of our subsidiaries;

• engage in specified transactions with subsidiaries and affiliates; or

• engage in other specified corporate activities.

     Also, our credit facilities require us to maintain compliance with specified financial ratios and satisfy certain financial condition tests. Our ability to comply with these ratios and financial condition tests may be affected by events beyond our control, and we cannot assure you that we will meet these ratios and financial condition tests. These financial ratio restrictions and financial condition tests could limit our ability to obtain future financing, make needed capital expenditures, withstand a future downturn in our business or economy in general or otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of the limitations that the restrictive covenants under the credit facilities impose on us. A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could result in a default under the credit facilities. A default, if not cured or waived, could result in acceleration of all indebtedness outstanding under the credit facilities. The accelerated debt would become immediately due and payable. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us.

We do not pay dividends on our common stock.

     We have never paid dividends on our common stock, and do not intend to pay cash dividends on the common stock in the foreseeable future. Net income from our operations, if any, will be used for the development of our business, including capital expenditures and to retire debt. Any decisions to pay dividends on the common stock in the future will depend upon our profitability at the time, the available cash and other factors. Our ability to pay dividends on our common stock is further limited by the terms of our revolving credit facility and our second lien term loan facility.

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Our stockholders’ rights plan, provisions in our corporate governance documents and Delaware law may delay or prevent an acquisition of Parallel, which could decrease the value of our common stock.

     Our certificate of incorporation, our bylaws and the Delaware General Corporation Law contain provisions that may discourage other persons from initiating a tender offer or takeover attempt that a stockholder might consider to be in the best interest of all stockholders, including takeover attempts that might result in a premium to be paid over the market price of our stock.

     On October 5, 2000, our Board of Directors adopted a stockholder rights plan. The plan is designed to protect Parallel from unfair or coercive takeover attempts and to prevent a potential acquirer from gaining control of Parallel without fairly compensating all of the stockholders. The plan authorized 50,000 shares of $0.10 par Series A Preferred Stock Purchase Rights. A dividend of one Right for each share of our outstanding common stock was distributed to stockholders of record at the close of business on October 16, 2000. If a public announcement is made that a person has acquired 15% or more of our common stock, or a tender or exchange offer is made for 15% of more of the common stock, each Right entitles the holder to purchase from the company one one-thousandth of a share of Series A Preferred Stock, at an exercise price of $26.00 per one one-thousandth of a share, subject to adjustment. In addition, under certain circumstances, the rights entitle the holders to buy Parallel’s stock at a 50% discount. We are authorized to issue 10.0 million shares of preferred stock; there are no outstanding shares as of December 31, 2006. Our Board of Directors has total discretion in the issuance and the determination of the rights and privileges of any shares of preferred stock which might be issued in the future, which rights and privileges may be detrimental to the holders of the common stock. It is not possible to state the actual effect of the authorization and issuance of a new series of preferred stock upon the rights of holders of the common stock and other series of preferred stock unless and until the Board of Directors determines the attributes of any new series of preferred stock and the specific rights of its holders. These effects might include:

• restrictions on dividends on common stock and other series of preferred stock if dividends on any new series of preferred stock have not been paid;

• dilution of the voting power of common stock and other series of preferred stock to the extent that a new series of preferred stock has voting rights, or to the extent that any new series of preferred stock is convertible into common stock;

• dilution of the equity interest of common stock and other series of preferred stock; and

• limitation on the right of holders of common stock and other series of preferred stock to share in Parallel’s assets upon liquidation until satisfaction of any liquidation preference attributable to any new series of preferred stock.

     The issuance of preferred stock in the future could discourage, delay or prevent a tender offer, proxy contest or other similar transaction involving a potential change in control of Parallel that might be viewed favorably by stockholders.

Future sales of our common stock could adversely affect our stock prices.

     Substantial sales of our common stock in the public market, or the perception by the market that those sales could occur, may lower our stock price or make it difficult for us to raise additional equity capital in the future. These potential sales could include sales of our common stock by our directors and officers, who beneficially owned approximately 7.49% of the outstanding shares of our common stock as of February 15, 2007.

Our business can be adversely impacted by downward changes in oil and natural gas prices, and most significantly by declines in oil prices.

     Our revenues, cash flows and profitability are substantially dependent on prevailing oil and natural gas prices, which are volatile. Declines in oil and natural gas prices would not only reduce revenue, but could reduce the amount of oil and natural gas that we can produce economically and, as a result, could have a material adverse effect on our financial condition, results of operations and reserves. Further, oil and natural gas prices do not necessarily move in tandem. Because approximately 84% of our estimated future net revenues from our proved reserves at December 31, 2006 are from oil production, we will be more affected by movements in oil prices.

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The price of our common stock may fluctuate which may cause our common stock to trade at a substantially lower price than the price which you paid for our common stock.

     The trading price of our common stock and the price at which we may sell securities in the future is subject to substantial fluctuations in response to various factors, including any of the following: our ability to successfully accomplish our business strategy; the trading volume in our stock; changes in governmental regulations; actual or anticipated variations in our quarterly or annual financial results; our involvement in litigation; general market conditions; the prices of oil and natural gas; our ability to economically replace our reserves; announcements by us and our competitors; our liquidity; our ability to raise additional funds; and other events.

If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.

     The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, there are many large, well-established, publicly traded companies active in our industry and market, which may mean that it is less likely that we will receive widespread analyst coverage. If one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     We have not received any written comments from the staff of the Securities and Exchange Commission that remain unresolved.

ITEM 2. PROPERTIES

General

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

Producing Wells and Acreage

     We have presented the table on the following page to provide you with a summary of the producing oil and natural gas wells and the developed and undeveloped acreage in which we owned an interest at December 31, 2006. We have not included in the table acreage in which our interest is limited to options to acquire leasehold interests, royalty or similar interests.

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	Producing Wells(1)								Acreage
	Oil(2)				Gas				Developed				Undeveloped
	Gross		Net(3)		Gross		Net(3)		Gross		Net(4)		Gross		Net(4)
Texas
Barnett Shale		—		—		21		6.69		1,150		363		18,037		4,765
Carm-Ann/M eans		90		74.85		—		—		5,560		4,843		235		235
Cook Mountain		—		—		14		1.39		1,044		238		74		33
Cotton Valley		—		—		1		0.13		40		5		9,365		968
Diamond M		97		64.03		—		—		5,805		3,809
Fullerton		151		127.86		—		—		3,683		3,155		—		—
Harris		65		54.72		—		—		1,179		1,044		2,586		2,484
Other Permian		243		34.94		27		11.74		23,079		15,469		280		280
Ganado Lake WI		8		4.80		5		3.00		12,732		5,958		—		—
Yegua/Frio/Wilcox		4		1.03		42		11.16		5,616		2,113		2,632		934
Total		658		362.23		110		34.11		59,888		36,997		33,209		9,699
Colorado		—		—		—		—		—		—		14,080		14,080
New Mexico		—		—		52		14.08		20,800		5,914		109,523		56,745
Utah		—		—		—		—		—		—		145,813		138,243
Total		658		362.23		162		48.19		80,688		42,911		302,625		218,767

(1)	Does not include 383 gross (162.43 net) wells that were shut in or temporarily abandoned as of December 31, 2006.
(2)	Does not include 222 gross (120.61 net) injection wells as of December 31, 2006.
(3)	Net wells are computed by multiplying the number of gross wells by our working interest in the gross wells.
(4)	Net acres are computed by multiplying the number of gross acres by our working interest in the gross acres.

     At December 31, 2006, we owned interests in 489 gross (376.42 net) oil and natural gas wells for which we were the operator and 936 gross (317.03 net) oil and natural gas wells where we were not the operator. Included in these wells are 383 (162.43 net) gross wells which are shut in or temporarily abandoned and 222 gross (120.61 net) injection wells.

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

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

Title to Properties

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

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We do not believe that any of these encumbrances or burdens will materially affect our ownership or the use of our properties.

Oil and Natural Gas Reserves

     For the year ended December 31, 2006, our oil and natural gas reserves were estimated by Cawley Gillespie & Associates, Inc., Fort Worth, Texas.

     At December 31, 2006, our total estimated proved reserves were approximately 28.7 MMBbls of oil and approximately 58.9 Bcf of natural gas, or 38.5 MMBoe.

     The information in the following table provides you with certain information regarding our proved reserves as estimated by Cawley Gillespie & Associates, Inc. at December 31, 2006.

	Proved Developed		Proved Developed		Proved		Total
	Producing		Non-Producing		Undeveloped		Proved
			($ in thousands)
Oil (MBbls)		14,118		814		13,789		28,721
Gas (MMcf)		25,380		3,361		30,155		58,896
MBOE		18,348		1,374		18,815		38,537

     Estimates of our proved reserves and future net revenues are made using sales prices and costs, estimated to be in effect as of the date of our reserve estimates, that are held constant throughout the life of the properties, except to the extent a contract specifically provides for escalation of prices or costs. The average prices utilized in the estimation of our reserve calculations as of December 31, 2006 were $54.67 per Bbl of oil and $5.00 per Mcf of natural gas.

     For additional information concerning our estimated proved oil and natural gas reserves, you should read Note 16 to the Consolidated Financial Statements.

     The reserve data in this Annual Report on Form 10-K represent estimates only. Reservoir engineering is a subjective process. There are numerous uncertainties inherent in estimating our oil and natural gas reserves and their estimated values. Many factors are beyond our control. Estimating underground accumulations of oil and natural gas cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment and the costs we actually incur in the development of our reserves. As a result, estimates of different engineers often vary. In addition, estimates of reserves are subject to revision by the results of drilling, testing and production after the date of the estimates. Consequently, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. The meaningfulness of estimates is highly dependent upon the accuracy of the assumptions upon which they were based.

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

     We do not have any oil or natural gas reserves outside the United States. Our oil and natural gas reserves and production are not subject to any long term supply or similar agreements with foreign governments or authorities.

     Our estimated reserves have not been filed with or included in reports to any federal agency other than the Securities and Exchange Commission.

ITEM 3. LEGAL PROCEEDINGS

     On December 30, 2005, we were named as a defendant in a lawsuit filed in the 352nd Judicial District Court of Tarrant County, Texas, Cause No. 352-215616-05, AFE Oil and Gas, L.L.C. (aka AFE Oil and Gas, LLC)

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v. Premium Resources II, L.P., Premium Resources, Inc., Danay Covert, Nick Morris, William D. Middleton, Dale Resources, L.L.C., and Parallel Petroleum, Inc.

     In this suit, the plaintiff alleges breach of fiduciary duty, fraud and conspiracy to defraud, breach of contract, constructive trust, suit to remove cloud from title, declaratory judgment, alter ego, tortious interference with contract and statutory fraud and seeks recovery of an unspecified amount of actual damages, special damages, consequential damages, exemplary damages, attorneys’ fees, pre-judgment and post-judgment interest and costs. Generally, the plaintiff alleges that it owns a 5.5% overriding royalty interest in certain oil and natural gas properties including the “Square Top LP” and the “West Fork LP” leases located in Tarrant County, Texas. The plaintiff alleges that the defendants (other than Dale Resources and Parallel) wrongfully and intentionally allowed these original oil and natural gas leases to terminate, causing the termination of plaintiff’s overriding royalty interest in each lease. The plaintiff further alleges that the defendants (other than Dale Resources and Parallel) failed to drill wells necessary to maintain the original leases in force and that after the original leases were allowed to terminate, the defendants (other than Dale Resources and Parallel) then acquired new oil and natural gas leases covering these same oil and natural gas properties, which were subsequently assigned to Dale Resources. Thereafter, Dale Resources allegedly assigned a portion of these new leases to Parallel.

     In addition to seeking unspecified monetary damages, the plaintiff also seeks to impose a constructive trust for its benefit on the new oil and natural gas leases and seeks a judicial declaration that either (1) the plaintiff is the owner of an overriding royalty interest in the new leases or that (2) the original leases and plaintiff’s interest in the original leases are still in effect. The plaintiff also claims that the new leases constitute a cloud on plaintiff’s title and seeks to have that cloud removed. Based on our present understanding of this case, we believe that we have substantial defenses to the plaintiff’s claims and intend to vigorously assert these defenses. However, if the plaintiff is awarded an interest in the new leases, we could potentially become liable for the payment to plaintiff of the portion of production proceeds attributable to plaintiff’s interest received by us. On the other hand, if the plaintiff prevails on its claim that the original leases are still in effect, our interest in the new leases could become subject to forfeiture. Based on the information known to date, we have not established a reserve for this matter.

     We are not aware of any other threatened material litigation and we have not been a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding.

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

     We did not submit any matter to a vote of our stockholders during the fourth quarter of 2006.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

     Our common stock trades on the Nasdaq Global Market under the symbol “PLLL”. The following table shows, for the periods indicated, the high and low closing price per share for our common stock as reported on the Nasdaq Global Market.

	Price Per Share
	High		Low
2004
First Quarter	$	4.67	$	3.60
Second Quarter	$	5.35	$	3.83
Third Quarter	$	5.68	$	4.38
Fourth Quarter	$	5.60	$	4.83
2005
First Quarter	$	7.60	$	5.01
Second Quarter	$	9.00	$	6.26
Third Quarter	$	14.15	$	8.29
Fourth Quarter	$	18.52	$	11.41
2006
First Quarter	$	21.13	$	15.67
Second Quarter	$	25.56	$	18.47
Third Quarter	$	26.39	$	18.90
Fourth Quarter	$	20.96	$	16.34

     The closing price of our common stock on February 1, 2007 was $19.53 per share, as reported on the Nasdaq Global Market.

     As of February 1, 2007, there were approximately 2,446 stockholders of record. This number does not include any beneficial owners for whom shares of common stock may be held in “nominee” or “street” name.

Dividends

     We have not paid, and do not intend to pay in the foreseeable future, cash dividends on our common stock. The revolving credit facility and second lien term loan facility we have with our lenders prohibit the payment of dividends on our common stock. See “Risks Related to Our Business — We do not pay dividends on our common stock” on page 21.

Sale of Unregistered Securities

     At our annual meeting of stockholders held on June 22, 2004, the stockholders approved the Parallel Petroleum Corporation 2004 Non-Employee Director Stock Grant Plan. You can find a description of this plan on page 74. Historically, Director’s fees had been paid solely in cash. However, upon approval of the plan by the stockholders, we began paying an annual retainer fee to each non-employee Director in the form of common stock. Only Directors of Parallel who are not employees of Parallel or any of its subsidiaries are eligible to participate in the plan. Under the plan, each non-employee Director is entitled to receive an annual retainer fee consisting of shares of common stock that are automatically granted on the first day of July in each year, beginning on July 1, 2004. The actual number of shares received is determined by dividing $25,000 by the average daily closing price of the common stock on the Nasdaq Global Market for the ten consecutive trading days commencing fifteen trading days before

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the first day of July of each year. On July 1, 2006, and in accordance with the terms of the plan, a total of 4,696 shares of common stock were granted to four non-employee Directors as follows: Jeffrey G. Shrader — 1,174 shares; Dewayne Chitwood — 1,174 shares; Martin B. Oring — 1,174 shares; and Ray M. Poage — 1,174 shares. The shares of common stock were issued without registration under the Securities Act of 1933, as amended, in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. Generally, shares issued under this plan are not transferable as long as the non-employee Director holding the shares remains a Director of Parallel.

     As further described under Item 13, Certain Relationships and Related Transactions, and Director Independence, on page 82 of this Annual Report on Form 10-K, Wealth Preservation, LLC, a financial consulting firm owned and managed by Martin B. Oring, a Director, exercised a warrant to purchase shares of our common stock on October 25, 2006. Utilizing a net exercise feature, Wealth Preservation LLC received 82,019 shares of common stock. No cash proceeds were received by us. The common stock was issued in reliance upon the exemptions from registration contained in Section 3(a)(9) and Section 4(2) of the Securities Act of 1933, as amended.

Repurchase of Equity Securities

     Neither we nor any “affiliated purchaser” repurchased any of our equity securities during the fourth quarter of the fiscal year ended December 31, 2006.

ITEM 6. SELECTED FINANCIAL DATA

     In the table below, we provide you with selected historical financial data. We have prepared this information using our audited Consolidated Financial Statements for the five-year period ended December 31, 2006. It is important that you read this data along with our audited Consolidated Financial Statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below. The selected financial data provided are not necessarily indicative of our future results of operations or financial performance.

	Year Ended December 31,
	2006(1)		2005			2004			2003			2002(2)
	($ in thousands, except per share and per unit data)
Consolidated Income Statements Data:
Operating revenues	$	97,025	$	66,150		$	35,837		$	33,855		$	12,106
Operating expenses	$	56,606	$	32,805		$	23,571		$	21,138		$	11,250
Income (loss) before cumulative effect of change in accounting principle	$	26,155	$	(1,589	)	$	2,271		$	7,664		$	18,701
Net income (loss)	$	26,155	$	(1,589	)	$	2,271		$	7,602		$	18,701
Cumulative preferred stock dividend	$	—	$	(271	)	$	(572	)	$	(580	)	$	(585	)
Net income (loss) available to common stockholders	$	26,155	$	(1,860	)	$	1,699		$	7,022		$	18,116
Income (loss) per common share before cumulative effect of change in accounting principle
Basic	$	0.73	$	(0.06	)	$	0.07		$	0.33		$	0.88
Diluted	$	0.71	$	(0.06	)	$	0.07		$	0.31		$	0.79
Weighted average common stock and common stock equivalents outstanding
Basic		35,888		32,253			25,323			21,264			20,680
Diluted		36,756		32,253			25,688			24,175			23,549
Cash dividends — common stock	$	—	$	—		$	—		$	—		$	—
Consolidated Balance Sheet Data:
Total assets	$	442,818	$	253,008		$	170,671		$	118,343		$	102,351
Total liabilities	$	259,036	$	163,506		$	110,677		$	57,111		$	56,852
Long-term debt, less current maturities	$	165,000	$	100,000		$	79,000		$	39,750		$	45,604
Total stockholders’ equity	$	183,782	$	89,502		$	59,994		$	61,232		$	45,499

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	Year Ended December 31,
	2006(1)			2005			2004			2003			2002(2)
	($ in thousands, except per share and per unit data)
Consolidated Statement of Cash Flow Data:
Cash provided by (used in)
Operating activities	$	74,186		$	37,118		$	18,156		$	19,493		$	1,528
Investing activities	$	(200,548	)	$	(84,949	)	$	(69,518	)	$	(15,494	)	$	(30,277	)
Financing activities	$	125,854		$	49,468		$	38,765		$	1,567		$	37,210
Operating Data:
Product Sales
Oil (Bbls)		1,137			923			729			629			131
Gas (Mcf)		6,539			3,592			2,690			3,356			2,670
BOE		2,227			1,522			1,177			1,188			576
Average sales price
Oil (per Bbl)	$	59.86		$	51.78		$	39.05		$	29.11		$	24.59
Gas (per Mcf)	$	6.19		$	8.54		$	5.85		$	5.40		$	3.33
Proved reserves
Oil (Bbls)		28,721			21,192			18,916			12,084			10,271
Gas (Mcf)		58,896			25,237			16,825			16,271			15,633

(1)	Results include $9.0 million of equity in income of pipeline and gathering systems representing Parallel’s shares of net gain on sale of certain pipeline assets.
(2)	Results include a $31.0 million gain attributable to equity in income of First Permian, L.P.

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

     The following discussion is intended to assist you in understanding our financial position and results of operations for each year in the three-year period ended December 31, 2006. You should read the following discussion and analysis in conjunction with our audited Consolidated Financial Statements and the related notes.

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

Overview and Strategy

     Our primary objective is to increase stockholder value by increasing reserves, production, cash flow and earnings. We have shifted the balance of our investments from properties having high rates of production in early years to properties expected to produce more consistently over a longer term. We attempt to reduce our financial risks by dedicating a smaller portion of our capital to high risk projects, while reserving the majority of our available capital for acquisitions, exploitation and development drilling opportunities. Obtaining positions in long-lived oil and natural gas reserves are given priority over properties that might provide more cash flow in the early years of production, but which have shorter reserve lives. We also attempt to further reduce risk by emphasizing acquisition possibilities over high risk exploration projects.

     During the latter part of 2002, we reduced our emphasis on high risk exploration efforts and started focusing on established geologic trends where we can utilize the engineering, operational, financial and technical expertise of our entire staff. Although we do participate in exploratory drilling activities, reducing financial, reservoir, drilling and geological risks and diversifying our property portfolio are important criteria in the execution of our business plan. In summary, our current business plan:

• focuses on projects having less geologic risk;

• emphasizes acquisition, exploitation, development and enhancement activities;

• includes the utilization of horizontal and fracture stimulation technologies on certain types of reservoirs;

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• focuses on acquiring producing properties; and

• expands the scope of operations by diversifying our exploratory and development efforts, both in and outside of our current areas of operation.

     We continue our efforts to maintain low general and administrative expenses relative to the size of our overall operations, utilize advanced technologies, serve as operator in appropriate circumstances, and reduce operating costs.

     The extent to which we are able to implement and follow through with our business plan will be influenced by:

• the prices we receive for the oil and natural gas we produce;

• the results of reprocessing and reinterpreting our 3-D seismic data;

• the results of our drilling activities;

• the costs of obtaining high quality field services;

• our ability to find and consummate acquisition opportunities; and

• our ability to negotiate and enter into work to earn arrangements, joint venture or other similar agreements on terms acceptable to us.

     Significant changes in the prices we receive for our oil and natural gas, or the occurrence of unanticipated events beyond our control may cause us to defer or deviate from our business plan, including the amounts we have budgeted for our activities.

Operating Performance

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

• seasonal demand;

• weather;

• hurricane conditions in the Gulf of Mexico;

• availability of pipeline transportation to end users;

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

• world oil prices.

     Additional factors influencing our overall operating performance include:

• production expenses;

• overhead requirements; and

• costs of capital.

(30)

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

• cash flow from operations;

• sales of our equity securities;

• bank borrowings; and

• industry joint ventures.

     Depletion per BOE in 2006 was $10.88, as compared to $7.61 in 2005 and $7.05 in 2004. The increase per BOE in 2006 was a result of increased drilling costs and recent acquisitions of producing properties.

Results of Operations

     As described under “Item 1. Business — About Our Strategy and Business”, we changed our business model in 2002. At the beginning of 2002, our total proved reserves were approximately 3.2 MMBoe with a reserves to production ratio of approximately 4 to 1. Through the execution of this business model, our reserves at the end of 2006 were approximately 38.5 MMBoe with a reserves to production ratio of approximately 17.3 to 1. As described on page 14 of this Annual Report on Form 10-K, the failure to replace oil and natural gas reserves may negatively affect our business. We monitor this risk by comparing the quantity of our oil and natural gas reserves at the end of each year to our production for that year. This comparison, which is made in the form of a reserves to production ratio, helps us measure our ability to offset produced volumes with new reserves that will be produced in the future. The reserves to production ratio is calculated by dividing the total proved reserves at the end of a year by the actual production for the same year. The annual change in this ratio provides us with an indication of our performance in replenishing annual production volumes. The reserves to production ratio is a statistical indicator that has limitations. The ratio is limited because it can vary widely based on the extent and timing of new discoveries and property acquisitions. In addition, the ratio does not take into account the cost or timing of future production of new reserves. For that reason, the ratio does not, and is not intended to, provide a measurement of value. At the end of 2002, our production was 77% natural gas and 23% oil, as compared to approximately 49% natural gas and 51% oil at the end of 2006. The production stream changed from shorter lived gulf coast natural gas to longer lived Permian Basin oil production and has increased our lease operating expense primarily due to increased utilities and chemicals associated with the operation of oil properties.

(31)

     The following table shows selected data and operating income comparisons for each of the three years ended December 31, 2006.

	Years Ended December 31,
	2006			2005			2004
	($ in thousands, except per unit data)
Production Volumes
Oil (Bbls)		1,137			923			729
Natural gas (Mcf)		6,539			3,592			2,690
BOE		2,227			1,522			1,177
Sales Price
Oil (per Bbl)(1)	$	59.86		$	51.78		$	39.05
Natural gas (per Mcf)(1)	$	6.19		$	8.54		$	5.85
BOE Price(1)	$	48.73		$	51.57		$	37.55
BOE Price(2)	$	43.56		$	43.46		$	30.45
Operating Revenues
Oil	$	68,076		$	47,800		$	28,455
Effect of oil hedges		(11,512	)		(12,139	)		(7,458	)
Natural gas		40,461			30,690			15,735
Effect of natural gas hedges		—			(201	)		(895	)
		97,025			66,150			35,837
Operating Expenses
Lease operating expense		16,819			9,947			7,373
Production taxes		5,577			4,102			2,108
General and administrative:
General and administrative		5,885			4,289			3,123
Public reporting		3,638			2,423			2,255
Depreciation, depletion and amortization		24,687			12,044			8,712
		56,606			32,805			23,571
Operating income	$	40,419		$	33,345		$	12,266

(1)	Excludes hedge transactions.
(2)	Includes hedge transactions.

Critical Accounting Policies and Practices

     Full Cost and Impairment of Assets. We account for our oil and natural gas exploration and development activities using the full cost method of accounting. Under this method, all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized. Costs of non-producing properties, wells in process of being drilled and significant development projects are excluded from depletion until such time as the related project is developed and proved reserves are established or impairment is determined. At the end of each quarter, the net capitalized costs of our oil and natural gas properties, as adjusted for asset retirement obligations, is limited to the lower of unamortized cost or a ceiling, based on the present value of estimated future net revenues, net of income tax effects, discounted at 10%, plus the lower of cost or fair market value of our unproved properties. Estimated future net revenues are measured at unescalated oil and natural gas prices at the end of each quarter, with effect given to our cash flow hedge positions. If the net capitalized costs of our oil and natural gas properties exceed the ceiling, we are subject to a ceiling test write-down to the extent of the excess. A ceiling test write-down is a non-cash charge to earnings. It reduces earnings and impacts stockholders’ equity in the period of occurrence and may result in lower depreciation, depletion and amortization expense in future periods.

     The risk that we will be required to write down the carrying value of oil and natural gas properties increases when oil and natural gas prices decline. If commodity prices deteriorate, it is possible that we could incur an impairment in future periods.

(32)

     Depletion. Provision for depletion of oil and natural gas properties under the full cost method is calculated using the unit of production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measurement based upon relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. Oil and natural gas properties included $50.4 million and $22.3 million for 2006 and 2005, respectively, for unevaluated properties not included in depletion. The cost of any impaired property is transferred to the balance of oil and natural gas properties subject to depletion.

     Proved Reserve Estimates. The discounted present value of our proved oil and natural gas reserves is a major component of the ceiling calculation, and represents the component that requires the most subjective judgments. Estimates of reserves are forecasts based on engineering data, projected future rates of production and the timing of future expenditures. The process of estimating oil and natural gas reserves requires substantial judgment, resulting in imprecise determinations, particularly for new discoveries. Different reserve engineers may make different estimates of reserve quantities based on the same data. Our reserve estimates are prepared by independent petroleum engineers.

     The passage of time provides more qualitative information regarding estimates of reserves, and revisions are made to prior estimates to reflect updated information. However, there can be no assurance that more significant revisions will not be necessary in the future. If future revisions significantly reduce previously estimated reserve quantities, it could result in a full cost ceiling write-down. At December 31, 2006, our ceiling was in excess of our capitalized costs. In addition to the impact of the estimates of proved reserves in calculating the ceiling test, estimates of proved reserves are also a significant component of the calculations of depreciation, depletion and amortization.

     While estimates of the quantities of proved reserves require substantial subjective judgment, the associated prices of oil and natural gas reserves that are included in the discounted present value of the reserves do not require judgment. Accounting principles generally accepted in the United States require that prices and costs in effect as of the last day of the period are held constant indefinitely. Accordingly, the resulting value is not indicative of the true fair value of the reserves. Oil and natural gas prices have historically been cyclical and, on the last day of a quarter, can be either substantially higher or lower than prices we actually receive in the long-term, which are a barometer for true fair value.

     Use of Estimates. The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported assets, liabilities, expenses, and some narrative disclosures. Hydrocarbon reserves, future development costs and certain hydrocarbon production expenses are the most critical estimates used in the preparation of our Consolidated Financial Statements.

     Derivatives. The Financial Accounting Standards Board issued SFAS No. 133, as amended by SFAS No. 138, that requires all derivative instruments to be recorded on the balance sheet at their respective fair values. We adopted SFAS no. 133 on January 1, 2001.

     During the period from January 1, 2003 to June 30, 2004, new derivative contracts were designated as cash flow hedges. These contracts remained designated as cash flow hedges through their settlement. Accordingly, the effective portion of the unrealized gains or losses was recorded in other comprehensive loss until the settlement of the contract position occurred. At settlement of these contracts, the cash value paid was recorded in revenue along with oil and natural gas sales, or in interest expense along with the interest expense that we incurred under our credit facilities. As of December 31, 2006, we had no remaining contracts which were designated as hedges.

     For periods prior to 2003 and for periods after July 1, 2004, derivative contracts entered into were not designated as cash flow hedges. Accordingly, the unrealized gain or loss on these derivative contracts was recorded in other income. At settlement of these contracts, the realized gain or loss remains in other income and is not offset against oil and natural gas sales or interest expense.

     Although we have designated our derivative contracts differently in different periods, the purpose of all of our derivative contracts is to provide a measure of stability in our oil and natural gas receipts and interest rate payments and to manage exposure to commodity price and interest rate risk under existing sales contracts.

(33)

Years Ended December 31, 2006 and December 31, 2005

     Our oil and natural gas revenues and production product mix are shown in the following table for the years ended December 31, 2006 and 2005.

	Revenues(1)						Production
	2006			2005			2006			2005
Oil (Bbls)		58	%		54	%		51	%		61	%
Natural gas (Mcf)		42	%		46	%		49	%		39	%
Total		100	%		100	%		100	%		100	%

⁽¹⁾ Includes the effects of derivative transactions accounted for as hedges.

     The following table shows our production volumes, product sale prices and operating revenues for the periods indicated.

										Percent
	Year Ended December 31,						Increase			Increase
	2006			2005			(Decrease)			(Decrease)
	($ in thousands, except per unit data)
Production Volumes
Oil (Bbls)		1,137			923			214			23	%
Natural gas (Mcf)		6,539			3,592			2,947			82	%
BOE		2,227			1,522			705			46	%
Sales Price
Oil (per Bbl)(1)	$	59.86		$	51.78		$	8.08			16	%
Natural gas (per Mcf)(1)	$	6.19		$	8.54		$	(2.35	)		(28	)%
BOE price(1)	$	48.73		$	51.57		$	(2.84	)		(6	)%
BOE price(2)	$	43.56		$	43.46		$	0.10			0	%
Operating Revenues
Oil	$	68,076		$	47,800		$	20,276			42	%
Effect of oil hedges		(11,512	)		(12,139	)		627			(5	)%
Natural gas		40,461			30,690			9,771			32	%
Effect of natural gas hedges		—			(201	)		201			(100	)%
Total	$	97,025		$	66,150		$	30,875			47	%

(1)	Excludes hedge transactions.
(2)	Includes hedge transactions.

     Oil revenues, excluding hedges, increased $20.3 million, or 42%, for the year ended 2006, as compared to 2005. Oil production volumes increased 23%, which was attributable to our 2006 drilling program in the Harris San Andres field that we acquired in 2005 and early 2006, re-stimulations and additional drilling in the Fullerton San Andres field and our drilling program in the Carm-Ann/N. Means Queen and Diamond M Canyon Reef. The increase in oil production increased revenue approximately $12.8 million for 2006. Average realized wellhead crude oil prices increased $8.08 per Bbl, or 16%, to $59.86 per Bbl for 2006, compared to 2005. The increase in oil price increased revenue approximately $7.5 million for 2006.

     Natural gas revenues, excluding hedges, increased $9.8 million, or 32%, for the year ended 2006, as compared to 2005. Natural gas production volumes increased 82% as a result of added production from drilling discoveries in our gulf coast area of south Texas, Fort Worth Basin Barnett Shale wells and initial production from our New Mexico Wolfcamp wells. The increase in natural gas volumes increased revenue approximately $18.2 million for 2006. Average realized wellhead natural gas prices decreased 28%, or $2.35 per Mcf, to $6.19 per Mcf. The decrease in natural gas prices had a negative effect on revenues of approximately $8.4 million for the year ended December 31, 2006.

(34)

     The negative effect on oil revenues of oil hedges decreased approximately $600,000, or 5%, for 2006, as compared to 2005, because contracts settled in 2006 had relatively higher strike prices in relation to the related market price at settlement. On a BOE basis, the negative effects of hedges declined from $8.11 per BOE in 2005 compared to $5.17 per BOE in 2006.

Costs and Expenses

							Percent
	Year Ended December 31,				Increase		Increase
	2006		2005		(Decrease)		(Decrease)
	($ in thousands)
Lease operating expense	$	16,819	$	9,947	$	6,872		69	%
Production taxes		5,577		4,102		1,475		36	%
General and administrative:
General and administrative		5,885		4,289		1,596		37	%
Public reporting		3,638		2,423		1,215		50	%
Total general and administrative		9,523		6,712		2,811		42	%
Depreciation, depletion and amortization		24,687		12,044		12,643		105	%
Total	$	56,606	$	32,805	$	23,801		73	%

     Lease operating expense increased 69%, or $6.9 million, compared to 2005. Fifty-three percent (53%) of our 2006 production was from our long-life oil assets located in our west Texas Fullerton, Carm-Ann, Diamond M and Harris properties. Our increase in lease operating expenses is due to mechanical, ad valorem and utility costs which increased our related lifting costs to $7.55 per BOE in 2006, as compared to $6.54 per BOE in 2005. We experienced a 15% increase in our per BOE lifting costs primarily due to higher lifting costs associated with non-operated wells and newly acquired operated wells for the year ended December 31, 2006. The lifting costs per BOE are expected to be reduced by further development of our natural gas properties.

     Production taxes increased 36%, or $1.5, million in 2006, which was associated with an increase in revenues of $30.0 million. Production taxes in future periods will continue to be a function of product mix, production volumes and product prices.

     Total general and administrative expenses increased 42%, or $2.8 million, in 2006 over 2005. During the second quarter of 2006, we determined that stock options to purchase 30,000 shares of common stock had been granted in 2003 to four of our employees under our 1998 Stock Option Plan, but which were not available for issuance under the plan. In June 2006, the Board of Directors authorized us to enter into settlement and release agreements with the four employees. Under these agreements, we made a one-time lump sum cash payment to each employee in an amount equal to the “spread” between the exercise price of the options and the closing price of our stock on June 21, 2006. The total cash payments were approximately $511,000. This amount was charged to general and administrative expense during the second quarter of 2006. General and administrative expenses capitalized to the full cost pool were $1.7 million for 2006, compared to $1.3 million for 2005. On a BOE basis, general and administrative costs were $2.64 per BOE in 2006 compared to $2.82 per BOE in 2005, while public reporting costs were $1.63 per BOE and $1.59 per BOE for the same period.

     Included in our total general and administrative expenses are public reporting costs which increased 50%, or $1.2 million. Increased public reporting costs included, but were not limited to, increases in road show expenses, corporate counseling and oil and natural gas reserve analysis. In addition, we incurred additional public reporting costs associated with the stock options granted to our board of directors in late 2005.

     Depreciation and depletion expense increased 105% or $12.6 million for 2006 compared to 2005. Depletion per BOE was $10.88 for 2006 and $7.61 for 2005. This increase is attributable to increased drilling costs, recent producing property purchases and reserve revisions as a result of decreased natural gas prices. We anticipate fiscal year 2007 depletion costs will increase with increased production volumes.

(35)

Other income (expense)

										Percent
	Year Ended December 31,						Increase			Increase
	2006			2005			(Decrease)			(Decrease)
	($ dollars in thousands)
Gain (loss) on derivatives not classified as hedges	$	2,802		$	(31,669	)	$	34,471			109	%
Gain (loss) on ineffective portion of hedges		626			(137	)		763			557	%
Interest and other income		158			167			(9	)		(5	)%
Interest expense		(12,360	)		(4,780	)		(7,580	)		159	%
Other expense		(189	)		(102	)		(87	)		85	%
Equity in income (loss) of pipelines and gathering system ventures		8,593			(89	)		8,682			9,755	%
Total	$	(370	)	$	(36,610	)	$	36,240			99	%

     We recorded a gain of $2.8 million in 2006 for derivatives not classified as hedges in 2006, as compared to a loss of $31.7 million for 2005. Future gains or losses on derivatives not classified as hedges will be impacted by the volatility of commodity prices and interest rates, as well as by the terms of any new derivative contracts.

     The ineffective portion of our hedges was a gain of approximately $626,000 in 2006, as compared to a loss of approximately $137,000 in 2005. As of December 31, 2006, all cash flow hedge contracts as defined by SFAS 133 were settled.

     Interest expense increased with the increase in our bank debt from $100.0 million to $165.0 million in 2006, along with an increase of our average loan interest rate from 7.96% to 8.30% in 2006. Interest expense will increase for 2007 with increased borrowings for leasehold acquisitions and amounts expended for drilling.

     We invested in four pipelines and gathering system joint ventures beginning in 2004. During 2006, the assets of two of these ventures were sold. As a result, we recognized our share of net gains on sale of $9.0 million in 2006.

     We had an income tax expense of $13.9 million in 2006, compared to a $1.7 million income tax benefit in 2005. The income tax rate for 2007 will be dependent on our earnings and is expected to be approximately 35% of income before income taxes.

     We had basic and diluted net earnings per share of $0.73 and $0.71, respectively, for 2006 and basic and diluted net loss per share of $0.06 for 2005. Basic weighted average common shares outstanding increased from 32.3 million shares in 2005 to 35.9 million shares in 2006. Diluted weighted average common shares increased from 32.3 million shares in 2005 to 36.8 million shares in 2006. The increase in common shares was primarily due to our public offering of 2.5 million shares of common stock in August 2006.

Years Ended December 31, 2005 and December 31, 2004

     Our oil and natural gas revenues and production product mix are shown in the table below for the years ended December 31, 2005 and 2004.

	Revenues(1)						Production
	2005			2004			2005			2004
Oil (Bbls)		54	%		59	%		61	%		62	%
Natural gas (Mcf)		46	%		41	%		39	%		38	%
Total		100	%		100	%		100	%		100	%

(1) Includes hedge transactions.

(36)

     The following table sets forth certain information about our operating revenues for the periods indicated.

										Percent
	Year Ended December 31,						Increase			Increase
	2005			2004			(Decrease)			(Decrease)
	($ in thousands, except per unit data)
Production Volumes
Oil (Bbls)		923			729			194			27	%
Natural gas (Mcf)		3,592			2,690			902			34	%
BOE		1,522			1,177			345			29	%
Sales Price
Oil (per Bbl)(1)	$	51.78		$	39.05		$	12.73			33	%
Natural gas (per Mcf)(1)	$	8.54		$	5.85		$	2.69			46	%
BOE price(1)	$	51.57		$	37.55		$	14.02			37	%
BOE price(2)	$	43.46		$	30.45		$	13.01			43	%
Operating Revenues
Oil	$	47,800		$	28,455		$	19,345			68	%
Oil hedges		(12,139	)		(7,458	)		(4,681	)		(63	)%
Natural gas		30,690			15,735			14,955			95	%
Natural gas hedges		(201	)		(895	)		694			78	%
Total	$	66,150		$	35,837		$	30,313			85	%

(1)	Excludes hedge transactions.
(2)	Includes hedge transactions.

     Oil revenues, excluding hedges, increased $19.3 million, or 68%, for the year ended 2005, as compared to 2004. Oil production volumes increased 27%, which was attributable to our 2005 drilling program in the Carm-Ann San Andres field and N. Mean Queen field that we acquired in 2004 and early 2005, re-stimulations and additional drilling in the Fullerton San Andres field and our drilling program in the Diamond M Canyon Reef. The increase in oil production increased revenue approximately $10.0 million for 2005. Average realized wellhead crude oil prices increased $12.73 per Bbl, or 33%, to $51.78 per Bbl for 2005, as compared to 2004. The increase in oil price increased revenue approximately $9.3 million for the year ended December 31, 2005.

     Natural gas revenues, excluding hedges, increased $15.0 million, or 95%, for the year ended 2005, compared to 2004. Natural gas production volumes increased 34% due to production from drilling discoveries in our south Texas Wilcox wells and initial production from our Fort Worth Basin Barnett Shale wells. The increase in natural gas volumes increased revenue approximately $7.7 million for 2005. Average realized wellhead natural gas prices increased 46%, or $2.69 per Mcf, to $8.54 per Mcf. The increase in natural gas prices had a positive effect on revenues of approximately $7.3 million for the year ended December 31, 2005.

     The negative effect on oil revenues of oil hedges increased $4.7 million, or 63%, for 2005, as compared to 2004 as a result of increased oil prices. The negative effect on natural gas revenues of natural gas hedge losses was $201,000 in 2005, as compared to $895,000 in 2004. Although natural gas prices increased 46% in 2005, we had less natural gas volumes hedged for 2005. On a BOE basis, hedges accounted for a reduction in revenue of $8.11 per BOE in 2005, as compared to $7.10 per BOE in 2004.

(37)

Costs and Expenses

							Percent
	Year Ended December 31,				Increase		Increase
	2005		2004		(Decrease)		(Decrease)
	($ in thousands)
Lease operating expense	$	9,947	$	7,373	$	2,574		35	%
Production taxes		4,102		2,108		1,994		95	%
General and administrative:
General and administrative		4,289		3,123		1,166		37	%
Public reporting		2,423		2,255		168		7	%
Total general and administrative		6,712		5,378		1,334		25	%
Depreciation, depletion and amortization		12,044		8,712		3,332		38	%
Total	$	32,805	$	23,571	$	9,234		39	%

     Lease operating expense increased 35%, or $2.6 million, compared to 2004. Sixty-one percent (61%) of our 2005 production was attributable to our long-life oil assets: the Fullerton, Carm-Ann, Harris and Diamond M properties. The increase in lease operating expenses was due to mechanical, ad valorem and utility costs. Related lifting costs were $6.54 per BOE in 2005, compared to $6.26 per BOE in 2004. We experienced a 4% increase in our per BOE lifting costs primarily due to higher lifting costs associated with operating new wells and newly acquired wells for the year ended December 31, 2005.

     Production taxes increased 95%, or $2.0 million, in 2005, which was associated with a net wellhead increase in revenues of $34.3 million. Production taxes are a function of product mix, production volumes and product prices.

     Total general and administrative expenses increased 25%, or $1.3 million, in 2005, as compared to 2004. General and administrative expenses increased with our aggressive drilling program in 2005 through employee additions, bonus payments, benefits, and public reporting costs. General and administrative expenses capitalized to the full cost pool were $1.3 million for 2005, compared to $1.1 million for 2004. On a BOE basis, general and administrative costs were $2.82 per BOE in 2005, compared to $2.65 per BOE in 2004, while public reporting costs were $1.59 per BOE and $1.92 per BOE for the same period. As anticipated, general and administrative expenses increased in 2006 in association with reporting requirements and operational support of current and new acquisitions.

     Depreciation and depletion expense increased 38%, or $3.3 million, for 2005, as compared to 2004. Depletion per BOE was $7.61 for 2005 and $7.05 for 2004. This increase is attributable to property purchases and increased drilling costs. Depreciation expense increased with the cost of a new accounting and production system installed in 2004. Depletion costs are highly correlated with production volumes and capital expenditures.

Other income (expense)

										Percent
	Year Ended December 31,						Increase			Increase
	2005			2004			(Decrease)			(Decrease)
	($ in thousands)
Gain (loss) on derivatives not classified as hedges	$	(31,669	)	$	(5,726	)	$	(25,943	)		(453	)%
Gain (loss) on ineffective portion of hedges		(137	)		(240	)		103			43	%
Interest and other income		167			189			(22	)		(12	)%
Interest expense		(4,780	)		(2,732	)		(2,048	)		75	%
Other expense		(191	)		(324	)		133			(41	)%
Total	$	(36,610	)	$	(8,833	)	$	(27,777	)		314	%

(38)

     Beginning in the third quarter of 2004, none of the derivative contracts that we entered into were designated as cash flow hedges as defined by SFAS 133. None of the derivative contracts that were entered into in 2004 settled in 2004.

     We recorded a loss of $31.7 million in 2005 on derivatives not classified as hedges, as compared to a loss of $5.7 million for 2004. The increase was partly attributable to a change in how we designated our derivative contracts. Prior to 2004, we designated our derivative contracts as cash flow hedges. Beginning in July 2004, we ceased designating our derivative contracts as cash flow hedges. As a result, changes in the fair value of these contracts were recorded in this account. The loss also increased because of large increases in commodity prices for oil contracts. Future gains or losses on derivatives not classified as hedges are impacted by the volatility of commodity prices and interest rates, as well as by the terms of any new derivative contracts.

     The loss associated with the ineffective portion of our hedges decreased $103,000, or 43%, for 2005, compared to 2004. Commodity prices increased in 2005, resulting in the ineffective portion being recorded in other expense. The ineffective hedge gain or loss fluctuates until settlement of our contracts. As of December 31, 2005, we had one remaining commodity contract and one remaining interest rate swap contract designated as cash flow hedges as defined by SFAS 133.

     Interest expense increased with the associated increase in our bank debt from $79.0 million to $100.0 million in 2005, along with an increase in our average loan interest rate from 7.01% to 7.96% later in 2005. Other expenses decreased in 2005 associated with legal, accounting and related costs for an aborted high yield debt offering in 2004. Interest expense increased in 2006 as a result of increased borrowings for our property acquisitions, interest rate increases and for funding our increased drilling budget.

     We had an income tax benefit of $1.7 million in 2005, compared to a $1.2 million expense in 2004. The income tax rate for 2006 is dependent on our earnings and is expected to be approximately 35% of income before income taxes.

     We had a basic and diluted net loss per share of $.06 for 2005 and basic and diluted net earnings per share of $.07 for 2004. Basic weighted average common shares outstanding increased from 25.3 million shares in 2004 to 32.3 million shares in 2005. Diluted weighted average common shares increased from 25.7 million shares in 2004 to 32.3 million shares in 2005. The increase in common shares resulted from our common stock offering of 5.75 million shares in February, 2005, and the conversion of our preferred stock, in June, 2005, into 2.7 million shares of common stock.

Capital Resources and Liquidity

     Our capital resources consist primarily of cash flows from our oil and natural gas properties, bank borrowings supported by our oil and natural gas reserves and equity offerings. Our level of earnings and cash flows depends on many factors, including the prices we receive for oil and natural gas we produce.

     Working capital decreased approximately $9.1 million as of December 31, 2006 compared with December 31, 2005. Current liabilities exceeded current assets by $8.7 at December 31, 2006. The working capital decrease was due to increased obligations associated with our accelerated drilling program in 2006.

     The following table summarizes our cash flows from operating, investing and financing activities:

	Year ended December 31,
	2006			2005			2004
	($ in thousands)
Operating activities	$	74,186		$	37,118		$	18,156
Investing activities	$	(200,548	)	$	(84,949	)	$	(69,518	)
Financing activities	$	125,854		$	49,468		$	38,765

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     Cash provided from operating activities in 2006 increased $37.1 million over 2005 largely due to increased net income from an increase in our production and a $9.0 million earnings distribution from equity method investments that resulted from our sale of the pipeline assets.

     Cash used in investing activities increased in 2006 compared to 2005, primarily as a result of our accelerated drilling activities in 2006.

     Cash provided by financing activities increased due to additional bank borrowings to fund our acquisitions and increased drilling activities. Proceeds from our 2006 equity offering were utilized for general corporate purposes, including debt repayment and the acceleration of our drilling and completion operations in certain core areas.

     Historically, we have funded our operations, capital requirements and interest expense requirements with cash flows from our oil and natural gas properties, bank borrowings and proceeds from sales of our equity securities. Although we expect these same capital resources to support our future activities, we continually review and consider alternative methods of financing.

Credit Facilities

     We have two separate credit facilities. Our Third Amended and Restated Credit Agreement or, the “Revolving Credit Agreement” with a group of bank lenders provides us with a revolving line of credit having a “borrowing base” limitation of $167.0 million at December 31, 2006. The total amount that we can borrow and have outstanding at any one time is limited to the lesser of $350.0 million or the borrowing base established by the lenders. At December 31, 2006, the principal amount outstanding under our revolving credit facility was $115.0 million, excluding $445,000 reserved for our letters of credit. Our second credit facility is a five year term loan facility provided to us under a Second Lien Term Loan Agreement or, the “Second Lien Agreement”, with a group of banks and other lenders. At December 31, 2006, our term loan under this facility was fully funded in the principal amount of $50.0 million, which was outstanding on that same date.

     Revolving Credit Facility

     The Revolving Credit Agreement allows us to borrow, repay and reborrow amounts available under the revolving credit facility. The amount of the borrowing base is based primarily upon the estimated value of our oil and natural gas reserves. The borrowing base amount is redetermined by the lenders semi-annually on or about April 1 and October 1 of each year or at other times required by the lenders or at our request. If, as a result of the lenders’ redetermination of the borrowing base, the outstanding principal amount of our loans exceeds the borrowing base, we must either provide additional collateral to the lenders or repay the outstanding principal of our loans in an amount equal to the excess. Except for the principal payments that may be required because of our outstanding loans being in excess of the borrowing base, interest only is payable monthly.

     Loans made to us under this revolving credit facility bear interest at the base rate of Citibank, N.A. or the “LIBOR” rate, at our election. Generally, Citibank’s base rate is equal to its “prime rate” as announced from time to time by Citibank.

     The LIBOR rate is generally equal to the sum of (a) the rate designated as “British Bankers Association Interest Settlement Rates” and offered in one, two, three, six or twelve month interest periods for deposits of $1.0 million, and (b) a margin ranging from 2.00% to 2.50%, depending upon the outstanding principal amount of our loans. If the principal amount outstanding is equal to or greater than 75% of the borrowing base, the margin is 2.50%. If the principal amount outstanding is equal to or greater than 50%, but less than 75% of the borrowing base, the margin is 2.25%. If the principal amount outstanding is less than 50% of the borrowing base, the margin is 2.00%.

     The interest rate we are required to pay on our borrowings, including the applicable margin, may never be less than 5.00%. At December 31, 2006, our weighted average base rate and LIBOR rate, plus the applicable margin, was 7.62% on $115.0 million, the outstanding principal amount of our revolving loan on that same date.

     In the case of base rate loans, interest is payable on the last day of each month. In the case of LIBOR loans, interest is payable on the last day of each applicable interest period.

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     If the total outstanding borrowings under the revolving credit facility are less than the borrowing base, we are required to pay an unused commitment fee to the lenders in an amount equal to .25% of the daily average of the unadvanced portion of the borrowing base. The fee is payable quarterly.

     If the borrowing base is increased, we are also required to pay a fee of .375% on the amount of any such increase.

     All outstanding principal and accrued and unpaid interest under the revolving credit facility is due and payable on October 31, 2010. The maturity date of our outstanding loans may be accelerated by the lenders upon the occurrence of an event of default under the Revolving Credit Agreement.

     The Revolving Credit Agreement contains various restrictive covenants, including (i) maintenance of a minimum current ratio, (ii) maintenance of a maximum ratio of funded indebtedness to earnings before interest, income taxes, depreciation, depletion and amortization,(iii) maintenance of a minimum net worth, (iv) prohibition of payment of dividends and (v) restrictions on incurrence of additional debt. We have pledged substantially all of our producing oil and natural gas properties to secure the repayment of our indebtedness under the Revolving Credit Agreement.

     As of December 31, 2006 we were in compliance with all of the covenants in our Revolving Credit Agreement.

     Second Lien Term Loan Facility

     We also have a $50.0 million term loan made available to us under our Second Lien Term Loan Agreement or, the “Second Lien Agreement”. Similar to our Revolving Credit Agreement, loans made to us under this credit facility bear interest, at our election, at an alternate base rate or a rate designated in the Agreement as the “LIBO” rate. The alternate base rate is the greater of (a) the prime rate in effect on any day and (b) the “Federal Funds Effective Rate” in effect on such day plus ¹/2 of 1%, plus a margin of 3.50% per annum.

     The LIBO rate is generally equal to the sum of (a) a rate appearing in the Dow Jones Market Service for the applicable interest periods offered in one, two, three or six month periods and (b) an applicable margin rate per annum equal to 4.50%.

     Our producing oil and natural gas properties are also pledged to secure payment of our indebtedness under this facility, but the liens granted to the lender under the Second Lien Agreement are second and junior to the rights of the first lienholders under the Revolving Credit Agreement.

     At December 31, 2006, our LIBO interest rate, plus the applicable margin, was 9.875% on $50.0 million, the outstanding principal amount of our term loan on that same date.

     In the case of alternate base rate loans, interest is payable the last day of each March, June, September and December. In the case of LIBO loans, interest is payable on the last day of the interest period applicable to each tranche, but not to exceed intervals of three months.

     The Second Lien Agreement contains various restriction covenants, including (i) maintenance of a maximum ratio of debt to earnings before interest, income taxes, depreciation, depletion and amortization, (ii) maintenance of a minimum ratio of oil and natural gas reserve value to debt, (iii) prohibition of payment of dividends, and (iv) restrictions on incurrence of additional debt. All outstanding principal and accrued and unpaid interest under the Second Lien Agreement is due and payable on November 15, 2010. The maturity date may be accelerated by the lenders upon the occurrence of an event of default under the Second Lien Agreement.

     As of December 31, 2006 we were in compliance with all of the covenants in our Second Lien Agreement.

     Interest accrued for the year ended December 31, 2006, for both of our credit facilities, was approximately $12.5 million. Of this amount, approximately $637,000 was capitalized.

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Preferred Stock

     At December 31, 2004 we had 950,000 shares of 6% convertible preferred stock outstanding. The preferred stock:

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

• was convertible into common stock at any time, at the option of the holder, into 2.8751 shares of common stock at an initial conversion price of $3.50 per share, subject to adjustment in certain events;

• was redeemable at our option, in whole or in part, for $10 per share, plus accrued dividends;

• had no voting rights, except as required by applicable law;

• was senior to the common stock with respect to dividends and on liquidation, dissolution or winding up of Parallel;

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

     As of June 6, 2005, all 950,000 outstanding shares of 6% convertible preferred stock had been converted into 2,714,280 shares of common stock.

Commodity Price Risk Management Transactions and Effects of Derivative Instruments

     The purpose of our derivative transactions is to provide a measure of stability in our cash flows. The derivative trade arrangements we have employed include collars, costless collars, floors or purchased puts, and oil, natural gas and interest rate swaps. In 2003, we designated our derivative trades as cash flow hedges under the provisions of SFAS 133, as amended. Although our purpose for entering into derivative trades has remained the same, contracts entered into after June 30, 2004 have not been designated as cash flow hedges.

     At December 31, 2006, we had no derivatives in place that were designated as cash flow hedges. All commodity derivative contracts at December 31, 2006 are accounted for by “mark-to-market” accounting whereby changes in fair value are charged to earnings. Changes in the fair values of derivatives are recorded in our Consolidated Statements of Operations as these changes occur in the “Other income (expense), net”. To the extent these trades relate to production in 2007 and beyond, and oil prices increase, we will report a loss currently, but if there is no further change in prices, our revenue will be correspondingly higher (than if there had been no price increase) when the production is sold.

     All interest rate swaps that we have entered into for 2007 and beyond are accounted for by “mark-to-market” accounting as prescribed in SFAS 133.

     We are exposed to credit risk in the event of nonperformance by the counterparties to our derivative trade instruments. However, we periodically assess the creditworthiness of the counterparties to mitigate this credit risk.

     For additional information about our price risk management transactions, see Item 7A of this Annual Report on Form 10-K, beginning on page 44.

Future Capital Requirements

     Our capital expenditure budget for 2007 is approximately $155.6 million and is highly dependent on future oil and natural gas prices and the availability of funding. In addition to the impact that oil and natural gas prices will have on our budget, these expenditures will also be subject to:

• our internally generated cash flows;

• the availability of additional borrowings under our revolving credit facility;

• the availability of supplies and services;

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• additional sources of funding; and

• our future drilling successes.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

     We have contractual obligations and commitments that may affect our financial condition. The following table is a summary of our significant contractual obligations:

	Obligation Due in Period
Contractual Cash Obligations	2007		2008		2009		2010		2011		After 5 years		Total
	($ in thousands)
Revolving Credit Facility (secured)	$	8,764	$	8,788	$	8,764	$	122,300	$	—	$	—	$	148,616
Term Loan Facility (secured)		4,937		4,951		4,938		54,315		—		—		69,141
Office Lease (Dinero Plaza)		204		210		216		36		—		—		666
Andrews and Snyder Field Offices (1)		23		14		14		14		14		530		609
Asset Retirement Obligations(2)		701		33		89		53		45		4,142		5,063
Derivative Obligations		14,109		13,954		224		208		—		—		28,495
Drilling Contract		808		—		—		—		—		—		808
Total	$	29,546	$	27,950	$	14,245	$	176,926	$	59	$	4,672	$	253,398

(1)	The Snyder office lease expires upon the cessation of production from the Diamond “M” area wells. The Andrews field office lease expires in December 2007. The lease cost for these two office facilities are billed to nonaffiliated third party working interest owners under our joint operating agreements with these third parties.
(2)	Asset retirement obligations of oil and natural gas assets, excluding salvage value and accretion.

     Deferred taxes are not included in the table above. The utilization of net operating loss carryforwards combined with our plans for development and acquisitions may offset any major cash outflows. However, the ultimate timing of the settlements cannot be precisely determined.

     The amounts above include principal payment obligations under the revolving credit facility and second lien term loan facility noted in the table above, and interest payments on such indebtedness. See Note 8 to the Consolidated Financial Statements.

     We have no off-balance sheet financing arrangements or any unconsolidated special purpose entities.

Outlook

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

• internally generated cash from operations;

• proceeds from bank borrowings; and

• proceeds from sales of equity securities.

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

• our proved reserves;

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

• the prices at which we sell oil and natural gas; and

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

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

• increased bank borrowings;

• sales of our debt and equity securities;

• sales of non-core properties; and

• other forms of financing.

     Except for our existing revolving credit facility, we do not have any agreements for future financing and there can be no assurance as to the availability or terms of any such financing.

Inflation

     Our drilling costs have escalated and we would expect this trend to continue. However, over the past several years our commodity prices have increased to offset the effects of cost inflation.

Recent Accounting Pronouncements

     In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 changes the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on subsequent derecognition of tax positions, financial statement classification, recognition of interest and penalties, accounting in interim periods, and disclosure and transition requirements. FIN 48 is effective for the Company’s fiscal year beginning January 1, 2007, with early adoption permitted. The Company is in the process of evaluating FIN 48 but does not believe that its implementation will have a material effect on the Company’s financial position or results of operation in any period.

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure requirements related to the use of fair value measures in financial statements. FAS 157 will be effective for our financial statements for the fiscal year beginning January 1, 2008; however, earlier application is encouraged. We are currently evaluating the timing of adoption and the impact that adoption might have on our financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The following quantitative and qualitative information is provided about market risks and our derivative instruments at December 31, 2006 from which we may incur future earnings, gains or losses from changes in market interest rates and oil and natural gas prices.

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Interest Rate Sensitivity as of December 31, 2006

     Our only financial instruments sensitive to changes in interest rates are our bank debt and interest rate swaps. Since our interest rates are variable and reflect current market conditions, the carrying value of our bank debt approximates the fair value. The table below shows principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average interest rates were determined using weighted average interest paid and accrued in December 2006. You should read Note 8 to the Consolidated Financial Statements for further discussion of our debt that is sensitive to interest rates.

	2006			2007			2008			2009			2010			Total
	($ in thousands)
Variable rate debt	$	—		$	—		$	—		$	—		$	165,000		$	165,000
Revolving Credit Facility (secured) Average interest rate		7.621	%		7.621	%		7.621	%		7.621	%		7.621	%
Second Lien Term Loan Facility (secured) Average interest rate		9.875	%		9.875	%		9.875	%		9.875	%		9.875	%

     At December 31, 2006, we had outstanding bank loans in the aggregate principal amount of $165.0 million at a weighted average interest rate of 8.30%. Under our revolving credit facility, we may elect an interest rate based upon the agent bank’s base lending rate or the LIBOR rate, plus a margin ranging from 2.00% to 2.50% per annum, depending on our borrowing base usage. The interest rate we are required to pay, including the applicable margin, may never be less than 5.00%. Under our second lien term loan facility, we may elect an interest rate based upon an alternate base rate, or the LIBOR rate, plus a margin of 4.50%.

     As of December 31, 2006, we employed fixed interest rate swap contracts with BNP Paribas and Citibank, NA based on the 90-day LIBOR rates at the time of the contracts. These contracts are accounted for by “mark to market” accounting as prescribed in SFAS 133. We receive interest based on a 90-day LIBOR rate and pay the fixed rates shown below. We view these contracts as protection against future interest rate volatility. Below is a table describing the nature of these interest rate swaps and the fair market value of these contracts as of December 31, 2006.

						Estimated
	Notional		Weighted Average			Fair Market Value
Period of Time	Amounts		Fixed Interest Rates			at December 31, 2006
	($ in millions)					($ in thousands)
January 1, 2007 thru December 31, 2007	$	100		4.62	%	$	611
January 1, 2008 thru December 31, 2008	$	100		4.86	%		12
January 1, 2009 thru December 31, 2009	$	50		5.06	%		(86	)
January 1, 2010 thru October 31, 2010	$	50		5.15	%		(71	)
Total Fair Market Value						$	466

Commodity Price Sensitivity as of December 31, 2006

     Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Market risk refers to the risk of loss from adverse changes in oil and natural gas prices. Realized pricing is primarily driven by the prevailing domestic price for crude oil and spot prices applicable to the region in which we produce natural gas. Historically, prices received for oil and natural gas production have been volatile and unpredictable. We expect pricing volatility to continue. Oil prices we received during 2006 ranged from a low of $51.65 per barrel to a high of

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$73.03 per barrel. Natural gas prices we received during 2006 ranged from a low of $1.00 per Mcf to a high of $15.11 per Mcf. A significant decline in the prices of oil or natural gas could have a material adverse effect on our financial condition and results of operations.

     We use various derivative instruments to minimize our exposure to the volatility of commodity prices. As of December 31, 2006, we had employed costless collars, collars and swaps in order to protect against this price volatility. Although all of the contracts that we have entered into are viewed as protection against this price volatility, all contracts are accounted for by the “mark to market” accounting method as prescribed in SFAS 133.

     As of December 31, 2005, we had one commodity swap contract with BNP Paribas that was designated as a cash flow hedge. This contract covered a total of 265,500 barrels of crude oil production in 2006 at a NYMEX swap price of $23.04 per Bbl. This contract expired on December 20, 2006.

     Below is a description of our active commodity contracts as of December 31, 2006.

     Collars. Collars are contracts which combine both a put option, or “floor”, and a call option, or “ceiling”. These contracts may not involve payment or receipt of cash at inception, depending upon “ceiling” and “floor” strike prices.

     A summary of our collar positions at December 31, 2006 is as follows:

									Houston
			NyMex						Ship Channel				WAHA				Fair
	Barrels		Oil Prices				MMBtu of		Gas Prices				Gas Prices				Market
Period of Time	of Oil		Floor		Cap		Natural Gas		Floor		Cap		Floor		Cap		Value
																	($ in
																	thousands)
January 1, 2007 thru December 31, 2007		292,000	$	55.63	$	84.88		—	$	—	$	—	$	—	$	—	$	357
April 1, 2007 thru October 31, 2007		—	$	—	$	—		214,000	$	6.00	$	11.05	$	—	$	—		85
April 1, 2007 thru October 31, 2007		—	$	—	$	—		642,000	$	—	$	—	$	6.25	$	8.90		291
January 1, 2008 thru December 31, 2008		237,900	$	60.38	$	81.08		—	$	—	$	—	$	—	$	—		411
January 1, 2009 thru December 31, 2009		620,500	$	63.53	$	80.21		—	$	—	$	—	$	—	$	—		1,733
January 1, 2010 thru October 31, 2010		486,400	$	63.44	$	78.26		—	$	—	$	—	$	—	$	—		1,285
Total Fair Market Value																	$	4,162

     Commodity Swaps. Generally, swaps are an agreement to buy or sell a specified commodity for delivery in the future, but at an agreed fixed price. Swap transactions convert a floating or market price into a fixed price. For any particular swap transaction, the counterparty is required to make a payment to us if the reference price for any settlement period is less than the swap or fixed price for the applicable derivative contract, and we are required to make a payment to the counterparty if the reference price for any settlement period is greater than the swap or fixed price for the applicable derivative contract.

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     We have entered into oil swap contracts with BNP Paribas. A recap for the period of time, number of Bbls, and weighted average swap prices are as follows:

	Barrels of		Nymex Oil		Fair Market
Period of Time	Oil		Swap Price		Value
					($ in thousands)
January 1, 2007 thru December 31, 2007		474,500	$	34.36	$	(14,109	)
January 1, 2008 thru December 31, 2008		439,200	$	33.37		(13,826	)
Total fair market value					$	(27,935	)

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our Consolidated Financial Statements and supplementary financial data are included in this Annual Report on Form 10-K beginning on page F-1.

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

     None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     We use disclosure controls and procedures to help ensure that information we are required to disclose in reports that we file with the Securities and Exchange Commission is accumulated and communicated to our management and recorded, processed, summarized and reported within the time periods specified by the SEC. As of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) was evaluated by Larry C. Oldham, our President and Chief Executive Officer (principal executive officer), and Steven D. Foster, our Chief Financial Officer (principal financial officer). Our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective for their intended purposes.

Management’s Report on Internal Control Over Financial Reporting

     Management of Parallel is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.

     Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and financial officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of management and our Board of Directors; and,

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• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

     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 with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

     Management assessed the effectiveness of Parallel’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. As a result of this assessment, management determined that Parallel’s internal control over financial reporting, as of December 31, 2006, was effective based on those criteria.

     BDO Seidman, LLP, the independent registered public accounting firm who also audited our Consolidated Financial Statements, has issued an attestation report on management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, which is set forth below under “Attestation Report”.

Changes in Internal Controls

     During the fourth quarter of fiscal 2006, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report

Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting

To the Board of Directors and Stockholders of
Parallel Petroleum Corporation
Midland, Texas

     We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Parallel Petroleum Corporation (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s 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 for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records

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that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006, and our report dated February 27, 2007 expressed an unqualified opinion.

/s/ BDO Seidman, LLP
Houston, Texas
February 27, 2007

ITEM 9B. OTHER INFORMATION

          None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     Our Directors and executive officers at February 1, 2007 are as follows:

		Director
Name	Age	Since	Position with Company
Thomas R. Cambridge (1)	71	1985	Chairman of the Board of Directors
Larry C. Oldham(1)	53	1979	Director, President and Chief Executive Officer
Martin B. Oring(1)(2)(3)(4)	61	2001	Director
Ray M. Poage (1)(2)(3)(4)	59	2003	Director
Jeffrey G. Shrader (1)(2)(3)(4)	56	2001	Director
Donald E. Tiffin	49	—	Chief Operating Officer
Eric A. Bayley	58	—	Vice President of Corporate Engineering
John S. Rutherford	46	—	Vice President of Land and Administration
Steven D. Foster	51	—	Chief Financial Officer

(1)	Member of Hedging and Acquisitions Committee
(2)	Member of Compensation Committee
(3)	Member of Audit Committee
(4)	Member of Corporate Governance and Nominating Committee

     Thomas R. Cambridge, Chairman of the Board of Directors of Parallel, is an independent petroleum geologist engaged in the exploration for, development and production of oil and natural gas. From 1970 until 1990, such activities were carried out primarily through Cambridge & Nail Partnership, a Texas general partnership. Since 1990, such activities have been carried out through Cambridge Production, Inc., a Texas corporation, and Cambridge Partnership, Ltd., a Texas limited partnership. Mr. Cambridge has served as a Director of Parallel since February 1985 and as Chairman of the Board since October 1985; as President during the period from October 1985 to October 1994 and as Chief Executive Officer from October 1985 to January 2004. He received a Bachelors degree in geology from the University of Nebraska in 1958 and a Masters of Science degree in 1960.

     Mr. Oldham is a founder of Parallel and has served as an officer and Director since its formation in 1979. Mr. Oldham became President of Parallel in October 1994, and served as Executive Vice President before becoming President. Effective January 1, 2004, Mr. Oldham replaced Mr. Cambridge as Chief Executive Officer. Mr. Oldham received a Bachelor of Business Administration degree from West Texas State University in 1975.

     Mr. Oring is an owner and managing member of Wealth Preservation, LLC, a financial counseling firm founded by Mr. Oring in January 2001. From 1998 to December 2000, Mr. Oring was Managing Director Executive Services of Prudential Securities Incorporated, and from 1996 to 1998, Mr. Oring was Managing Director Capital Markets of Prudential Securities Incorporated. From 1989 to 1996, Mr. Oring was Manager of Capital Planning for The Chase Manhattan Corporation. At February 1, 2007, Mr. Oring was Chairman of the Hedging and Acquisitions Committee of the Board of Directors.

     Mr. Poage was a partner in KPMG LLP from 1980 to June 2002 when he retired. Mr. Poage’s responsibilities included supervising and managing both audit and tax professionals and providing services, primarily in the area of taxation, to private and publicly held companies engaged in the oil and natural gas industry. At February 1, 2007, Mr. Poage was Chairman of the Audit Committee of the Board of Directors.

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     Mr. Shrader has been a shareholder in the law firm of Sprouse Shrader Smith, Amarillo, Texas, since January 1993. He has also served as a director of Hastings Entertainment, Inc. since 1992. At February 1, 2007, Mr. Shrader was Chairman of the Compensation Committee and Corporate Governance and Nominating Committee of the Board of Directors.

     Mr. Tiffin served as Vice President of Business Development from June 2002 until January 1, 2004 when he became Chief Operating Officer. From August 1999 until May 2002, Mr. Tiffin served as General Manager of First Permian, L.P. and from July 1993 to July 1999, Mr. Tiffin was the Drilling and Production Manager in the Midland, Texas office of Fina Oil and Chemical Company. Mr. Tiffin graduated from the University of Oklahoma in 1979 with a Bachelor of Science degree in Petroleum Engineering.

     Mr. Bayley has been Vice President of Corporate Engineering since July 2001. From October 1993 until July 2001, Mr. Bayley was employed by Parallel as Manager of Engineering. From December 1990 to October 1993, Mr. Bayley was an independent consulting engineer and devoted substantially all of his time to Parallel. Mr. Bayley graduated from Texas A&M University in 1978 with a Bachelor of Science degree in Petroleum Engineering. He graduated from the University of Texas of the Permian Basin in 1984 with a Master’s of Business Administration degree.

     Mr. Rutherford has been Vice President of Land and Administration of Parallel since July 2001. From October 1993 until July 2001, Mr. Rutherford was employed as Manager of Land/Administration. From May 1991 to October 1993, Mr. Rutherford served as a consultant to Parallel, devoting substantially all of his time to Parallel’s business. Mr. Rutherford graduated from Oral Roberts University in 1982 with a degree in Education, and in 1986 he graduated from Baylor University with a Master’s degree in Business Administration.

     Mr. Foster has been the Chief Financial Officer of Parallel since June 2002. From November 2000 to May 2002, Mr. Foster was the Controller and Assistant Secretary of First Permian, L.P. and from September 1997 to November 2000, he was employed by Pioneer Natural Resources, USA in the capacities of Director of Revenue Accounting and Manager of Joint Interest Accounting. Mr. Foster graduated from Texas Tech University in 1977 with a Bachelor of Business Administration degree in Accounting. He is a certified public accountant.

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

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

     There are no family relationships between any of Parallel’s directors or officers.

Consulting Arrangements

     As part of our overall business strategy, we continually monitor our general and administrative expenses. Decisions regarding our general and administrative expenses are made within parameters we believe to be compatible with our size, the level of our activities and projected future activities. Our goal is to keep general and administrative expenses at acceptable levels, without impairing the quality of services and organizational structure necessary for conducting our business. In this regard, we retain outside advisors and consultants from time to time to provide technical and administrative support services in the operation of our business.

Corporate Governance

     Under the Delaware General Corporation Law and Parallel’s bylaws, our business, property and affairs are managed by or under the direction of the Board of Directors. Members of the Board are kept informed of Parallel’s business through discussions with the Chairman of the Board , the Chief Executive Officer and other officers, by reviewing materials provided to them and by participating in meetings of the Board and its committees. We currently have five members of the Board, including Thomas R. Cambridge, Larry C. Oldham, Martin B. Oring, Ray M. Poage and Jeffrey G. Shrader. The Board has determined that all of our Directors, other than Mr. Cambridge and Mr. Oldham, are “independent” for the purposes of NASD Rule 4200(a) (15). The Board based these determinations primarily on responses of the Directors and executive officers to questions regarding employment and compensation history, affiliations and family and other relationships and on discussions among the Directors.

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     The Board has four standing committees:

• the Audit Committee;

• the Corporate Governance and Nominating Committee;

• the Compensation Committee; and

• the Hedging and Acquisitions Committee.

     Dewayne E. Chitwood also served on our Board of Directors from December 2000 until January 2007 when he resigned from the Board. Mr. Chitwood was also one of our independent Directors and served on the Audit, Compensation and Corporate Governance and Nominating committees throughout 2006.

Audit Committee

     The Audit Committee of the Board of Directors reviews the results of the annual audit of our Consolidated Financial Statements and recommendations of the independent auditors with respect to our accounting practices, policies and procedures. As prescribed by our Audit Committee charter, the Audit Committee also assists the Board of Directors in fulfilling its oversight responsibilities, reviewing our systems of internal accounting and financial controls, and the independent audit of our Consolidated Financial Statements.

     The Audit Committee of the Board of Directors consists of three directors, all of whom have no financial or personal ties to Parallel (other than director compensation and equity ownership as described in this Annual Report on Form 10-K) and meet the Nasdaq standards for independence. The Board of Directors has determined that at least one member of the Audit Committee, Ray M. Poage, meets the criteria of an “audit committee financial expert” as that term is defined in Item 401(h) of Regulation S-K, and is independent for purposes of Nasdaq listing standards and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended. Mr. Poage’s background and experience includes service as a partner of KPMG LLP where Mr. Poage participated extensively in accounting, auditing and tax matters related to the oil and natural gas business. The Audit Committee operates under a charter which can be viewed in our website on www.plll.com.

     The current members of the Audit Committee are Martin B. Oring, Ray M. Poage (Chairman) and Jeffrey G. Shrader.

Corporate Governance and Nominating Committee

     The Board’s Corporate Governance and Nominating Committee operates under a charter outlining the functions and responsibilities of the committee, including recommending to the full Board of Directors nominees for election as directors of Parallel, and making recommendations to the Board of Directors from time to time as to matters of corporate governance. The current members of this committee are Martin B. Oring, Ray M. Poage and Jeffrey G. Shrader A copy of the charter can be viewed in our website at www.plll.com.

     The committee will consider candidates for Director suggested by stockholders. Stockholders wishing to suggest a candidate for Director should write to any one of the members of the committee at his address shown under Item 12 of this Annual Report on Form 10-K. Suggestions should include:

• a statement that the writer is a stockholder and is proposing a candidate for consideration by the committee;

• the name of and contact information for the candidate;

• a statement of the candidate’s age, business and educational experience;

• information sufficient to enable the committee to evaluate the candidate;

• a statement detailing any relationship between the candidate and any joint interest owners, customer, supplier or competitor of Parallel;

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• detailed information about any relationship or understanding between the proposing stockholder and the candidate; and

• a statement that the candidate is willing to be considered and willing to serve as a Director if nominated and elected.

Compensation Committee

     The members of the Compensation Committee during 2006 were Dewayne E. Chitwood, Martin B. Oring, Ray M. Poage and Jeffrey G. Shrader. Messrs. Oring, Poage and Shrader continue to serve as members of the Compensation Committee. Mr. Chitwood’s membership on the committee terminated when he resigned from the Board of Directors in January 2007. Mr. Shrader presently acts as the Chairman of the Compensation Committee. The Compensation Committee’s responsibilities include reviewing and recommending to the Board the compensation and terms of benefit arrangements with Parallel’s officers, and making of awards under such arrangements.

Hedging and Acquisitions Committee

     The Hedging and Acquisitions Committee presently consists of all five of our Directors, including Messrs. Oring, Poage, Shrader, Oldham and Cambridge. Mr. Oring presently serves as chairman of this committee. With respect to derivative contracts, the committee reviews, assists, and advises management on overall risk management strategies and techniques. The committee strives to implement prudent commodity and interest rate derivative arrangements, and monitors our compliance with certain covenants in our revolving credit facility. The Hedging and Acquisitions Committee also reviews with management plans and strategies for pursuing acquisitions.

Code of Ethics

     The Board has adopted a code of ethics which applies to all of our directors, officers and employees, including our chief executive officer, chief financial officer and all other financial officers and executives. You may review the code of ethics on our website at www.plll.com. A copy of our code of ethics has also been filed with the Securities and Exchange Commission and is incorporated by reference as an exhibit to this Annual Report on Form 10-K. We will provide without charge to each person, upon written or oral request, a copy of our code of ethics. Requests should be directed to:

Manager of Investor Relations
Parallel Petroleum Corporation
1004 N. Big Spring, Suite 400
Midland, Texas 79701
Telephone: (432) 684-3727

Stockholder Communications with Directors

     Parallel stockholders who want to communicate with any individual Director can write to that Director at his address shown under Item 12 of this Annual Report on Form 10-K.

     Your letter should indicate that you are a Parallel stockholder. Depending on the subject matter, the Director will:

• if you request, forward the communication to the other Directors;

• request that management handle the inquiry directly, for example where it is a request for information about the company or it is a stock-related matter; or

• not forward the communication to the other Directors or management if it is primarily commercial in nature or if it relates to an improper or irrelevant topic.

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Director Attendance at Annual Meetings

     We typically schedule a Board meeting in conjunction with our annual meeting of stockholders and expect that our Directors will attend, absent a valid reason, such as illness or a schedule conflict. Last year, all six of the individuals then serving as Directors attended our annual meeting of stockholders.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires Parallel’s Directors and officers to file periodic reports with the Securities and Exchange Commission. These reports show the Directors’ and officers’ ownership and the changes in ownership, of Parallel’s common stock and other equity securities. To our knowledge, all Section 16(a) filing requirements were complied with during 2006, except that Eric A. Bayley, Vice President of Corporate Engineering, owned a warrant to purchase 200 shares of common stock which was not included in his Form 3 Report when he became an officer of Parallel on July 1, 2001.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction and Overview

     The Compensation Committee of the Board of Directors is responsible for determining the types and amounts of compensation we pay to our executives. Our Committee operates under a written charter that you can view on our website at http://www.plll.com. The Board of Directors has affirmatively determined that each director who is a member of the Committee meets the independence requirements of the Nasdaq Global Market. The Board determines, in its business judgment, whether a particular Director satisfies the requirements for membership on the Committee set forth in the Committee’s charter. None of the members of the Compensation Committee are current or former employees of Parallel or any of its subsidiaries.

     Our Compensation Committee is responsible for formulating and administering the overall compensation principles and plans for Parallel. This includes establishing the compensation paid to our officers, administering our stock option plans and, generally, reviewing our compensation programs at least annually.

     The Committee periodically meets in executive session without members of management or management directors present and reports to the Board of Directors on its actions and recommendations.

     We discuss below the philosophy, objectives and principles we followed last year for compensating our executive officers.

Compensation Philosophy and Objectives

     The Committee’s compensation philosophy is to provide an executive compensation program that:

• is competitive with compensation programs offered by comparable companies engaged in businesses similar to ours;

• rewards performance, skills and talents necessary to advance our company objectives and further the interests of stockholders;

• is balanced between a fair and reasonable cash compensation and incentives linked to Parallel’s overall operating performance; and

• is fair to our executives, but within reasonable limits.

     The Company’s practice is and has been to link compensation with performance, measured at the company level, and to emphasize the importance of each executive’s contribution to the overall success of the Company. The overall objectives of our compensation philosophy are to:

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• provide a reasonable and competitive level of current annual income;

• provide incentives that encourage our executives to continue their employment with us;

• motivate executives to accomplish our company goals and reward performance;

• create an environment conducive to company-oriented success rather than individual success;

• align compensation and benefits with business strategy and competitive market data; and

• encourage the application of prudent decision making processes in an industry marked by volatility and high risk.

     Our Committee supports these objectives by emphasizing compensation arrangements that we believe will attract and retain qualified executives and reward them for creating a solid platform for the long-term growth and success of Parallel. At the same time, we are mindful of, and try to balance our executive compensation arrangements with, the interests and concerns of stockholders.

     To more fully understand our current compensation philosophies and practices, it is important to keep in mind some historical milestones that have influenced the shaping of our compensation practices. For instance, it was not until May 2002 that we had more than seven employees, as compared to 41 employees that we currently have; our total market capitalization (including shares held by our officers and directors) at December 31, 2002 was approximately $58 million, as compared to a total market capitalization (including shares held by our officers and directors) of approximately $660 million at December 31, 2006; and it was not until the latter part of 2004 that the market price of our stock consistently exceeded $5.00 per share. Given our small size, limited staff and limited resources in earlier years, the compensation of our executives consisted primarily of salaries, cash bonuses and stock options, with an emphasis on the use of stock options. Since November 2002, however, we have moved away from the use of stock options as a long-term incentive and relied more on our Incentive and Retention Plan that we adopted in 2004. Other than shifting our emphasis from the use of stock options to the Incentive and Retention Plan, we have chosen to continue a relatively simple compensation framework for our executives. We believe that by doing so, we are able to establish a higher degree of understanding and certainty for our executives as well as the investing public, while at the same time avoiding complex benefit packages and agreements that are less transparent than our compensation program and that require significant time and cost to properly administer. In the end, we believe our compensation arrangements provide the desired results: fair and reasonable pay for achievements beneficial to Parallel and its stockholders.

Compensation Components

     Our judgments regarding executive compensation are primarily based upon our assessment of company performance, and each executive officer’s leadership, performance and individual contributions to Parallel’s business. The accounting and tax treatment of different elements of compensation has not had a significant impact on our use of any particular form of compensation. In reviewing the overall compensation of our officers, we have historically considered a mix of the following components or elements of executive compensation:

• base salaries;

• stock option grants;

• annual cash bonuses;

• health and life insurance plans which are generally available to all of our employees;

• contributions by Parallel to our 401(k) retirement plan;

• an equity based cash incentive plan;

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• change of control arrangements; and

• limited perquisites and personal benefits provided by Parallel to our executive officers.

     To help give you a better understanding of the overall compensation picture of our executives, we have included the following table showing the elements of executive compensation we have used in the past and certain types of executive compensation that we have not used :

	Used by	Not Used by
Elements of Compensation	Parallel	Parallel
Base salaries	ü
Employment agreements		ü
Cash bonuses	ü
Stock awards		ü
Change of control/severance arrangements	ü
Defined benefit pension plan		ü
Defined contribution plan	ü
Stock options	ü
Tax gross-ups	ü
Employee stock purchase/ ownership plan		ü
Supplemental executive retirement plans/benefits		ü
Deferred compensation plan		ü
Incentive and retention plan	ü
Limited perquisites and personal benefits	ü

Evaluation Factors

     In addition to comparing the compensation packages of our officers with the compensation packages of officers of other companies similar to Parallel, we also relied, as we have in the past, on our general knowledge and experience in the oil and natural gas industry, focusing on a subjective analysis of each of our executive’s contributions to Parallel’s overall performance. While specific performance levels or “benchmarks” are not used to establish salaries, cash bonuses or grant stock options, we do take into account historic comparisons of Parallel’s performance. The link between pay and company performance is based primarily on the Compensation Committee’s evaluation of periodic results of certain elements of company performance. Generally, our evaluations are influenced equally by operational metrics and financial metrics.

     We have not adopted specific target or performance levels with respect to quantitative or qualitative performance-related factors which would automatically result in increases or decreases in compensation. Instead, we make subjective determinations based upon a consideration of many factors, including those we have described below. We have not assigned relative weights or rankings to these factors. Specific elements of company performance and individual performance that we consider in setting compensation policies and making compensation decisions

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include the following factors, several of which we consider in the context of Parallel alone and by comparison with peer companies:

• growth in the quantity and value of our proved oil and natural gas reserves;

• volumes of oil and natural gas produced by Parallel and our executives’ ability to replace oil and natural gas produced with new oil and natural gas reserves;

• cash flows from operations;

• revenues;

• earnings per share;

• the market value of our common stock;

• the extent to which the officers have been successful in finding and creating opportunities for Parallel to participate in acquisition, exploitation and drilling ventures having quality prospects;

• the ability of our officers to formulate and maintain sound budgets for our business activities;

• the overall financial condition of Parallel;

• the achievement by management of specific tasks and goals set by the Board of Directors from time to time;

• the effectiveness of our compensation packages in motivating officers to remain in Parallel’s employment;

• oil and gas finding costs and operating costs; and

• the ability of our executives to effectively implement risk management practices, including oil and natural gas and interest rate hedging activities.

     In addition to considering the elements of performance described above, other factors that we consider in determining compensation include:

• longevity of service; and

• the individual performance, leadership, business knowledge and level of responsibility of our officers.

     We believe the key components of our executive compensation program, base salary, cash bonuses and the potential for awards under our Incentive and Retention Plan, provide an adequate mix of different types of compensation that reflect the outcome of our analysis of the evaluation factors described above. For instance, we believe that potential rewards under the Incentive and Retention Plan are reflective of the longer-term operational metrics of reserve growth, increased production and increased cash flows from operations, while base salaries and cash bonuses are more closely linked to the short-term objectives of providing reasonable and competitive levels of current annual increases. Since the elements of compensation we use are fairly limited, the results of our evaluation of the company’s performance and executive’s individual performance are reflected more by the amounts of compensation we award, rather than by type of award.

     In recent years, the practice of the Committee has been to complete our compensation evaluation and make compensation recommendations prior to the end of each year. This year, however, and partly because of the SEC’s new executive compensation disclosure rules, we approached our review and evaluation differently, giving additional emphasis to the processes we used in reviewing and evaluating compensation, as described under “Compensation

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Committee Report” on page 64. As a result, and as described below, the Committee recommended minimal cash bonuses in December 2006 and also awarded final cash bonuses and increases in base salaries in February 2007.

     With our compensation philosophy and objectives in mind, we discuss below in more detail the key elements of executive compensation and the factors underlying our decisions for 2006.

Base Salaries

     Salary levels are based on factors including individual and company performance, level and scope of responsibility and competitive salary levels within the industry. We do not give specific weights to these factors. The Committee determines base salary levels by reviewing comparative salary data gathered by our CEO and CFO and by the Committee’s consultant, and by reviewing publicly available information such as proxy statements filed by other exploration and production companies with similar market capitalizations. As the focal point for determining base salaries, we targeted the median to the 75^th percentile range of salaries and cash bonuses for executive officers of a fifteen company peer group. The peer group consisted of Edge Petroleum Corporation, PetroQuest Energy, Inc., Brigham Exploration Company, Vaalco Energy, Inc., Carrizo Oil & Gas, Inc., PrimeEnergy Corporation, Goodrich Petroleum Corporation, The Exploration Company of Delaware, Inc., Barnwell Industries, Inc., Abraxas Petroleum Corporation, Harken Energy Corporation, Panhandle Royalty Company, Warren Resources, Inc., Toreador Resources Corporation and Ivanhoe Energy Inc. This peer group was selected based primarily on total revenues and market capitalization. Base salaries for each executive are reviewed individually on an annual basis. Salary adjustments are based on the individuals’ experience and background, the individual’s performance during the prior year, the general movement of salaries in the marketplace, our financial position and the recommendations of our chief executive officer. As a result of these factors, an executive’s base salary may be above or below the base salaries of executives in other oil and gas exploration and production companies at any point in time. Upon completion of the Committee’s review and evaluation, and based on the financial and operations results and the criteria for the salary determinations, our named executive officers received the following increases in their annual base salaries:

Mr. Oldham	-- from	$	300,000	to	$	330,000
Mr. Tiffin	-- from	$	250,000	to	$	275,000
Mr. Rutherford	-- from	$	160,000	to	$	175,000
Mr. Foster	-- from	$	175,000	to	$	190,000
Mr. Bayley	-- from	$	160,000	to	$	175,000
Mr. Cambridge	-- from	$	135,000	to	$	145,000

Cash Bonuses

     Historically, we have used, and continue to use, short-term incentives in the form of annual cash bonuses to compensate executive officers. Annual cash bonuses are viewed by the Committee as supplemental short-term incentives in recognition of Parallel’s overall performance and the efforts made by our executives during a particular year. Cash bonuses are based on a subjective determination of amounts we deem sufficient to reward our executives and remain competitive within our geographic environment. As with base salaries, we also targeted the median to 75^th percentile rankings of our fifteen-company peer group. We do not use specific performance targets when determining cash bonuses. The Committee considers Parallel’s overall performance, the individual performance of each executive, and the level of responsibility and experience of each executive to determine the final bonus amounts. Bonuses are paid at the discretion of the Committee based on the overall accomplishments of Parallel and individual performance.

     In December 2006, we addressed the short-term incentives provided to our executives in the form of cash bonuses and an associated tax gross-up payment. Even though we had not completed our evaluations for 2006, we chose to award these cash bonuses in December because we recognized the overall efforts and accomplishments of

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Parallel and our executives and we believed it was important to communicate to our executives a preliminary recognition of their achievements. Specific criteria and company events we considered in awarding these cash bonuses included the growth of our proved oil and natural gas reserves, and the successful completion of our equity offering in August 2006. After our preliminary review of these criteria and events, in December 2006, the Committee initially authorized cash bonuses and an associated tax gross-up for each of its executive officers as follows:

	Amount of		Amount of
	Bonus		Tax Gross-Up
Mr. Oldham	$	10,000	$	3,629
Mr. Tiffin	$	10,000	$	1,687
Mr. Rutherford	$	10,000	$	3,697
Mr. Foster	$	10,000	$	3,559
Mr. Bayley	$	10,000	$	3,836
Mr. Cambridge	$	10,000	$	5,152

After completing our review in February 2007, the Committee authorized additional cash bonuses as follows:

	Amount of
	Bonus
Mr. Oldham	$	175,000
Mr. Tiffin	$	137,500
Mr. Rutherford	$	50,000
Mr. Foster	$	50,000
Mr. Bayley	$	50,000
Mr. Cambridge	$	50,000

Stock Options

     Prior to 2003, we relied heavily on the use of stock options as a form of compensation because of our size and limited cash resources. Although we believe stock options can provide meaningful and reasonable long-term incentives, the Committee determined that additional annual grants of stock options were not warranted, considering the number of stock options granted in prior years. We have not granted stock options to any of our executive officers since November 2002. The last time we granted stock options to our Chief Executive Officer, Mr. Oldham, was on June 20, 2001 when he was granted a stock option to purchase 200,000 shares of common stock at an exercise price of $4.97 per share, the fair market value of the common stock on the date of grant. In May 2003, Mr. Oldham voluntarily relinquished 100,000 shares of common stock underlying this option in order to restore and make available shares of stock for option grants to non-officer employees. The last time we granted stock options to any of our other executives was on November 14, 2002 when we granted stock options to Mr. Tiffin, our Chief Operating Officer, and to Mr. Foster, our Chief Financial Officer. Mr. Tiffin was granted a stock option to purchase 50,000 shares of common stock and Mr. Foster was granted a stock option to purchase 35,000 shares of stock. The exercise price of both stock options was $2.18 per share, the fair market value of the common stock on the date of grant.

     We do not have a specific program or plan with regard to the timing or dating of option grants. Our stock options have not been granted at regular intervals or on pre-determined dates. The Committee’s practice as to when options are granted has historically been made at the discretion of the Committee. Generally, no distinctions have been made in the timing of option grants to executives as compared to employees. Since October 1993, stock options have been granted to our officers and employees on thirteen different occasions. On eight occasions, options were awarded to employees only; on four occasions options were awarded to officers and employees; and on one occasion an option was awarded to one officer.

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     We do not grant discounted options and exercise prices are not based on a formula. All of our options are granted “at-the-money.” In other words, the exercise price of the option equals the fair market value of the underlying stock on the actual date of grant. We conducted an internal review of all of our stock option grants since August 1996 and we did not find any instances of option “backdating.”

     Historically, the granting of options has not been purposefully timed around the public announcement of material non-public information. Our Committee’s practice has been to meet whenever one or more of the Committee members expresses a desire to discuss in executive session any particular aspect of executive compensation, and the proximity of any stock option grant to earnings or other material announcements is coincidental. We have not and do not plan to purposefully time the release of material non-public information for the purpose of affecting the value of executive compensation.

     Other Compensation

     Our executive officers participate in a 401(k) retirement and savings plan on the same basis as other employees. Parallel “matches” certain employee contributions to its 401(k) retirement plan with cash contributions. Company matching amounts for the named executive officers are included under the caption “All Other Compensation” in the Summary Compensation Table on page 65.

     We do not have a written policy or formula regarding the adjustment, reduction or recovery of awards of payments if company performance is not optimal. However, the Committee does take into account compensation realized or potentially realizable from prior compensation awards in setting new types and amounts of compensation. Although we have never decreased the compensation of any of our executive officers, the percentage increases in annual salaries and cash bonuses vary from year to year, with some increases being smaller than previous years.

Allocation of Amounts and Types of Compensation

     Other than our 401(k) retirement plan and outstanding stock options that were granted to our executive officers prior to 2003, we do not presently have a long-term incentive program in place, although we may in the future implement a long-term incentive or performance plan. We do, however, believe that our Incentive and Retention Plan does have long-term incentive characteristics. Since we do not have a traditional form of long-term incentive program, the method of allocating different forms of long-term compensation has not been a consideration for us. The Committee has not adopted a specific policy for allocating between long-term and currently paid out compensation, nor have we adopted a specific policy for allocating between cash and non-cash compensation. However, since December 2002, the compensation we have paid to our executives has emphasized the use of cash rather than non-cash compensation. We have chosen to do this in order to maintain and continue our practice of having a simplified, but effective and competitive, compensation package. In determining the amount and mix of compensation elements for each executive officer, the Committee relies on judgment, not upon fixed guidelines or formulas, or short term changes in our stock price. Specific allocation policies have not been applied by the Committee largely because company performance in the oil and natural gas industry is often volatile and cyclical and Parallel’s performance in any given year, whether favorable or unfavorable, may not necessarily be representative of immediate past results or future performance. The Committee also recognizes that company performance is often the result of factors beyond the control of Parallel or its executives, especially oil and natural gas prices. For instance, even when we believe our executives have demonstrated superior individual performance during any particular year, the year-end value and quantities of our proved reserves, which are based on oil and gas prices at December 31 of each year, may reflect a level of company performance, whether good or bad, that is not necessarily reflective of actual company and individual performance. Consequently, the Compensation Committee examines and recommends executive compensation levels based on the evaluation factors described above compared over a period of time, rather than applying these factors on an isolated or “snapshot” basis at the time compensation levels are established by the Committee. In this regard, and partly due to the peculiarities of financial accounting requirements for exploration and production companies, the Committee emphasizes a subjective approach to allocating the amounts and types of compensation for our executives.

     By choosing to pay the elements of compensation discussed above, we try to maintain a simple and competitive position for our total compensation package.

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Internal and External Assistance

     Our Committee has the authority to retain, at Parallel’s expense, compensation consultants. Utilizing this authority, our Committee engaged the services of an independent compensation consultant, Mercer Human Resources Consultants, Inc., to assist us in our review of executive compensation for 2006. The consultant reports directly to the Committee. We compared the data provided to us by the consultant to data provided to us by management. The Committee next reviewed with Mercer the differences between the data provided by management and the data provided by Mercer, including the peer group of companies selected by each. We selected the peer group used by Mercer in its analysis, which was based primarily on the similarity of revenue and market capitalization of Parallel and the peer companies. Our review included comparisons of pay data for comparable executive positions and compensation components used by the peer group. Both the independent compensation consultant and Messrs. Oldham and Foster also provided the Committee with statistical information and advice on current competitive compensation practices and trends in the marketplace, including information derived from compensation surveys published by other independent compensation consultants.

     Generally, the Compensation Committee also seeks the input and insight of Mr. Oldham concerning broad, general topics such as morale of our executive officers, any specific factors that Mr. Oldham believes to be appropriate for the Committee’s consideration and which the Committee may not be aware of, such as extraordinary day-to-day efforts or accomplishments of any of our executives and ranges of compensation recommended by Mr. Oldham. Mr. Foster assists us in gathering and organizing data for our review.

Change of Control Arrangements

     Our stock option plans and our Incentive and Retention Plan contain “change of control” provisions. We use these provisions in an effort to provide some assurance to the Board of Directors that the Board will be able to rely upon our executives continuing in their positions with Parallel, and that Parallel will be able to rely upon each executive’s services and advice as to the best interests of Parallel and its stockholders without concern that the executive might be distracted by the personal uncertainties and risks created by any proposed or threatened change of control.

     Stock Option Plans

     As described in more detail under the caption “Change of Control Arrangements” on page 68, the Compensation Committee may adjust the stock options held by our executives upon the occurrence of a change of control. With this authority, the Compensation Committee may in its discretion elect to accelerate the vesting of any stock options that were not fully vested at the time of a change of control. In addition, under some of our stock option plans, acceleration of vesting schedules will automatically occur. In the “Outstanding Equity Awards at Fiscal Year-End” table on page 67, you can see the stock options currently held by our executives and the exercise prices for each of these options. Mr. Oldham, our Chief Executive Officer, is the only executive officer that has a stock option that had not fully vested as of December 31, 2006. As described in the “Outstanding Equity Awards at Fiscal Year-End” table, Mr. Oldham holds a stock option to purchase a total of 37,500 shares of common stock which remained unvested at December 31, 2006. If a change of control had occurred on December 31, 2006, a total of 37,500 shares would have automatically vested on that date.

     Mr. Oldham’s option to purchase an aggregate of 37,500 of our shares, with a value of $17.57 per share, could have become fully exercisable on December 31, 2006 if a change of control were to have occurred on that date. Under the terms of Mr. Oldham’s stock option, he would have to pay an aggregate of $186,375 to purchase these shares. Accordingly, the maximum value of the accelerated vesting of the option would have been $472,500 ($17.57 per share value on December 31, 2006, multiplied by 37,500 of our shares subject to the option minus $186,375, the aggregate exercise price for the option).

(61)

     Incentive and Retention Plan

     In 2002 and before, long-term incentives were made up of stock options. In 2004, upon recommendation of the Committee, we adopted the Incentive and Retention Plan described in more detail on page 69 of this Annual Report on Form 10-K. Generally, this plan authorizes the Committee to grant executive officers awards in the form of “base shares,” with one base share being equated to one share of our common stock. The value of base shares fluctuates directly with changes in the price of Parallel’s stock which we believe more closely ties the interests of our executives directly to those of stockholders. The base shares are paid out only upon a corporate transaction or a change of control as further described below and on page 70. Payouts, when triggered, are to be paid in cash. The Committee will determine the total number of base shares to grant each executive officer by using individual performance, level of responsibility, experience and the extent to which each executive officer may have contributed to the occurrence of a triggering event under the plan, as well as the outcome of the event. All of our other employees and consultants are also eligible to participate in this plan.

     The Incentive and Retention Plan is designed to align the interests of executives with stockholders and to provide each executive with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. When we were in the initial stages of formulating this plan, we began with the concept of a more traditional long-term incentive plan which would provide our executives with potential cash awards based on year-to-year comparisons of the growth in our proved oil and natural gas reserves, with these annual cash awards being predicated on various performance factors, including predetermined percentage increases in our proved oil and natural gas reserves. However, we realized that under this approach annual cash payments could result simply as a result of increases in the prices of oil and natural gas which would not necessarily equate to actual growth in our reserves or any specific achievements by our executives and under circumstances that might not result in additional value to our stockholders. After further consideration, we decided to tie any potential rewards under this plan to the market price of our stock. Although not linked to any specific performance measures, we believe that linking potential rewards to the market price of our stock reflects a “bundling” of company performance measures that are of importance to investors in smaller exploration and production companies like Parallel, and which will be reflected in the market price of our stock. In addition, and instead of providing for “automatic” annual bonuses, we believed it important to reward our executives under circumstances that were more likely to coincide with events that could also result in our stockholders realizing value. Thus, one prong of the Incentive and Retention Plan provides for payments only when there is a “corporate transaction,” such as a merger or sale of Parallel. The second prong of the plan provides for payments upon the occurrence of a change on control. We structured the Incentive and Retention Plan in this fashion primarily to satisfy our objective of retaining management, and to more closely connect potential payments to our executives to an event in which all of our stockholders would be more likely to realize value from their investments in Parallel. Further, it is our belief that the interests of stockholders will be best served if the interests of our management are aligned with them, and the Incentive and Retention Plan should eliminate, or at least reduce, any reluctance management might have to pursue potential corporate transactions that may be in the best interests of stockholders. The cash benefits are payable in one lump-sum.

     The oil and natural gas industry in our specific areas of operation continues to experience increases in leasing, acquisitions, drilling and development activities. This activity has resulted in significant management turnover within the areas we operate, largely because of greater compensation packages and incentives being offered by our competitors. Our Committee believes that the potential rewards to our executives under the Incentive and Retention Plan provide the necessary incentive for our executives to remain employed by, and diligently pursue the goals of, Parallel. Since adopting the plan, none of our officers have left our employment, and only one employee has left our employment.

     Under our Incentive and Retention Plan, our officers, employees and consultants are eligible to receive a one-time performance payment upon the occurrence of a corporate transaction or a one-time retention payment upon the occurrence of a change of control. Generally, a corporate transaction means an acquisition of Parallel, a sale of substantially all of Parallel’s assets or the dissolution of Parallel. A change of control generally means the acquisition of 60% or more of our outstanding common stock or an event that results in our current Directors ceasing to constitute a majority of the Board of Directors.

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     In the case of a corporate transaction, the total aggregate potential payments would be equal to the sum of (a) the per share price received by all stockholders minus a base price of $3.73 per share, multiplied by 1,080,362 “base shares,” plus (b) the per share price received by all stockholders minus an “additional base price” of $8.62 per share, multiplied by 400,000 “additional base shares”. If a change of control occurs, the aggregate potential payments to all plan participants would be equal to the sum of (a) the per share closing price of Parallel’s common stock on the day immediately preceding the change of control, minus the base price of $3.73 per share, multiplied by 1,080,362, plus (b) the per share closing price of Parallel’s common stock on the day immediately preceding the change of control, minus an “additional base price” of $8.62 per share, multiplied by 400,000 “additional base shares.”

     If a corporate transaction or change of control occurs, the Compensation Committee has the discretion to allocate for payment to each of our executives, employees or consultants a portion of the total performance bonus or retention payment as the Committee determines in its sole discretion. Although the Committee has not made any awards under our Incentive and Retention Plan, for illustration purposes, assuming a corporate transaction or change of control occurred on December 31, 2006, and that the applicable price of our common stock was $17.57 per share, the closing price of our common stock as of December 31, 2006, the total aggregate potential payments to all eligible participants would be $18.5 million.

     The change of control provisions in our stock option plans and in the Incentive and Retention Plan utilize “single triggers.” As compared to “double triggers,” we believe that single triggers provide a more definitive outcome for our executives if a triggering event does occur and are more likely to prevent an executive from becoming entangled in various interpretive issues concerning the applicability of a second or double trigger to any particular triggering event. For these reasons, coupled with the fact that none of our executives have deferred compensation arrangements or employment or other post-termination compensation agreements with Parallel, we believe the use of single triggers is not inconsistent with the best interests of Parallel or our stockholders.

Stock Ownership/Retention Guidelines

     Although we do not have written guidelines or policy statements requiring specified levels of stock ownership or “holding” practices, we encourage all of our officers and directors to refrain from selling their shares. We have not adopted formal guidelines because our executives and directors as a group have in the past voluntarily and consistently demonstrated a practice of holding and retaining their shares. During the three year period ended December 31, 2006, none of our officers and directors have sold any shares of Parallel stock.

     Under our policy covering insider trading procedures, our executives, their spouses and other immediate family members sharing the executive’s household are prohibited from selling any securities of Parallel that are not owned at the time of the sale, a “short sale.” Also, no such person may buy or sell puts, calls or exchange-traded options in Parallel’s securities. These transactions are speculative in nature and may involve a “bet against the company” which we believe is inappropriate for our insiders.

Perquisites and Personal Benefits

     We have provided limited perquisites and personal benefits to our executives, including club memberships and allowing our executives a choice of receiving a car allowance or personal use of a company provided vehicle. We encourage our executives to belong to a social club so that they have an appropriate entertainment forum for customers and appropriate interaction with their communities.

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     Our executives also participate in Parallel’s other benefit plans on the same terms as other employees. These plans include medical and dental insurance, and life insurance. All employees, including our executives, age fifty or over are also eligible to participate in an extended health care coverage plan that we maintain. We do not have charitable gift matching or discounts on products.

     The types and amounts of perquisites we provide to our executives are included in the “All Other Compensation” column of the Summary Compensation Table on page 65 of this Annual Report on Form 10-K.

Limit on Deductibility of Certain Compensation

     Provisions of the Internal Revenue Code that restrict the deductibility of certain compensation over one million dollars per year have not been a factor in our considerations or recommendations. Section 162(m) of the Code currently imposes a $1 million limitation on the deductibility of certain compensation paid to our executives. Excluded from the limitation is compensation that is “performance based.” For compensation to be performance based, it must meet certain criteria, including being based on predetermined objective standards approved by stockholders. The Compensation Committee has not taken the requirements of Section 162(m) into account in designing executive compensation. Compensation to our executives does not qualify as “performance based compensation” and thus is not deductible by us for federal income tax purposes.

COMPENSATION COMMITTEE REPORT

     The Compensation Committee of the Board of Directors administers and approves all elements of compensation and awards for our executive officers. The Committee has the responsibility to review and approve the corporate goals and objectives relevant to each executive officer’s compensation, evaluates individual performance of each executive in light of those goals and objectives, and determines and approves each executive’s compensation based on this evaluation.

     Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence standards of the Nasdaq Global Market. The Committee has the sole authority to retain consultants and advisors as it may deem appropriate in its discretion, and sole authority to approve related fees and retention terms for these advisors.

     Generally, on its own initiative the Compensation Committee reviews the performance and compensation of all of our executives and then reviews its conclusions and recommendations with management. In addition to the processes described under “Compensation Discussion and Analysis,” other processes and tools used by the Committee in reviewing and evaluating the compensation paid to our executives in 2006 included a review of tally sheets, stock option inventories and internal pay equity.

     The Committee has reviewed and discussed the Compensation Discussion and Analysis with management.

     Based on its review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our Annual Report on Form 10-K for the year ended December 31, 2006 and in our proxy statement for the 2007 annual meeting of stockholders.

Members of the Compensation Committee

          Jeffrey G. Shrader (Chairman)

          Martin B. Oring

          Ray M. Poage

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Summary of Annual Compensation

     The table below shows a summary of the types and amounts of compensation paid for 2006 to Mr. Cambridge, our Chairman of the Board, and to Mr. Oldham, our President and Chief Executive Officer. The table also includes a summary of the types and amounts of compensation paid to our other four executive officers for the year ended December 31, 2006.

Summary Compensation Table

														Change in
														Pension Value
														and
												Non-Equity		Nonqualified		All
												Incentive		Deferred		Other
							Stock		Option			Plan Com-		Compensation		Com-
Name and			Salary		Bonus		Awards		Awards			pensation		Earnings		pensation			Total
Principal Position	Year		($)		($)		($)		($)			($)		($)		($)			($)
(a)	(b)		(c)		(d)		(e)		(f)			(g)		(h)		(i) (1)			(j)
L. C. Oldham		2006	$	300,000	$	185,000		0		16,683	(2)		0		0	$	51,090	(3)	$	552,773
President , Chief Executive Officer and Director
D. E. Tiffin		2006	$	250,000	$	147,500		0		0			0		0	$	43,247	(4)	$	440,747
Chief Operating Officer
E. A. Bayley		2006	$	160,000	$	60,000		0		0			0		0	$	39,321	(5)	$	259,321
Vice President of Corporate Engineering
J. S. Rutherford		2006	$	160,000	$	60,000		0		0			0		0	$	38,174	(6)	$	258,174
Vice President of Land and Administration
S. D. Foster		2006	$	175,000	$	60,000		0		0			0		0	$	45,547	(7)	$	280,547
Chief Financial Officer
T. R. Cambridge		2006	$	135,000	$	60,000		0		0			0		0	$	5,152		$	200,152
Chairman of the Board

(1) This column includes the incremental cost of perquisites and personal benefits received by the named executive officers. We have included in this column the incremental cost of all perquisites and personal benefits for each named executive officer and as identified in the following table:

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		Mr.			Mr.			Mr.			Mr.		Mr.		Mr.
		Oldham			Tiffin			Rutherford			Foster		Bay ley		Cambridge
Personal use of club membership s(a)	2006	$	—		$	—		$	3,376		$	3,652	$	—	$	—
Personal use of comp any car(b)	2006	$	1,723		$	—		$	1,179		$	—	$	8,401	$	—
Car allowance	2006	$	—		$	6,000		$	—		$	6,000	$	—	$	—
Personal use of office sp ace(c)	2006	$	2,366		$	—		$	—		$	—	$	—	$	—
CEO life insurance(d)	2006	$	3,793		$	—		$	—		$	—	$	—	$	—
Personal use of charter aircraft	2006			(e)			(e)			(e)	$	—	$	—	$	—
Tax “gross up “(f)	2006	$	3,629		$	1,687		$	3,697		$	3,559	$	3,836	$	5,152

(a)	The value of personal use of club memberships represents that portion of annual club dues determined by multiplying the total annual club dues by a fraction equal to expenses for personal use divided by total business and personal expenses. All employees pay or reimburse us for their personal expenses.
(b)	Personal use of a company car is based on the sum of the fair lease value of the car, maintenance expense and gas expense, multiplied by a fraction, the numerator of which is the number of miles driven for personal use and the denominator of which is the total number of miles driven in fiscal 2006.
(c)	Includes personal use of office space by Mr. Oldham’s wife for charitable, civic and personal activities. The value has been determined by multiplying the number of square feet in the office by the cost per square foot paid by Parallel under its lease agreement covering its executive offices.
(d)	We provide a $100,000 whole life insurance policy for Mr. Oldham and pay the premiums for maintaining the policy in force.
(e)	From time to time, the executive’s spouse will accompany the executive on business trips when there is an unoccupied seat on the aircraft. However, there is no aggregate incremental cost to us.
(f)	The tax “gross up” payments for each named executive officer were made in connection with cash bonuses in the amount of $10,000 that were awarded to each named executive officer on December 6, 2006.

(2) This value is what is also included in our Consolidated Financial Statements in accordance with FAS 123(R). This option to purchase 37,500 shares of common stock was granted to Mr. Oldham on June 20, 2001 at an exercise price of $4.97 per share, and is exercisable in increments of 7,500 shares on the first day of January of each year. There were no stock option awards to Mr. Oldham in 2006. For a discussion of valuation assumptions, see Note 11 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

(3) Such amount includes Parallel’s 2006 contribution in the amount of $18,000 to Mr. Oldham’s individual retirement account maintained under Parallel’s 401(k) plan; insurance premiums in the amount of $21,579 for nondiscriminatory group life, medical, disability, long-term care and dental insurance; and $11,511 representing the total value of all perquisites and personal benefits provided to Mr. Oldham as described in footnote 1.

(4) Such amount includes Parallel’s 2006 contribution in the amount of $15,000 to Mr. Tiffin’s individual retirement account maintained under Parallel’s 401(k) plan; insurance premiums in the amount of $20,560 for nondiscriminatory group life, medical, disability, long-term care and dental insurance; and $7,687 representing the total value of all perquisites and personal benefits provided to Mr. Tiffin as described in footnote 1.

(5) Such amount includes Parallel’s 2006 contribution in the amount of $9,600 to Mr. Bayley’s individual retirement account maintained under Parallel’s 401(k) plan; insurance premiums in the amount of $17,484 for nondiscriminatory group life, medical, disability, long-term care and dental insurance; and $12,237 representing the total value of all perquisites and personal benefits provided to Mr. Bayley as described in footnote 1.

(6) Such amount includes Parallel’s 2006 contribution in the amount of $9,600 to Mr. Rutherford’s individual retirement account maintained under the 401(k) plan; insurance premiums in the amount of $20,322 for nondiscriminatory group life, medical, disability and dental insurance; and $8,252 representing the total value of all perquisites and personal benefits provided to Mr. Rutherford as described in footnote 1.

(7) Such amount includes Parallel’s 2006 contribution in the amount of $10,500 to Mr. Foster’s individual retirement account maintained under Parallel’s 401(k) plan; insurance premiums in the amount of $21,836 for nondiscriminatory group life, medical, disability, long-term care and dental insurance; and $13,211 representing the total value of all perquisites and personal benefits provided to Mr. Foster as described in footnote 1.

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Stock Options

     We use stock options as part of the overall compensation of directors, officers and employees. However, we did not grant any stock options in 2006 to any of the executive officers named in the Summary Compensation Table. Summary descriptions of our stock option plans are included in this Annual Report on Form 10-K, beginning on page 74 so you can review the types of options we have granted in the past and the significant features of our stock options.

     In the table below, we show certain information about the outstanding stock options held by the named executive officers at December 31, 2006.

Outstanding Equity Awards at Fiscal Year-End

	Option Awards											Stock Awards
																		Equity
																Equity		Incentive
																Incentive		Plan
																Plan		Awards:
						Equity										Awards:		Market or
						Incentive										Number		Payout
						Plan								Market		of		Value of
						Awards:						Number		Value		Unearned		Unearned
	Number		Number			Number						of Shares		of Shares		Shares,		Shares,
	of		of			of						or		or Units		Units or		Units or
	Securities		Securities			Securities						Units of		of		Other		Other
	Underlying		Underlying			Underlying						Stock		Stock		Rights		Rights
	Unexercised		Unexercised			Unexercised		Option				That Have		That Have		That Have		That Have
	Options		Options			Unearned		Exercise		Option		Not		Not		Not		Not
	(#)		(#)			Options		Price		Expiration		Vested		Vested		Vested		Vested
Name	Exercisable		Unexercisable			(#)		($)		Date		(#)		($)		(#)		($)
(a)	(b)		(c)			(d)		(e)		(f)		(g)		(h)		(i)		(j)
T. R. Cambridge		100,000		0			0		4.09		05-17-07		0		0		0		0
		50,000		0			0		3.60		08-04-08		0		0		0		0
		50,000		0			0		1.82		10-28-09		0		0		0		0
		100,000		0			0		4.97		06-20-11		0		0		0		0
L. C. Oldham		46,000		0			0		3.60		08-04-08		0		0		0		0
		0		37,500	(1)		0		4.97		06-20-11		0		0		0		0
E. A. Bayley		25,000		0			0		4.53		07-17-07		0		0		0		0
		25,000		0			0		3.60		08-04-08		0		0		0		0
		50,000		0			0		4.97		06-20-11		0		0		0		0
J. S. Rutherford		50,000		0			0		4.97		06-20-11		0		0		0		0
D. E. Tiffin		0		0			0		0		0		0		0		0		0
S. D. Foster		0		0			0		0		0		0		0		0		0

(1) This incentive stock option became exercisable as to 7,500 shares on January 1, 2007, and an additional 7,500 shares become exercisable on the first day of January in each of the years 2008, 2009, 2010 and 2011.

(67)

Option Exercises and Stock Vested

     In the table below, we show certain information about the exercise of stock options in 2006, the value realized on exercise of the stock options and stock awards.

	Option Exercises and Stock Vested
	Option Awards					Stock Awards
	Number of					Number of
	Shares		Value			Shares		Value
	Acquired		Realized			Acquired		Realized
	on		on			on		on
	Exercise		Exercise			Vesting		Vesting
Name	(#)		($)			(#)		($)
(a)	(b)		(c)			(d)		(e)
Thomas R. Cambridge		0		0			0		0
Larry C. Oldham		7,500		110,850	(1)		0		0
Eric A. Bayley		25,000		428,250	(2)		0		0
John S. Rutherford		25,000		509,250	(3)		0		0
		18,750		365,625	(4)
Donald E. Tiffin		0		0			0		0
Steven D. Foster		0		0			0		0

(1)	The value realized on exercise is equal to the closing price of our common stock on the date of exercise ($19.75), less the exercise price ($4.97) of the stock option exercised.
(2)	The value realized on exercise is equal to the closing price of our common stock on the date of exercise ($22.53), less the exercise price ($5.40) of the stock option exercised.
(3)	The value realized on exercise is equal to the closing price of our common stock on the date of exercise ($24.90), less the exercise price ($4.53) of the stock option exercised.
(4)	The value realized on exercise is equal to the closing price of our common stock on the date of exercise ($24.90), less the exercise price ($5.40) of the stock option exercised.

Change of Control Arrangements

     Stock Option Plans

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

• Parallel is not the surviving entity in a merger or consolidation (or survives only as a subsidiary of another entity);

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

• Parallel is to be dissolved and liquidated;

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

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

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     Under our 1992 Stock Option Plan and Employee Stock Option Plan, if a change of control occurs, the Compensation Committee of the Board of Directors can:

• accelerate the time at which options may be exercised;

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

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

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

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

• the per share price offered to our stockholders in a merger, consolidation, sale of assets or dissolution transaction;

• the price per share offered to our stockholders in a tender offer or exchange offer where a change of control takes place; or

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

     In the case of our 1997 Nonemployee Directors Stock Option Plan, 1998 Stock Option Plan and 2001 Nonemployee Director Stock Option Plan, upon the occurrence of a change of control, any outstanding options under these plans become fully exercisable and upon exercise of the option, the option holder will be entitled to purchase, instead of the numbers of shares of stock for which the option is then exercisable, the number and class of shares of stock or other securities or property to which the option holder would have been entitled under the terms of the change of control if, immediately before the change of control, the option holder had been the holder of record of the number of shares of stock for which the option is then exercisable.

     Incentive and Retention Plan

     On September 22, 2004, the Compensation Committee of the Board of Directors approved and adopted an incentive and retention plan for our officers and employees. On September 24, 2004, the Board of Directors adopted the plan upon recommendation by the Compensation Committee.

     The purpose of the plan is to advance the interests of Parallel and its stockholders by providing officers and employees with incentive bonus compensation which is linked to a corporate transaction. As defined in the plan, a corporate transaction means:

• an acquisition of Parallel by way of purchase, merger, consolidation, reorganization or other business combination, whether by way of tender offer or negotiated transaction, as a result of which Parallel’s outstanding securities are exchanged or converted into cash, property and/or securities not issued by Parallel;

• a sale, lease, exchange or other disposition by Parallel of all or substantially all of its assets;

• the stockholders of Parallel approving a plan or proposal for the liquidation or dissolution of Parallel; or

• any combination of any of the foregoing.

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     The plan also recognizes the possibility of a proposed or threatened transaction and the need to be able to rely upon officers and employees continuing their employment, and that Parallel be able to receive and rely upon their advice as to the best interests of Parallel and its stockholders without concern that they might be distracted by the personal uncertainties and risks created by any such transaction. In this regard, the plan also provides for a retention payment upon the occurrence of a change of control, as defined below.

     All members of Parallel’s “executive group” are participants in the plan. For purposes of the plan, the “executive group” includes Messrs, Cambridge, Oldham, Tiffin, Foster, Rutherford and Bayley and any other officer employee of Parallel selected by the Compensation Committee in its sole discretion. In addition, the Committee may designate other non-officer employees of Parallel and consultants to Parallel as participants in the plan who will also be eligible to receive a performance bonus upon the occurrence of a corporate transaction or a retention payment upon the occurrence of a change of control.

     Generally, the plan provides for:

• the payment of a one-time performance bonus to eligible officers and employees upon the occurrence of a corporate transaction; or

• a one time retention payment upon a change of control of Parallel. A change of control is generally defined as the acquisition of beneficial ownership of 60% or more of the voting power of Parallel’s outstanding voting securities by any person or group of persons, or a change in the composition of the Board of Directors of Parallel such that the individuals who, at the effective date of the plan, constitute the Board of Directors cease for any reason to constitute at least a majority of the Board of Directors.

     On August 23, 2005, the Compensation Committee of the Board of Directors of Parallel approved and adopted amendments to the incentive and retention plan, and on that same date, the Board of Directors approved the amendments upon recommendation by the Compensation Committee. Generally, the plan was amended to provide for 400,000 “additional base shares” with an associated “additional base price” of $8.62 per share. The plan was further amended on February 27, 2007 to expand the class of eligible participants to include consultants to Parallel.

     The amount of these payments depends on future prices of Parallel’s common stock, which is undeterminable until a triggering event occurs. In the case of a corporate transaction, the total cash obligation for performance bonuses is equal to the sum of (a) per share price received by all stockholders minus a base price of $3.73 per share, multiplied by 1,080,362 shares, plus (b) the per share price received by all stockholders minus an “additional base price” of $8.62 per share, multiplied by 400,000 “additional base shares”. As an example, if the stockholders of Parallel received the December 31, 2006 per share price of $17.57 in a merger, tender offer or other corporate transaction, the total aggregate potential payments to all plan participants would be [($17.57 - $3.73) x 1,080,362], plus [$17.57 - $8.62) x 400,000], or $18.5 million. If a change of control occurs, the total amount of cash retention payments to all plan participants would be equal to the sum of (a) per share closing price of Parallel’s common stock on the day immediately preceding the change of control minus the base price of $3.73 per share, multiplied by 1,080,362, plus (b) the per share closing price of Parallel’s common stock on the day immediately preceding the change of control minus an “additional base price” of $8.62 per share, multiplied by 400,000.

      If a corporate transaction or change of control occurs, the Compensation Committee will allocate for payment to each member of the executive group such portion of the total performance bonus or retention payment as the Compensation Committee determines in its sole discretion. After making these allocations, if any part of the total performance bonus or retention payment amount remains unallocated, the Compensation Committee may allocate any remaining portion of the performance bonus or retention payment among all other participants in the plan. After all allocations of the performance bonus have been made, each participant’s proportionate share of the performance bonus or retention payment will be paid in a cash lump sum.

     There is no certainty with respect to whether or when payments under this plan might be triggered, or the amount of any potential payment to any member of the executive group or other participants if a triggering event did occur.

     Parallel’s ultimate liability under the plan is not readily determinable because of the inability to predict the occurrence of a corporate transaction or change of control, or Parallel’s stock price on the future date of any such corporate transaction or change of control. No liability will be recorded until such time as a corporate transaction or change of control becomes probable and the amount of the liability becomes determinable. The occurrence of a change of control or a corporate transaction could have a negative impact on Parallel’s financial condition and

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results of option, depending upon the price of Parallel’s common stock at the time of a change of control or corporate transaction.

     The plan is entirely unfunded and the plan makes no provision for segregating any of Parallel’s assets for payment of any amounts under the plan.

     A participant’s rights under the plan are not transferable.

     The plan is administrated by the Compensation Committee of the Board of Directors of Parallel. The Compensation Committee has the power, in its sole discretion, to take such actions as may be necessary to carry out the provisions and purposes of the plan. The Compensation Committee has the authority to control and manage the operation and administration of the plan and has the power to:

• designate the officers and employees of, and consultants to, Parallel and its subsidiaries who participate in the plan, in addition to the “Executive Group”;

• maintain records and data necessary for proper administration of the plan;

• adopt rules of procedure and regulations necessary for the proper and efficient administration of the plan;

• enforce the terms of the plan and the rules and regulations it adopts;

• employ agents, attorneys, accountants or other persons; and

• perform any other acts necessary or appropriate for the proper management and administration of the plan.

     The plan automatically terminates and expires on the date participants receive a performance bonus or retention payment.

Non-Officer Severance Plan

     In January 2006, a Non-Officer Employee Severance Plan was implemented for the purpose of providing our non-officer employees with an incentive to remain employed by us. This plan provides for a one-time severance payment to non-officer employees equal to one year of their then current base salary upon the occurrence of a change of control within the meaning of the plan. Based on the aggregate non-officer base salaries in effect as of December 31, 2006, if a change of control had occurred at December 31, 2006, the total severance amount payable under this plan would have been approximately $3.3 million.

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Compensation of Directors

     In the table below, we show certain information about the compensation paid to our non-employee Directors during 2006.

2006 Director Compensation

									Change in
	Fees								Pension
	Earned								Value and
	or						Non-Equity		Nonqualified
	Paid in		Stock		Option		Incentive Plan		Deferred		All Other
	Cash		Awards		Awards		Compensation		Compensation		Compensation		Total
Name	($)		($)		($)		($)		($)		($)		($)
(a)	(b)		(c)(1)		(d)(2)		(e)		(f)		(g)		(h)
D.E. Chitwood		34,000		29,620		143,160		0		0		0		206,780
M.B. Oring		42,250		29,620		143,160		0		0		0		215,030
R.M . Poage		40,625		29,620		143,160		0		0		0		213,405
J.G. Shrader		29,500		29,620		143,160		0		0		0		202,280

(1)

On the first day of July of each year, beginning July 1, 2004, our non-employee directors are automatically granted shares of common stock having a value of $25,000. The actual number of shares granted is determined by dividing $25,000 by the average daily closing price of the common stock for ten consecutive trading days commencing fifteen trading days before the first day of July of each year. Under this plan, each of Messrs. Chitwood, Oring, Poage and Shrader have been granted a total of 9,295 shares of common stock since inception of the plan, which includes 1,174 shares granted to each of them on the July 1, 2006 grant date. For the July 1, 2006 grant, the 1,174 shares were calculated by dividing $25,000 by $21.294, the ten trading day average closing price of the stock, beginning on June 12, 2006. Since July 1, 2006 was not a business day, the amount set forth in this column is based on the closing price of our common stock on July 3, 2006, the first business day following the grant date. The amounts set forth in this column represent the dollar amount we recognized for financial statement reporting purposes with respect to 2006 in accordance with FAS 123R and also represents the aggregate grant date fair value computed in accordance with FAS 123R.

(2)

On August 23, 2005, each of our non-employee Directors was granted a nonqualified stock option to purchase 50,000 shares of common stock at an exercised price of $12.27 per share. The options are exercisable in five equal annual installments beginning August 23, 2006. This value is what is also included in our Consolidated Financial Statements in accordance with FAS 123(R). For a discussion of valuation assumptions, see Note 11 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

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     In the table below, we show certain information about the outstanding stock options held by our non-employee Directors during 2006.

Outstanding Equity Awards at Fiscal Year-End

	Option Awards										Stock Awards
																	Equity
															Equity		Incentive
															Incentive		Plan
															Plan		Awards:
					Equity										Awards:		Market or
					Incentive										Number		Pay out
					Plan								Market		of		Value of
					Awards:						Number		Value		Unearned		Unearned
	Number		Number		Number						of Shares		of Shares		Shares,		Shares,
	of		of		of						or		or Units		Units or		Units or
	Securities		Securities		Securities						Units of		of		Other		Other
	Underlying		Underlying		Underlying						Stock		Stock		Rights		Rights
	Unexercised		Unexercised		Unexercised		Option				That Have		That Have		That Have		That Have
	Options		Options		Unearned		Exercise		Option		Not		Not		Not		Not
	(#)		(#)		Options		Price		Expiration		Vested		Vested		Vested		Vested
Name	Exercisable		Unexercisable		(#)		($)		Date		(#)		($)		(#)		($)
(a)	(b)		(c)(1)		(d)		(e)		(f)		(g)		(h)		(i)		(j)
D. E. Chitwood		25,000		0		0		4.58		05-02-11(2)		0		0		0		0
		25,000		0		0		4.97		06-21-11(2)		0		0		0		0
		50,000		0		0		2.80		12-18-12(2)		0		0		0		0
		10,000		40,000		0		12.27		08-23-15(2)		0		0		0		0
M. B. Oring		5,000		0		0		4.58		05-02-11		0		0		0		0
		25,000		0		0		4.97		06-21-11		0		0		0		0
		50,000		0		0		2.80		12-18-12		0		0		0		0
		20,000		0		0		4.61		05-07-11		0		0		0		0
		10,000		15,000		0		12.27		08-23-15		0		0		0		0
		—		25,000		0		12.27		08-23-15		0		0		0		0
R. M . Poage		50,000		0		0		2.61		04-28-13		0		0		0		0
		10,000		40,000		0		12.27		08-23-15
J. G. Shrader		10,000		40,000		0		12.27		08-23-15		0		0		0		0

(1)	The nonqualified stock options included in this column are exercisable with respect to 10,000 shares on August 23, 2007, and an additional 10,000 shares become exercisable on the twenty-third day of August in each of the years 2008 through 2010.
(2)	As a result of Mr. Chitwood’s resignation from the Board of Directors on January 24, 2007, this option is scheduled to expire on April 24, 2007, except in the case of Mr. Chitwood’s death prior to that time in which event the option will expire one year from date of death.

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     Cash

     Following stockholder approval of the 2004 Non-Employee Director Stock Grant Plan in June 2004, we reduced by one-half the per meeting and annual cash fees we had been paying to our non-employee Directors. We now pay each non-employee Director a cash fee of $750 for attendance at each meeting of the Board of Directors and each non-employee Director who is a member of a Board committee also receives:

• $375 per meeting for service on the Compensation Committee, with the Chairman of the Compensation Committee being entitled to receive an additional fee of $2,500 per year;

• $375 per meeting for service on the Audit committee, with the Chairman of the Audit Committee being entitled to receive an additional fee of $5,000 per year and each other Audit Committee member receiving $2,500 per year;

• $375 per meeting for service on the Corporate Governance and Nominating Committee, with the Chairman of the Corporate Governance and Nominating Committee being entitled to receive an additional fee of $2,500 per year; and

• $375 per meeting for service on the Hedging and Acquisitions Committee, with the Chairman of the Hedging and Acquisition Committee being entitled to receive an additional fee of $2,500 per year.

     All Directors are reimbursed for expenses incurred in connection with attending meetings.

     Stock Options

     Directors who are not employees of Parallel are also eligible to participate in Parallel’s 1997 Nonemployee Directors Stock Option Plan and the 2001 Nonemployee Directors Stock Option Plan. You can find more information about these stock option plans under the caption “Stock Option Plans” below. No options were granted to any of our non-employee Directors in 2006.

     Other

     All Directors are reimbursed for expenses incurred in connection with attending meetings.

     Parallel provides liability insurance for its directors and officers. The cost of this coverage for 2006 was approximately $516,000.

     We do not offer non-employee Directors travel accident insurance, life insurance or a pension or retirement plan.

     2004 Non-Employee Director Stock Grant Plan

     In April 2004, upon recommendation of the Board’s Compensation Committee, our Directors approved the 2004 Non-Employee Director Stock Grant Plan. The plan was later approved by our stockholders at our annual meeting held on June 22, 2004. Directors of Parallel who are not employees of Parallel or any of its subsidiaries are eligible to participate in the Plan. Under this Plan, each non-employee Director is entitled to receive an annual retainer fee consisting of shares of common stock that will be automatically granted on the first day of July in each year. The actual number of shares received is determined by dividing $25,000 by the average daily closing price of the common stock on the Nasdaq Global Market for the ten consecutive trading days commencing fifteen trading days before the first day of July of each year. Historically, Directors’ fees had been paid solely in cash. However, in accordance with this plan and following approval by our stockholders, we commenced paying an annual retainer fee in July 2004 to each non-employee Director in the form of common stock having a value of $25,000.

     This plan is administrated by the Compensation Committee. Although the Compensation Committee has authority to adopt such rules and regulations for carrying out the plan as it may deem proper and in the best interests of Parallel, the Committee’s administrative functions are largely ministerial in view of the plan’s explicit provisions described below, including those related to eligibility and predetermination of the timing, pricing and amount of grants. The interpretation by the Compensation Committee of any provision of the plan is final.

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     The total number of shares of common stock initially available for grant under the plan was 116,000 shares, subject to adjustment as described below. If there is a change in the common stock by reason of a merger, consolidation, reorganization, recapitalization, stock divided, stock split, combination of shares, exchange of shares, change in corporate structure or otherwise, the aggregate number of shares available under the plan will be appropriately adjusted in order to avoid dilution or enlargement of the rights intended to be made available under the plan.

     The Board may suspend, terminate or amend the Plan at any time or from time to time in any manner that the Board may deem appropriate; provided that, without approval of the stockholders, no revision or amendment shall change the eligibility of Directors to receive stock grants, the number of shares of common stock subject to any grants, or materially increase the benefits accruing to participants under the plan, and plan provisions relating to the amount, price and timing of grants of stock may not be amended.

     Shares acquired under the plan are non-assignable and non-transferable other than by will or the laws of descent and distribution and may not be sold, pledged, hypothecated, assigned or transferred until the non-employee Director holding such stock ceases to be a Director, except that the Compensation Committee may permit a transfer of stock subject to the condition that the Compensation Committee receive evidence satisfactory to it that the transfer is being made for essentially estate and/or tax planning purposes or a gratuitous or donative purpose and without consideration.

     The plan will remain in effect until terminated by the Board, although no additional shares of common stock may be issued after the 116,000 shares subject to the plan have been issued.

     At February 1, 2007, 78,820 shares of common stock were available for issuance under this plan.

Stock Option Plans

     1992 Stock Option Plan. In May 1992, our stockholders approved and adopted the 1992 Stock Option Plan. The 1992 Plan expired by its own terms on March 1, 2002, but remains effective only for purposes of outstanding options. The 1992 Plan provided for granting to key employees, including officers and Directors who were also key employees of Parallel, and Directors who were not employees, options to purchase up to an aggregate of 750,000 shares of common stock. Options granted under the 1992 Plan to employees are either incentive stock options or options which do not constitute incentive stock options. Options granted to nonemployee Directors are not incentive stock options.

     The 1992 Plan is administered by the Board’s Compensation Committee, none of whom were eligible to participate in the 1992 Plan, except to receive a one-time option to purchase 25,000 shares at the time he or she became a Director. The Compensation Committee selected the employees who were granted options and established the number of shares issuable under each option and other terms and conditions approved by the Compensation Committee. The purchase price of common stock issued under each option is the fair market value of the common stock at the time of grant.

     The 1992 Plan provided for the granting of an option to purchase 25,000 shares of common stock to each individual who was a nonemployee Director of Parallel on March 1, 1992 and to each individual who became a nonemployee Director following March 1, 1992. Members of the Compensation Committee were not eligible to participate in the 1992 Plan other than to receive a nonqualified stock option to purchase 25,000 shares of common stock as described above.

     When the 1992 Plan expired on March 1, 2002, 65,000 shares of common stock remained authorized for issuance under the 1992 Plan. However, the 1992 Plan prohibited the grant of options after March 1, 2002. Consequently, no additional options are available for grant under the 1992 Plan.

     At February 1, 2007, options to purchase a total of 80,000 shares of common stock were outstanding under the 1992 Plan.

     1997 Nonemployee Directors Stock Option Plan. The 1997 Non-Employee Directors Stock Option Plan was approved by our stockholders at the annual meeting of stockholders held in May 1997. This plan provides for granting to Directors who are not employees of Parallel options to purchase up to an aggregate of 500,000 shares of

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common stock. Options granted under this plan will not be incentive stock options within the meaning of the Internal Revenue Code.

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

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

     Options may not be granted under this plan after March 27, 2007. At February 1, 2007, options to purchase a total of 355,000 shares of common stock were outstanding under this plan.

     At February 1, 2007, 17,500 shares of common stock were available for future option grants under this plan.

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

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

     Options granted to employees contain terms and conditions that are approved by the Compensation Committee. The Compensation Committee is empowered and authorized, but is not required, to provide for the exercise of options by payment in cash or by delivering to Parallel shares of common stock having a fair market value equal to the purchase price, or any combination of cash and common stock. The purchase price of common stock issued under each option must not be less than the fair market value of the common stock at the time of grant. Options granted under the 1998 Plan are not transferable other than by will or the laws of descent and distribution and are not exercisable after ten years from the date of grant.

     Options may not be granted under the 1998 Plan after March 11, 2008. At February 1, 2007, options to purchase a total of 188,500 shares of common stock were outstanding under this plan.

     At February 1, 2007, there were no shares of common stock available for future option grants under the 1998 Stock Option Plan.

     2001 Nonemployee Directors Stock Option Plan. The Parallel Petroleum 2001 Non-employee Directors Stock Option Plan was approved by our stockholders at the annual meeting of stockholders held in June 2001. This plan provides for granting to Directors who are not employees of Parallel options to purchase up to an aggregate of 500,000 shares of common stock. Options granted under the plan will not be incentive stock options within the meaning of the Internal Revenue Code.

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

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

     Options may not be granted under this plan after May 2, 2011. At February 1, 2007, options to purchase 375,000 shares of common stock were outstanding under this plan.

     At February 1, 2007, no shares of common stock were available for future option grants under this plan.

     Employee Stock Option Plan. In June 2001, our Board of Directors adopted the Parallel Petroleum Employee Stock Option Plan. This plan authorized the grant of options to purchase up to 200,000 shares of common stock, or less than 1.00% of our outstanding shares of common stock. Directors and officers are not eligible to receive options under this plan. Only employees are eligible to receive options. Stock options granted under this plan are not incentive stock options.

     This plan was implemented without stockholder approval.

     The Employee Stock Option Plan is administrated by the Compensation Committee of the Board of Directors. The Compensation Committee selects the employees who are granted options and establishes the number of shares issuable under each option.

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

     The Employees Stock Option Plan will expire on June 20, 2011. No additional options may be granted under this plan.

     At February 1, 2007, options to purchase 200,000 shares of common stock were outstanding under this plan.

Section 408(k) Retirement Plan

     Until December 31, 2004, Parallel maintained under Section 408(k) of the Internal Revenue Code a combination simplified employee pension and individual retirement account plan for eligible employees. Generally, eligible employees included all employees who were at least twenty-one years of age.

     Effective January 1, 2005, the 408(k) plan was replaced with a new retirement plan under Section 401(k) of the Internal Revenue Code, as described below, and we ceased making contributions to the 408(k) plan.

     Contributions to employee SEP accounts were made at the discretion of Parallel, as authorized by the Compensation Committee of the Board of Directors. Although the percentage of contributions were permitted to vary from time to time, the same percentage contribution was required to be made for all participating employees. Parallel was not required to make annual contributions to the SEP accounts. Under the prototype plan adopted by Parallel, all of the SEP contributions were required to be made to SEP/IRAs maintained with the sponsor of the plan, a national investment banking firm. All contributions to employees’ accounts vested immediately and became the property of each employee at the time of contribution, including employer contributions, income-deferral contributions and IRA contributions. Generally, earnings on contributions to an employee’s SEP/IRA account are not subject to federal income tax until withdrawn.

     In addition to receiving SEP contributions made by Parallel, employees were permitted to make individual annual IRA contributions of up to the maximum of $13,000 for the year 2004. Maximum total contributions by Parallel and Parallel’s employees could be no more than $41,000 for the year 2004. In addition to this annual salary deferral limit, employees reaching age 50 or older during a calendar year could elect to take advantage of a catch-up salary deferral contribution of up to $2,000 for the year 2004. Each employee is responsible for the investment of funds in his or her own SEP/IRA and can select investments offered through the sponsor of the plan.

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     Distributions could be taken by employees at any time and must commence by April 1^st following the year in which the employee attains age 70 1/2.

     Parallel made matching contributions to employee accounts in an amount equal to the contribution made by each employee, subject to a maximum of 6% of each employee’s salary during any calendar year.

Section 401(k) Retirement Plan

     Effective January 1, 2005, we adopted a retirement plan qualifying under Section 401(k) of the Internal Revenue Code. This plan is designed to provide eligible employees with an opportunity to save for retirement on a tax-deferred basis. A third party acts as the plan’s administrator and is responsible for the day-to-day administration and operation of the plan. This plan is maintained on a yearly basis beginning on January 1 and ending on December 31 of each year.

     Each employee is eligible to participate in the plan as of the date of his or her employment. An employee may elect to have his or her compensation reduced by a specific percentage or dollar amount and have that amount contributed to the plan as a salary deferred contribution. A plan participant’s aggregate salary deferred contributions for a plan year may not exceed certain statutory dollar limits, which for 2006 was $15,000. In addition to the annual salary deferral limit, employees who reach age 50 or older during a calendar year can elect to take advantage of a catch-up salary deferral contribution which, for 2006, was $5,000. The amount deferred by a plan participant, and any earnings on that amount, are not subject to income tax until actually distributed to the participant.

     Each year, in addition to salary deferrals made by a participant, Parallel may contribute to the plan “safe harbor” contributions and discretionary matching contributions. Matching contributions, if made, will equal a uniform percentage of a participant’s salary deferrals. The Compensation Committee established a “safe harbor” profit sharing contribution of 3% and a discretionary matching contribution in an amount not to exceed 3% of a participant’s annual salary. Each participant will share in discretionary profit sharing contributions, if any, regardless of the amount of service completed by the participant during the applicable plan year.

     Each participant may direct the investment of his or her interest in the plan under established investment direction procedures setting forth the investment choices available to the participants. Each participant will be entitled to all of the participant’s account under the plan upon retirement after age 65. Each participant is at all times 100% vested in amounts attributed to the participant’s salary deferrals and to matching contributions and discretionary profit sharing contributions made by Parallel. The plan contains special provisions relating to disability and death benefits.

     Participants may borrow from their respective plan accounts, subject to the plan administrator’s determination that the participant submitting an application for a loan meets the rules and requirements set forth in the written loan program established by Parallel. Parallel has the right to amend the plan at any time. However, no amendment may authorize or permit any part of the plan assets to be used for purposes other than the exclusive benefit of participants or their beneficiaries.

     Parallel made matching contributions to employee accounts in an amount equal to the contribution made by each employee, subject to a maximum of 6% of each employee’s salary during any calendar year. During 2006, Parallel contributed an aggregate of $240,252 to the accounts of 41 employee participants. Of this amount, $18,000 was allocated to Mr. Oldham’s account; $9,600 was allocated to Mr. Bayley’s account; $9,600 was allocated to Mr. Rutherford’s account; $15,000 to Mr. Tiffin’s account; and $10,500 to Mr. Foster’s account.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The table below shows information as of February 15, 2007 about the beneficial ownership of common stock by: (1) each person known by us to own beneficially more than five percent of our outstanding common stock; (2) the executive officers named in the Summary Compensation Table on page 65; (3) each director of Parallel; and (4) all of our executive officers and directors as a group.

Name and Address	Amount and Nature			Percent
of	of			of
Beneficial Owner	Beneficial Ownership (1)			Class(2)
Thomas R. Cambridge		1,026,545	(3)		2.71	%
2201 Civic Circle, Suite 216 Amarillo, Texas 79109
Larry C. Oldham		897,090	(4)		2.39	%
1004 N. Big Spring, Suite 400 Midland, Texas 79701
Martin B. Oring		225,314	(5)		*
10817 Grande Blvd. West Palm Beach, Florida 33417
Ray M. Poage		89,363	(6)		*
4711 Meandering Way Colleyville, Texas 76034
Jeffrey G. Shrader		144,295	(7)		*
801 S. Filmore, Suite 600 Amarillo, Texas 79105
Eric A. Bayley		203,490	(8)		*
1004 N. Big Spring, Suite 400 Midland, Texas 79701
John S. Rutherford		166,300	(9)		*
1004 N. Big Spring, Suite 400 Midland, Texas 79701
Donald E. Tiffin		63,265	(10)		*
1004 N. Big Spring, Suite 400 Midland, Texas 79701
Steven D. Foster		46,000	(11)		*
1004 N. Big Spring, Suite 400 Midland, Texas 79701
All Executive Officers and Directors		2,861,662	(12)		7.49	%
as a Group (9 persons)

*	Less than one percent.
(1)	Unless otherwise indicated, all shares of common stock are held directly with sole voting and investment powers.
(2)	Securities not outstanding, but included in the beneficial ownership of each such person, are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of

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	the class owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. Shares of common stock that may be acquired within sixty days of February 15, 2007 upon exercise of outstanding stock options are deemed to be outstanding.
(3)	Includes 726,545 shares of common stock held indirectly through Cambridge Collateral Services, Ltd., a limited partnership of which Mr. Cambridge and his wife are the general partners. Also included are 300,000 shares of common stock underlying presently exercisable stock options held by Mr. Cambridge. At February 15, 2007, a total of 726,545 shares of common stock were pledged as collateral to secure repayment of loans.
(4)	Includes 400,000 shares of common stock held indirectly through Oldham Properties, Ltd., a limited partnership, and as to which Mr. Oldham disclaims beneficial ownership. Also included are 53,500 shares of common stock underlying presently exercisable stock options held by Mr. Oldham. At February 15, 2007, a total of 366,500 shares of common stock were pledged as collateral to secure repayment of loans.
(5)	Of the total number of shares shown, 24,000 shares are held directly by Mr. Oring’s wife; 82,019 shares are held by Wealth Preservation, LLC, a limited liability company owned and controlled by Mr. Oring and his wife; and 110,000 shares may be acquired by Mr. Oring upon exercise of stock options held by Mr. Oring.
(6)	Includes 20,068 shares of common stock held indirectly by Mr. Poage through his Individual Retirement Account. Also included are 60,000 shares that may be acquired upon exercise of presently exercisable stock options.
(7)	Includes 10,000 shares of common stock that may be acquired upon exercise of a presently exercisable stock option. At February 15, 2007, a total of 125,000 shares of common stock were pledged as collateral to secure repayment of loans.
(8)	Includes 100,000 shares of common stock underlying presently exercisable stock options. A total of 6,790 shares of common stock are held indirectly by Mr. Bayley through an Individual Retirement Account and Parallel’s 408(k) Plan. At February 15, 2007, a total of 65,000 shares of common stock were pledged as collateral to secure repayment of loans. The total number of shares shown excludes a warrant to purchase 200 shares of common stock.
(9)	Includes 50,000 shares of common stock underlying a presently exercisable stock option. Also included are 7,550 shares held indirectly by Mr. Rutherford through his 408(k) Plan. At February 15, 2007, a total of 108,750 shares of common stock were pledged as collateral to secure repayment of loans.
(10)	Of the total number of shares shown, 9,350 shares are held indirectly through Mr. Tiffin’s individual retirement account. At February 15, 2007, a total of 50,000 shares of common stock were pledged as collateral to secure repayment of loans.
(11)	Includes 400 shares of common stock held by Mr. Foster’s wife and 9,000 shares held in his 408(k) Plan. At February 15, 2007, a total of 25,000 shares of common stock were pledged as collateral to secure repayment of loans.
(12)	Includes 683,500 shares of common stock underlying stock options that are presently exercisable. The unexercisable portion of stock options held by our officers and directors do not become exercisable within the next sixty days.

Equity Compensation Plans

     At December 31, 2006, a total of 1,394,820 shares of common stock were authorized for issuance under our equity compensation plans. In the table below, we describe certain information about these shares and the equity compensation plans which provide for their authorization and issuance. You can find additional information about our stock grant and stock option plans beginning on page 74.

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Equity Compensation Plan Information

						(c)
						Number of securities
				(b)		remaining available for
	(a)			Weighted-average		future issuance under
	Number of securities to be			exercise		equity compensation
	issued upon exercise of			price of outstanding		plans (excluding
	outstanding options,			options, warrants and		securities reflected in
Plan category	warrants and rights			rights		column (a))
Equity compensation plans approved by security holders		998,500	(1)	$	5.48		96,320	(2)
Equity compensation plans not approved by security holders		300,000	(3)	$	4.64		—
Total		1,298,500		$	5.29		96,320

(1)	Includes the following plans: 1992 Stock Option Plan; 1997 Nonemployee Directors Stock Option Plan; 1998 Stock Option Plan; and 2001 Non-employee Directors Stock Option Plan.
(2)	Includes 78,820 shares available for future grant under the 2004 Non-Employee Director Stock Grant Plan and 17,500 shares available for future stock option grants under the 1997 Non-Employee Directors Stock Option Plan.
(3)	These shares include an aggregate of 200,000 shares of common stock underlying stock options granted on June 20, 2001 to non-officer employees pursuant to Parallel’s Employee Stock Option Plan. The Employee Stock Option Plan is the only equity compensation plan in effect that was adopted without approval of our stockholders. Directors and officers of Parallel are not eligible to participate in this plan. A description of the material features of this plan can be found under the caption “Employee Stock Option Plan” on page 77. The total number of shares shown also includes 100,000 shares of common stock underlying a stock purchase warrant we issued to an investment banking firm in December 2003. These warrants were issued under a financial advisory services agreement with the investment banking firm, and not under employee or director compensation plans. The warrants are exercisable, in whole or in part, at an exercise price equal to $3.98 per share and are exercisable at any time during the four-year period commencing on December 23, 2004. All of the warrants contain customary provisions providing for adjustment of the exercise price and the number and type of securities issuable upon exercise of the warrants if any one or more of certain specified events occur. The warrants also grant to the holder certain registration rights for the securities issuable upon exercise of the warrants.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Transactions

     During 2006, Cambridge Production, Inc. a corporation owned by Mr. Cambridge, served as operator of two wells on oil and natural gas leases in which we acquired a working interest in 1984. Generally, the operator of a well is responsible for the day to day operations on the lease, overseeing production, employing field personnel, maintaining production and other records, determining the location and timing of drilling of wells, administering natural gas contracts, joint interest billings, revenue distribution, making various regulatory filings, reporting to working interest owners and other matters. During 2006, Cambridge Production billed us approximately $23,000 for our pro rata share of lease operating expenses. The largest amount we owed Cambridge Production at any one time during 2006 was approximately $2,300. At December 31, 2006, no amounts were owed by us to Cambridge Production for these expenses. Our pro rata share of oil and natural gas sales during 2006 from the wells operated by Cambridge Production was approximately $176,000. Cambridge Production’s billings to us are made monthly on the same basis as all other working interest owners in the wells.

     Cambridge Partnership, Ltd., a limited partnership controlled by Mr. Cambridge, acquired an undivided working interest in 1999 from Parallel in an oil and natural gas prospect located in south Texas. The interest was acquired on the same terms as all other unaffiliated working interest owners. Since then, Cambridge Partnership, Ltd. has participated with us in the drilling and development of this prospect. Cambridge Partnership, Ltd. has participated in these operations under standard form operating agreements on the same or similar terms afforded by Parallel to nonaffiliated third parties. Although Parallel is not the operator of this project, we invoice Cambridge Partnership, Ltd., on a monthly basis, without interest, for its pro rata share of operating expenses. During 2006, we

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billed Cambridge Partnership, Ltd. approximately $3,000 for its proportionate share of lease operating expenses incurred on properties we administer and Cambridge Partnership, Ltd. paid us approximately $3,000 for its proportionate share of lease operating expenses, which included approximately $150 attributable to expenses billed to Cambridge Partnership, Ltd. in 2005. The largest amount owed to us by Cambridge Partnership, Ltd. at any one time during 2006 for its share of lease operating expenses was approximately $400. At December 31, 2006 Cambridge Partnership, Ltd. owed us approximately $300 for these expenses. During 2006, we disbursed approximately $8,000 to Cambridge Partnership, Ltd. in payment of revenues attributable to its pro rata share of the proceeds from sales of oil and natural gas produced from properties in which Cambridge Partnership, Ltd. and Parallel owned interests.

     Cambridge Production, Inc. maintains an office in Amarillo, Texas from which Mr. Cambridge performs his duties and services as Chairman of the Board and as geological consultant to Parallel. We reimburse Cambridge Production, Inc. $3,000 per month for office and administrative expenses incurred on behalf of Parallel. During 2006 we reimbursed Cambridge Production, Inc. a total of $36,000.

     In December 2001, and prior to his employment with Parallel, Donald E. Tiffin, our Chief Operating Officer, received from an unaffiliated third party a 3% working interest in our Diamond M project in Scurry County, Texas for services rendered in connection with assembling the project. In August 2002, shortly after his employment with Parallel, and due to the personal financial exposure in the Diamond M project and to prevent the interest from being acquired by a third party, Mr. Tiffin assigned two-thirds of his ownership interest in the project to Parallel at no cost, leaving him with a 1% working interest. Parallel acquired its initial interest in the Diamond M Project from the same third party in December 2001, but did not become operator of the project until March 1, 2003. As with other nonaffiliated interest owners, we invoice Mr. Tiffin on a monthly basis, without interest, for his share of drilling, development and lease operating expenses. During 2006, we billed Mr. Tiffin a total of approximately $111,000 for his proportionate share of capital expenditures and lease operating expenses, and Mr. Tiffin paid us approximately $115,000 for these drilling and development expenses, which included approximately $12,000 attributable to expenses billed to Mr. Tiffin in 2005. During 2006, we disbursed to Mr. Tiffin approximately $100,000 in oil and natural gas revenues related to his interest in this project. The largest aggregate amount outstanding and owed to us by Mr. Tiffin at any one time during 2006 was approximately $36,000. At December 31, 2006, Mr. Tiffin owed us approximately $8,000.

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

Director Independence

     Under the Delaware General Corporation Law and our bylaws, Parallel’s business, property and affairs are managed by or under the direction of the Board of Directors. Members of the Board are kept informed of our business through discussions with the Chairman of the Board, the Chief Executive Officer and other officers, by reviewing materials provided to them and by participating in meetings of the Board and its committees. Throughout 2006, we had six directors serving on our Board of Directors, including Thomas R. Cambridge, Dewayne E. Chitwood, Larry C. Oldham, Martin B. Oring, Ray M. Poage and Jeffrey G. Shrader. As reported in our Current Report on Form 8-K dated January 24, 2007, Mr. Chitwood resigned from the Board on January 24, 2007. Messrs. Cambridge, Oldham, Oring, Poage and Shrader continue to serve as Directors.

     The Board has determined that Mr. Oring, Mr. Poage and Mr. Shrader meet the definition of an “independent director” for the purposes of NASD Rule 4200(a)(15), the independence standards applicable to us, and that Mr. Chitwood was also “independent” while serving on the Board. The Board based these determinations primarily on responses of the Directors to questions regarding employment and compensation history, affiliations and family and other relationships, comparisons of the independence criteria under NASD Rule 4200(a)(15) to the particular circumstances of each Director and on discussions among the directors.

     Martin B. Oring, a director of Parallel, and his wife are the owners and managing members of Wealth Preservation, LLC, a financial consulting services firm. One of Wealth Preservation’s former clients, Stonington Corporation, was engaged by us in November 2001 for the purpose of obtaining general corporate financial advisory services and financial advisory services in the placement of debt or equity securities. Under our November 2001 agreement with Stonington, we issued to Stonington a five-year warrant to purchase 275,000 shares of common

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stock at an exercise price of $2.95 per share, the fair market value of our common stock on the date the warrant was issued. The expiration date of the warrant was November 20, 2006. As we have previously reported, under terms of Wealth Preservation’s August 2001 consulting agreement with Stonington, which was terminated in December 2002, Wealth Preservation became entitled to receive one-third of the warrant that we issued to Stonington on November 20, 2001. After giving affect to anti-dilution provisions contained in the warrant, the warrant held by Wealth Preservation entitled it to purchase 95,187 shares of common stock at an exercise price of $2.84 per share. Utilizing a “cashless exercise” feature in the warrant, Wealth Preservation exercised the warrant on October 25, 2006 and a total of 82,019 shares of common stock were issued to Wealth Preservation. In considering and determining Mr. Oring’s independence, the Audit Committee reviewed and took into account Wealth Preservation’s exercise of the warrant.

Procedures for Reviewing Certain Transactions

     We have adopted a written policy for the review, approval or ratification of related party transactions. All of our officers, directors and employees are subject to the policy. Under this policy, the Audit Committee reviews all related party transactions for potential conflicts of interest situations. Generally, our policy defines a “related party transaction” as a transaction in which we are a participant and the amount involved exceeds $10,000, and in which a related party has an interest. A “related party” is:

• a director or officer of Parallel or a nominee to become a director;

• an owner of more than 5% of our outstanding common stock;

• certain family members of any of the above persons; and

• any entity in which any of the above persons is employed or is a partner or principal or in which such person has a 5% or greater ownership interest.

     Approval Procedures

     Before entering into a related party transaction, the related party or the department within Parallel responsible for the potential transaction must notify the Audit Committee of the facts and circumstances of the proposed transaction, including:

• the related party’s relationship to Parallel and interest in the transaction;

• the material terms of the proposed transaction;

• the benefits to Parallel of the proposed transaction;

• the availability of other sources of comparable properties or services; and

• whether the proposed transaction is on terms comparable to terms available to an unrelated third party or to employees generally.

     The Audit Committee will then consider all of the relevant facts and circumstances available to it, including the matters described above and, if applicable, the impact on a director’s independence. No member of the Audit Committee is permitted to participate in any review, consideration or approval of any related party transaction if such member or any of his or her immediate family members is the related party. After review, the Audit Committee may approve, modify or disapprove the proposed transaction. The Audit Committee will approve only those related party transactions that are in, or are not inconsistent with, the best interests of Parallel and its stockholders.

     Ratification Procedures

     If an officer or director of Parallel becomes aware of a related party transaction that has not been previously approved or ratified by the Audit Committee then, if the transaction is pending or ongoing, the transaction must be submitted to the Audit Committee and the Audit Committee will consider the matters described above. Based on the

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conclusions reached, the Audit Committee will evaluate all options, including ratification, amendment or termination of the related party transaction. If the transaction is completed, the Audit Committee will evaluate the transaction, taking into account the same factors as described above, to determine if rescission of the transaction or any disciplinary action is appropriate, and will request that we evaluate our controls and procedures to determine the reason the transaction was not submitted to the Audit Committee for prior approval and whether any changes to the procedures are recommended.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The Audit Committee had not, as of the time of filing this Annual Report on Form 10-K with the Securities and Exchange Commission, adopted policies and procedures for pre-approving audit or permissible non-audit services performed by our independent auditors. Instead, the Audit Committee as a whole has pre-approved all such services. In the future, our Audit Committee may approve the services of our independent auditors pursuant to pre-approval policies and procedures adopted by the Audit Committee, provided the policies and procedures are detailed as to the particular service, the Audit Committee is informed of each service, and such policies and procedures do not include delegation of the Audit Committee’s responsibilities to our management.

     The aggregate fees for professional services rendered by our principal accountants, BDO Seidman, LLP, for 2006 and 2005 were:

Types of Fees	2006			2005
	($ in thousands)
Audit fees	$	469	(1)	$	378	(2)
Audit-related fees		52			5
Tax fees		—			—
All other fees		—			—
Total	$	521		$	383

(1)	Such amount includes $160,000 for professional services rendered in connection with the audit of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. This amount includes associated expenses in the amount of approximately $31,000.
(2)	Such amount includes $160,000 for professional services rendered in connection with the audit of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. This amount includes associated expenses in the amount of approximately $20,000.

     We retained an independent third party to assist us in our Sarbanes-Oxley 404 readiness and assessment of internal control over financial reporting. The aggregate fees for services provided in connection with the internal control over financial reporting for 2006 and 2005 were approximately $67,000 and $85,000, respectively, including associated expenses.

     In the above table, “audit fees” are fees we paid for professional services for the audit of our Consolidated Financial Statements included in our Annual Report on Form 10-K and for the review of our Consolidated Financial Statements included in our Quarterly Reports on Form 10-Q, or for services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements and fees for Sarbanes-Oxley 404 audit work. “Audit-related fees” are fees billed for assurance and related services in connection with acquisition transactions and related regulatory filings.

     We estimate that personnel other than full time permanent employees of BDO Seidman, LLP performed 30% of the total hours expended to audit our Consolidated Financial Statements.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

(a)(1) and (a)(2) Financial Statement and Financial Statement Schedules

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

(a)(3) Exhibits

See Item 15(b) below.

(b) Exhibits:

A list of exhibits to this Annual Report on Form 10-K is set forth below.

No.	Description of Exhibit
3.1	Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)

*3.2	Bylaws of Registrant
3.3	Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
3.4	Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.4 of the Registrant’s Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
3.5	Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No. 3.5 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
3.6	Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No. 3.6 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
4.1	Certificate of Designations, Preferences and Rights of Serial Preferred Stock – 6% Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)
4.2	Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Incorporated by reference to Exhibit 4.2 of Form 10-K of the Registrant for the fiscal year ended December 31, 2000)
4.3	Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 1 of Form 8-A of the Registrant filed with the Securities and Exchange Commission on October 10, 2000)
4.4	Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No. 4.6 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
4.5	Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)

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No.	Description of Exhibit
4.6	Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
*4.7	Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American Stock Transfer, Inc.
*4.8	First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant, Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A.

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

10.1	1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
10.2	Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee Pension Plan (Incorporated by reference to Exhibit 10.6 of the Registrant’s Form 10-K for the fiscal year ended December 31, 1995)
10.3	Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)
*10.4	1998 Stock Option Plan
10.5	2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of the Registrant’s Form 10-Q Report for the fiscal quarter ended March 31, 2004)
10.6	2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 22, 2004)
*10.7	Incentive and Retention Plan
10.8	First Amended and Restated Credit Agreement, dated December 20, 2002, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western National Bank and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form 8-K of the Registrant, dated December 20, 2002)
10.9	Guaranty dated December 20, 2002, between Parallel, L.L.C. and First American Bank, SSB, as Agent (Incorporated by reference to Exhibit 10.3 of Form 8-K of the Registrant, dated December 20, 2002)
10.10	First Amendment to First Amended and Restated Credit Agreement, dated as of September 12, 2003, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western National Bank, and BNP Paribas (Incorporated by reference to Exhibit 10.29 of Form 10-Q of the Registrant for the quarter ended September 30, 2003)
10.11	Second Amended and Restated Credit Agreement, dated September 27, 2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 27, 2004 and filed with the Securities and Exchange Commission on October 1, 2004)
10.12	Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
10.13	First Amendment to Second Amended and Restated Credit Agreement, dated as of December 27, 2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated December 30, 2004 and filed with the Securities and Exchange Commission on December 30, 2004)

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No.

Description of Exhibit

10.14

Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated April 4, 2005 and filed with the Securities and Exchange Commission on April 8, 2005)

10.15	Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated October 4, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.16	Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy, Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney, Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.17	Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.18	Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit 10.4 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.19	ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank, N.A. (Incorporated by reference to Exhibit 10.5 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.20	Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas, CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrant’s Form 8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on December 30, 2005)
10.21	Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference to Exhibit No. 10.4 of the Registrant’s Form 8-K Report, dated November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)
10.22	Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas, N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C. (Incorporated by reference to Exhibit No. 10.5 of the Registrant’s Form 8-K Report, dated November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)
*10.23	Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of Citibank Texas, N.A.
*10.24	Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between Parallel, L.L.C. and Citibank Texas, N.A.
*10.25	Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas
14	Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrant’s Form 10-K Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange Commission on March 22, 2004)
21	Subsidiaries (Incorporated by reference to Exhibit No. 21 of the Registrant’s Form 10-K Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange Commission on March 22, 2004)
*23.1	Consent of BDO Seidman, LLP
*23.2	Consent of Cawley Gillespie & Associates Inc. Independent Petroleum Engineers

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No.	Description of Exhibit
*31.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
*31.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
*32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.
*32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

* Filed herewith.

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PARALLEL PETROLEUM CORPORATION

Index to the Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm		F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 2006 and 2005		F-3
Consolidated Statements of Operations for the years ended December 2006, 2005, and 2004		F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		F-6
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2006, 2005, and 2004		F-7
Notes to Consolidated Financial Statements		F-8

All schedules are omitted, as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes.

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors
Parallel Petroleum Corporation
Midland, Texas

We have audited the accompanying consolidated balance sheets of Parallel Petroleum Corporation as of December 31, 2006 and 2005 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Parallel Petroleum Corporation at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Parallel Petroleum Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2007, expressed an unqualified opinion thereon.

BDO Seidman, LLP
Houston, Texas

February 27, 2007

F-2

PARALLEL PETROLEUM CORPORATION

Consolidated Balance

Sheets December 31, 2006 and 2005

(dollars in thousands)

	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	5,910		$	6,418
Accounts receivable:
Oil and natural gas sales		18,605			13,183
Joint interest owners and other, net of allowance for doubtful account of $80 and $9		10,539			877
Affiliates		8			12
		29,152			14,072
Other current assets		2,863			2,364
Deferred tax asset		4,340			5,241
Total current assets		42,265			28,095
Property and equipment, at cost:
Oil and natural gas properties, full cost method (including $50,375 and $22,328 not subject to depletion)		501,405			303,819
Other		2,614			2,404
		504,019			306,223
Less accumulated depreciation, depletion and amortization		(115,513	)		(90,826	)
Net property and equipment		388,506			215,397
Restricted cash		325			2,640
Investment in pipelines and gathering system ventures		6,454			3,326
Other assets, net of accumulated amortization of $760 and $901		5,268			3,550
	$	442,818		$	253,008
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	36,171		$	10,841
Asset retirement obligations		701			214
Derivative obligations		14,109			16,607
Total current liabilities		50,981			27,662
Revolving credit facility		115,000			50,000
Term loan		50,000			50,000
Asset retirement obligations		4,362			2,281
Derivative obligations		14,386			25,527
Deferred tax liability		24,307			8,036
Total long-term liabilities		208,055			135,844
Commitments and contingencies (Note 15)
Stockholders’ equity:
Series A preferred stock — par value $0.10 per share, authorized 50,000 shares		—			—
Preferred stock — 6% convertible preferred stock — par value of $0.10 per share, (liquidation preference of $10 per share) authorized, 10,000,000 shares		—			—
Common stock — par value $0.01 per share, authorized 60,000,000 shares, issued and outstanding 37,547,010 and 34,748,916		375			347
Additional paid-in capital		140,353			78,699
Retained earnings		43,054			16,899
Accumulated other comprehensive loss		—			(6,443	)
Total stockholders’ equity		183,782			89,502
	$	442,818		$	253,008

See accompanying Notes to Consolidated Financial Statements.

F-3

PARALLEL PETROLEUM CORPORATION

Consolidated Statements of Operations

Years ended December 31, 2006, 2005, 2004

(dollars in thousands, except per share data)

	2006			2005			2004
Oil and natural gas revenues:
Oil and natural gas sales	$	97,025		$	66,150		$	35,837
Cost and expenses:
Lease operating expense		16,819			9,947			7,373
Production taxes		5,577			4,102			2,108
General and administrative		9,523			6,712			5,378
Depreciation, depletion and amortization		24,687			12,044			8,712
Total costs and expenses		56,606			32,805			23,571
Operating income		40,419			33,345			12,266
Other income (expense), net:
Gain (loss) on derivatives not classified as hedges		2,802			(31,669	)		(5,726	)
Gain (loss) on ineffective portion of hedges		626			(137	)		(240	)
Interest and other income		158			167			189
Interest expense		(12,360	)		(4,780	)		(2,732	)
Other expense		(189	)		(102	)		(324	)
Equity in income (loss) of pipelines and gathering system ventures		8,593			(89	)		—
Total other income (expense), net		(370	)		(36,610	)		(8,833	)
Income (loss) before income taxes		40,049			(3,265	)		3,433
Income tax benefit (expense)		(13,894	)		1,676			(1,162	)
Net income (loss)		26,155			(1,589	)		2,271
Cumulative preferred stock dividend		—			(271	)		(572	)
Net income (loss) available to common stockholders	$	26,155		$	(1,860	)	$	1,699
Net income (loss) per common share:
Basic	$	0.73		$	(0.06	)	$	0.07
Diluted	$	0.71		$	(0.06	)	$	0.07

See accompanying Notes to Consolidated Financial Statements.

F-4

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2006, 2005 and 2004

(amounts in thousands)

																	Accumulated
	Preferred stock						Common stock				Additional						Other			Total
	Number of						Number of				paid-in			Retained			Comprehensive			stockholders’
	shares			Amount			shares		Amount		capital			earnings			Loss			equity
Balance,
January 1, 2004		960		$	96			25,217	$	253	$	47,544		$	17,060		$	(3,721	)	$	61,232
Common stock issued for services		—			—			21		—		99			—			—			99
Preferred stock converted		(10	)		(1	)		27		—		1			—			—			—
Options exercised, including income tax benefit of $177		—			—			174		1		522			—			—			523
Deferred stock offering costs		—			—			—		—		(7	)		—			—			(7	)
Stock option expense		—			—			—		—		169			—			—			169
Changes in fair value of cash flow hedges, net of tax		—			—			—		—		—			—			(3,721	)		(3,721	)
Net income		—			—			—		—		—			2,271			—			2,271
Dividends on preferred stock ($0.60 per share)		—			—			—		—		—			(572	)		—			(572	)
Balance,
December 31, 2004		950		$	95			25,439	$	254	$	48,328		$	18,759		$	(7,442	)	$	59,994
Common stock issued, net of transaction costs		—			—			5,750		58		27,686			—			—			27,744
Common stock issued for services		—			—			12		—		99			—			—			99
Preferred stock converted		(950	)		(95	)		2,714		27		68			—			—			—
Cashless exercise of warrants		—			—			120		1		(1	)		—			—			—
Options exercised, including income tax benefit of $44		—			—			714		7		2,241			—			—			2,248
Stock option expense		—			—			—		—		278			—			—			278
Changes in fair value of cash flow hedges, net of tax		—			—			—		—		—			—			999			999
Net income (loss)		—			—			—		—		—			(1,589	)		—			(1,589	)
Dividends on preferred stock ($0.60 per share)		—			—			—		—		—			(271	)		—			(271	)
Balance,
December 31, 2005		—		$	—			34,749	$	347	$	78,699		$	16,899		$	(6,443	)	$	89,502
Common stock issued, net of transaction costs		—			—			2,500		25		60,242			—			—			60,267
Common stock issued for services		—			—			5		—		118			—			—			118
Cashless exercise of warrants		—			—			117		1		(1	)		—			—			—
Options exercised, including income tax benefit of $180		—			—			176		2		764			—			—			766
Stock option expense		—			—			—		—		531			—			—			531
Changes in fair value of cash flow hedges, net of tax		—			—			—		—		—			—			6,443			6,443
Net income		—			—			—		—		—			26,155			—			26,155
Balance,
December 31, 2006		—		$	—			37,547	$	375	$	140,353		$	43,054		$	—		$	183,782

See accompanying Notes to Consolidated Financial Statements.

F-5

PARALLEL PETROLEUM CORPORATION

Consolidated Statements of Cash Flows

Years ended December 31, 2006, 2005 and 2004

(dollars in thousands)

	2006			2005			2004
Cash flows from operating activities:
Net income (loss)	$	26,155		$	(1,589	)	$	2,271
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization		24,687			12,044			8,712
Accretion of asset retirement obligation		248			112			92
Deferred income tax		13,894			(1,676	)		1,162
(Gain) loss on derivatives not classified as hedges		(2,802	)		31,669			5,726
(Gain) loss on ineffective portion of hedges		(626	)		137			240
Common stock issued for directors fees		118			99			99
Stock option expense		531			278			169
Equity (income) loss in pipelines and gathering system ventures		(8,593	)		—			—
Return on investment in pipelines and gathering system ventures		9,000			89			—
Bad debt expense		71			—			—
Changes in assets and liabilities:
Other assets, net		1,567			(823	)		163
Restricted cash		(50	)		(274	)		—
Increase in accounts receivable		(15,151	)		(7,034	)		(2,112	)
(Increase) decrease in other current assets		(153	)		(1,187	)		31
Increase in accounts payable and accrued liabilities		25,330			5,273			1,603
Federal tax deposit		(40	)		—			—
Net cash provided by operating activities		74,186			37,118			18,156
Cash flows from investing activities:
Additions to oil and natural gas properties		(195,396	)		(77,351	)		(67,911	)
Restricted cash		2,366			(79	)		(2,287	)
Proceeds from disposition of oil and natural gas properties		130			3,028			1,625
Additions to other property and equipment		(210	)		(342	)		(647	)
Settlements of derivative instruments		(3,902	)		(5,022	)		—
Purchase of derivative instruments		—			(2,363	)		—
Investment in pipelines and gathering system ventures		(11,260	)		(2,820	)		(298	)
Return of investment in pipelines and gathering system ventures		7,724			—			—
Net cash used in investing activities		(200,548	)		(84,949	)		(69,518	)
Cash flows from financing activities:
Borrowings from bank line of credit		117,000			45,714			53,325
Payments on bank line of credit		(52,000	)		(74,714	)		(14,075	)
Deferred financing costs		(179	)		(1,253	)		(429	)
Borrowings from term loan		—			50,000			—
Proceeds from exercise of stock options		766			2,248			523
Proceeds (net) from common stock issued		60,267			27,744			—
Payment of preferred stock dividend		—			(271	)		(572	)
Deferred stock offering costs		—			—			(7	)
Net cash provided by financing activities		125,854			49,468			38,765
Net increase (decrease) in cash and cash equivalents		(508	)		1,637			(12,597	)
Cash and cash equivalents at beginning of year		6,418			4,781			17,378
Cash and cash equivalents at end of year	$	5,910		$	6,418		$	4,781
Non-cash financing and investing activities:
Oil and natural gas properties asset retirement obligation	$	2,320		$	251		$	338
Other transactions:
Interest paid	$	12,540		$	5,422		$	1,708

See accompanying Notes to Consolidated Financial Statements.

F-6

PARALLEL PETROLEUM CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2006, 2005 and 2004

(dollars in thousands)

	2006			2005			2004
Net income (loss)	$	26,155		$	(1,589	)	$	2,271
Other comprehensive income (loss):
Unrealized losses on derivatives		(1,648	)		(10,980	)		(14,357	)
Reclassification adjustment for losses on derivatives included in net income (loss)		11,409			12,494			8,719
Change in fair value of derivatives		9,761			1,514			(5,638	)
Income tax benefit (expense), deferred		(3,318	)		(515	)		1,917
Total other comprehensive income (loss)		6,443			999			(3,721	)
Total comprehensive income (loss)	$	32,598		$	(590	)	$	(1,450	)

F-7

(1) Organization, Business and Summary of Significant Accounting Policies

(a)	Basis of Consolidation
	The accompanying financial statements present the consolidated accounts of Parallel Petroleum Corporation, a Delaware Corporation, and its wholly owned subsidiaries, Parallel L.P. and Parallel, L.L.C. (collectively “the Company” or Parallel). All significant inter-company account balances and transactions have been eliminated.
	The Company accounts for its interests in oil and natural gas joint ventures and working interests using the proportionate consolidation method. Under this method, the Company records its proportionate share of assets, liabilities, revenues and expenses.
(b)	Nature of Operations
	The Company’s focus is on the acquisition, development and exploitation of long-lived oil and natural gas reserves and, to a lesser extent, exploration for new oil and natural gas reserves. The Company’s business activities are currently carried out primarily in Texas and New Mexico. The Company’s activities are focused in the Permian Basin of west Texas and New Mexico, the Fort Worth Basin of north Texas and the onshore Gulf Coast area of south Texas. The Company is actively evaluating, leasing, drilling and preparing to drill new projects located in the Cotton Valley Reef trend of east Texas and the Uinta Basin of Utah.
(c)	Concentration of Credit Risk
	Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of unsecured accounts receivable from unaffiliated working interest owners and crude oil and natural gas purchasers. A substantial portion of Parallel’s oil and natural gas reserves are located in the Permian Basin and the Company may be disproportionally exposed to the impact of delays or interruptions of production from these wells due to mechanical problems, damages to the current producing reservoirs and significant governmental regulation, including any curtailment of production or interruption of transportation of oil or natural gas produced from the wells.
(d)	Property and Equipment
	Oil and natural gas properties:
	The Company uses the full cost method of accounting for its oil and natural gas producing activities. Accordingly, all costs associated with acquisition, exploration, and development of oil and natural gas reserves, including directly related overhead costs, are capitalized.
	Management and service fees received under contractual arrangements, if any, are treated as reimbursement of costs, offsetting the costs incurred to provide those services. Specifically, from time to time, the Company serves as operator of its oil and natural gas properties in which it owns an interest. Under operating agreements naming the Company as operator, the Company is reimbursed for certain specified direct charges and overhead charges. Amounts received in reimbursement for drilling activities are applied as a reduction to Parallel’s capital costs, and amounts received in reimbursement for producing activities are applied to reduce the Company’s general and administrative expenses.
	Depletion is provided using the unit-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins.
	If the net investment in oil and natural gas properties in a cost center, as adjusted for asset retirement obligations, exceeds an amount equal to the sum of (1) the standardized measure of discounted future net cash flows from

F-8

	proved reserves (see Note 16) and (2) the lower of cost or fair market value of properties in process of development and unexplored acreage, the excess is charged to expense as additional depletion. The standardized measure is calculated using a 10% discount rate and is based on unescalated prices in effect at year-end with effect given to the Company’s cash flow hedge positions.
	Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and natural gas reserves, in which case the gain or loss is recognized in income.
	Other Property and Equipment:
	Maintenance and repairs are charged to operations. Renewals and betterments are capitalized to the appropriate property and equipment accounts.
	Upon retirement or disposition of assets other than oil and natural gas properties, the cost and related accumulated depreciation are removed from the accounts with the resulting gains or losses, if any, recognized in income. Depreciation of other property and equipment is computed using the straight-line method based on the estimated useful lives of the property and equipment.
(e)	Income Taxes
	The Company accounts for federal income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on previously recorded deferred tax assets and liabilities resulting from a change in tax rates is recognized in earnings in the period in which the change is enacted.
(f)	Investments
	Investments in affiliated companies with a 20% to 50% ownership interest are accounted for under the equity method and, accordingly, net income includes the Company’s proportionate share of their income or loss. In addition, the Company has an investment in a joint venture which is accounted for by the equity method because the Company does not have effective control or voting interest although the Company owns approximately 76 1/2% of the joint venture economic interest.
(g)	Stock-Based Compensation
	Parallel accounts for its stock based compensation using the prospective method under Statement of Financial Accounting Standards No. 123 (“SFAS 123”). Under this method, the fair values of all options granted since 2003 have been reflected as compensation expense over the periods in which the services are rendered.
	Parallel adopted SFAS 123(R) effective January 1, 2006, and is applying the modified prospective method, whereby compensation cost associated with the unvested portion of awards granted during the period of June 2001 to December 2002 will be recognized over the remaining vesting period. No options that were granted prior to June 2001 remain unvested at January 1, 2006. Under this method, prior periods are not revised for comparative purposes.
(h)	Environmental Expenditures
	The Company is subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed.

F-9

	Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscovered unless the timing of cash payments for the liability or component are fixed or reliably determinable.
(i)	Earnings Per Share
	Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share are computed similar to basic earnings per share; however, diluted earnings per share reflect the assumed conversion of all potentially dilutive securities.
	The following table provides the computation of basic and diluted earnings per share for the year ended December 31:

	2006		2005			2004
	($ in thousands, except per share data)
Basic EPS Computation:
Numerator-
Net income (loss)	$	26,155	$	(1,589	)	$	2,271
Preferred stock dividend		—		(271	)		(572	)
Net income (loss) available to common stockholders		26,155		(1,860	)		1,699
Denominator-
Weighted average common shares outstanding		35,888		32,253			25,323
Basic earnings (loss) per share	$	0.73	$	(0.06	)	$	0.07
Diluted EPS Computation:
Numerator-
Net income (loss)	$	26,155	$	(1,589	)	$	2,271
Preferred stock dividend		—		(271	)		(572	)
Net income (loss) available to common stockholders	$	26,155	$	(1,860	)	$	1,699
Denominator -
Weighted average common shares outstanding		35,888		32,253			25,323
Employee stock options		599		—			289
Warrants		269		—			76
Weighted average common shares for diluted earnings per share assuming conversion		36,756		32,253			25,688
Diluted earnings (loss) per share	$	0.71	$	(0.06	)	$	0.07

	For the year ended December 31, 2005, the effects of all potentially dilutive securities (including options, warrants and the “if converted” effects of convertible preferred stock) were excluded from the computation of diluted earnings per share because the Company had a net loss and, therefore, the effect would have been antidilutive. Approximately 664,000 options and warrants were excluded from the computation of diluted earnings per share in 2004, because the Company’s inclusion would have resulted in antidilution. Likewise, convertible preferred shares were not treated as “if converted” for the year ended December 31, 2004, because the effects would have been antidilutive.
(j)	Use of Estimates in the Preparation of Consolidated Financial Statements
	Preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. The oil and natural gas reserve estimates, and the related future net cash flows derived from those reserves,

F-10

	are used in the determination of depletion expense and the full-cost ceiling test and are inherently imprecise. Actual results could differ from those estimates.
(k)	Cash Equivalents
	For purposes of the statements of cash flows, the Company considers all demand deposits, money market accounts and certificates of deposit purchased with an original maturity of three months or less to be cash equivalents.
(l)	Restricted Cash
	Restricted cash as of December 31, 2006, includes $50,000 placed in a certificate of deposit for a Letter of Credit with the State of New Mexico and approximately $275,000 placed in a certificate of deposit for a drilling bond. As of December 31, 2005, restricted cash included cash held in escrow for the Harris San Andres purchase (see Note 3) aggregating approximately $2.3 million and monies placed in a certificate of deposit for a drilling bond of approximately $275,000.
(m)	Reclassifications
	Certain reclassifications have been made to prior years amounts to conform with current year presentation.
(n)	Derivative Financial Instruments
	Derivative financial instruments, utilized to manage or reduce commodity price risk related to the Company’s production and interest rate risk related to the Company’s long-term debt, are accounted for under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and for Hedging Activities”, and related interpretations and amendments. Under this Statement, derivatives are carried on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (“OCI”) and are recognized in the statement of operations when the hedged item affects earnings. If the derivative is not designated as a hedge, changes in the fair value are recognized in other expense. Ineffective portions of changes in the fair value of cash flow hedges are also recognized in other expense.
(o)	Revenue Recognition
	Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes oil and natural gas revenue based on the amount of oil and natural gas sold to purchasers. For the period ended December 31, 2006, 2005 and 2004, the Company did not have any oil or natural gas imbalances recorded. The Company does not recognize revenues until they are realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; and, (iv) collectibility is reasonably assured.
	The following summarizes revenue for each of the three years ended December 31 by product sold.

	2006			2005			2004
	($ in thousands)
Oil revenue	$	68,076		$	47,800		$	28,455
Effects of oil hedges		(11,512	)		(12,139	)		(7,458	)
Natural gas revenue		40,461			30,690			15,735
Effects of natural gas hedges		—			(201	)		(895	)
	$	97,025		$	66,150		$	35,837

F-11

(p) Recent Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 changes the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on subsequent derecognition of tax positions, financial statement classification, recognition of interest and penalties, accounting in interim periods, and disclosure and transition requirements. FIN 48 is effective for the Company’s fiscal year beginning January 1, 2007, with early adoption permitted. The Company is in the process of evaluating FIN 48 but does not believe that its implementation will have a material effect on the Company’s financial position or results of operation in any period.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. The Statement is to be effective for Parallel’s financial statements for the fiscal year beginning January 1, 2008; however, earlier application is encouraged. Parallel is currently evaluating the timing of adoption and the impact that adoption might have on our financial position or results of operations.

(2)	Fair Value of Financial Instruments
	The carrying amount of cash, accounts receivable, accounts payable, and accrued liabilities approximates fair value because of the short maturity of these instruments.
	The carrying amount of long-term debt approximates fair value because the Company’s current borrowing rate is based on a variable market rate of interest. The Company also has derivative instruments which are described in Footnote 6.
(3)	Oil and Natural Gas Properties
	The following table reflects capitalized costs related to the oil and natural gas properties as of December 31:

	2006			2005
	($ in thousands)
Proved properties	$	451,030		$	281,491
Unproved properties, not subject to depletion		50,375			22,328
		501,405			303,819
Accumulated depletion		(113,467	)		(89,202	)
	$	387,938		$	214,617

F-12

The following table reflects, by category of cost, amounts excluded from the depletion base as of December 31, 2006:

					Prepaid
	Leasehold		Geological and		Drilling
Year Incurred	Costs		Geophysical		Costs		Total
	($ in thousands)
2006	$	26,880	$	2,943	$	5,200	$	35,023
2005		8,414		688		—		9,102
2004		4,398		700		—		5,098
2003 and prior		817		335		—		1,152
	$	40,509	$	4,666	$	5,200	$	50,375

At December 31, 2006 and 2005, unevaluated costs of approximately $50.3 million and $22.3 million were excluded from the depletion base. These costs consist primarily of acreage acquisition, related geological and geophysical costs and prepaid drilling costs. The majority of these costs relate to the Company’s New Mexico, Utah and Barnett Shale leasehold positions. Although the Company expects transfers of costs to the full cost pool to commence in 2007 and continue throughout the term of the leases, timing is highly dependent on the Company’s anticipated drilling program.

Certain directly identifiable internal costs of property acquisition, exploration, and development activities are capitalized. Such costs capitalized in 2006, 2005 and 2004 totaled approximately $2.3 million, $1.5 million and $1.0 million, respectively, including $620,000 and $180,000 of capitalized interest for the year ended December 31, 2006 and 2005, respectively.

Depletion per equivalent unit of production (BOE) was $10.88, $7.61 and $7.05 for 2006, 2005 and 2004, respectively.

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

	2006		2005		2004
	($ in thousands)
Proved property acquisition costs	$	27,370	$	23,763	$	39,763
Unproved property acquisitions costs		30,058		11,743		7,400
Exploration costs		71,003		15,455		6,794
Development costs		66,965		26,390		13,954
	$	195,396	$	77,351	$	67,911

In September and October 2004, in two separate transactions, Parallel purchased additional non-operated working interests in the Fullerton Field properties. The net purchase price for these two transactions was approximately $20.9 million.

In October and December 2004, Parallel purchased producing properties in the Carm-Ann San Andres and North Means Queen Unit located in Andrews and Gaines counties, Texas. The combined net purchase price was approximately $16.5 million. In January 2005, Parallel acquired additional interest in these properties for a net purchase price of approximately $1.5 million. The 2005 purchase was made out of restricted cash.

In November 2005, Parallel purchased producing and undeveloped oil and natural gas properties in the Harris San Andres Field located in Andrews and Gaines counties, Texas. The net purchase price was approximately $20.8 million. In January, 2006, Parallel acquired additional interest in these properties for a net purchase price of approximately

F-13

$23.4 million, including adjustments. The 2006 purchase was made utilizing Parallel’s restricted cash and revolving credit facility.

In March 2006, Parallel purchased additional interests in the Barnett Shale Gas Project located in Tarrant County, Texas. The additional interests were acquired from five unaffiliated parties for a total cash purchase price of approximately $5.5 million. In April 2006, Parallel acquired an additional interest in the Barnett Shale Gas Project located in Tarrant County, Texas from one other unaffiliated third party for approximately $570,000.

The following table presents unaudited, pro forma operating results as if these property purchases had been made on January 1, 2006 and 2005. The pro forma results have been prepared for comparative purposes only. The pro formas are not intended to represent what actual results would have been if the acquisitions had been made on those dates and these pro forma amounts are not indicative of future results.

	Twelve Months Ended
	December 31,
	Pro Forma		Pro Forma
	2006		2005
	($ in thousands)
Oil and gas revenue	$	97,580	$	74,270
Operating income	$	40,738	$	38,800
Net income available to common stockholders	$	26,291	$	(732	)
Net income per common share:
Basic	$	0.73	$	(0.02	)
Diluted	$	0.72	$	(0.02	)

(4)	Other Assets
	Below are the components of other assets as of December 31, 2006 and 2005:

	December 31,
	2006		2005
	($ in thousands)
Bank fees, net of accumulated amortization	$	1,361	$	1,675
Prepaid drilling		54		1,125	(1)
Fair value of derivative contracts		3,845		738
Other		8		12
	$	5,268	$	3,550

⁽¹⁾ This represents the long-term portion of prepaid drilling costs to be transferred to property, plant and equipment as work is performed.

(5)	Asset Retirement Obligation
	On January 1, 2003, the Company adopted SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 requires companies to recognize a liability for the present value of all legal obligations associated with the retirement of tangible long-lived assets and to capitalize an equal amount as part of the cost of the related oil and natural gas properties.

F-14

The following table summarizes our asset retirement obligation transactions:

	2006			2005			2004
	($ in thousands)
Beginning asset retirement obligation	$	2,495		$	2,132		$	1,701
Additions related to new properties		406			370			939
Revisions in estimated cash flows		1,979			(3	)		(53	)
Deletions related to property disposals		(65	)		(116	)		(547	)
Accretion expense		248			112			92
Ending asset retirement obligation	$	5,063		$	2,495		$	2,132

	Accretion expense is recognized as a component of lease operating expense.
(6)	Derivative Instruments
	The Company enters into derivative contracts to provide a measure of stability in the cash flows associated with the Company’s oil and natural gas production and interest rate payments and to manage exposure to commodity price and interest rate risk. The Company’s objective is to lock in a range of oil and natural gas prices and to limit variability in its cash interest payments. In addition, the Company’s revolving credit facility and second lien term loan facility require the Company to maintain derivative financial instruments which limit the Company’s exposure to fluctuating commodity prices covering at least 50% of the Company’s estimated monthly production of oil and natural gas extending 24 months into the future.
	The Company designated all of its interest rate swaps, commodity collars and commodity swaps entered into in 2002 and 2003 as cash flow hedges (“hedges”). The effective portion of the unrealized gain or loss on cash flow hedges is recorded in other comprehensive income (loss) until the forecasted transaction occurs. During the term of a cash flow hedge, the effective portion of the change in the fair value of the derivatives is recorded in stockholders’ equity as other comprehensive income (loss) and then transferred to oil and natural gas revenues when the production is sold and interest expense as the interest accrues. Ineffective portions of hedges (changes in fair value resulting from changes in realized prices that do not match the changes in the hedge or reference price) are recognized in other expense as they occur.
	As of December 31, 2005, the Company had recorded unrealized losses of $9.8 million, respectively, related to its derivative instruments designated as hedges, which represented the estimated aggregate fair values of the Company’s open hedge contracts as of that date. The unrealized losses, net of taxes, are presented in stockholders’ equity in the Consolidated Balance Sheets as accumulated other comprehensive loss. All derivative instruments previously designated as cash flow hedges had been settled as of December 31, 2006.
	Derivative contracts not designated as hedges are “marked to market” at each period end and the increases or decreases in fair values recorded to earnings. No derivative instruments entered into subsequent to June 30, 2004 have been designated as cash flow hedges.
	The Company is exposed to credit risk in the event of nonperformance by the counterparties to these contracts, BNP Paribas and Citibank, N.A. However, the Company periodically assesses their credit worthiness to mitigate this credit risk.
	Interest Rate Sensitivity
	Under the Company’s revolving credit facility, the Company may elect an interest rate based upon the agent bank’s base lending rate or the LIBOR rate, plus a margin ranging from 2.00% to 2.50% per annum, depending on the Company’s borrowing base usage. The interest rate the Company is required to pay, including the applicable margin, may never be less than 5.00%. Under the Company’s term loan facility second lien term loan facility, the Company may elect an interest rate based upon an alternate base rate, or the LIBOR rate, plus a margin of 4.50%.

F-15

Interest Rate Swaps. The Company has entered into interest rate swaps with BNP Paribas and Citibank, N.A. (the “counterparties”) which are intended to have the effect of converting the variable rate interest payments to be made on the Company’s revolving credit agreement and second lien term loan facility to fixed interest rates for the periods covered by the swaps. Under terms of these swap contracts, in periods during which the fixed interest rate stated in the agreement exceeds the variable rate (which is based on the 90 day LIBOR rate), the Company pays to the counterparties an amount determined by applying this excess fixed rate to the notional amount of the contract. In periods when the variable rate exceeds the fixed rate stated in the swap contracts, the counterparties pay an amount to the Company determined by applying the excess of the variable rate over the stated fixed rate to the notional amount of the contract.

The Company completed a fixed interest rate swap contract with BNP Paribas, based on the 90-day LIBOR rates at the time of the contract. This interest rate swap was treated as a cash flow hedge as defined by SFAS 133. This interest rate swap was on $10.0 million of our variable rate debt for all of 2006. As of December 31, 2006, this contract had expired.

We have employed additional fixed interest rate swap contracts with BNP Paribas and Citibank, N.A. based on the 90-day LIBOR rates at the time of the contracts. However, these contracts are accounted for by “mark to market” accounting as prescribed in SFAS 133. Nonetheless, we view these contracts as additional protection against future interest rate volatility.

The table below recaps the nature of these interest rate swaps and the fair market value of these contracts as of December 31, 2006.

						Estimated
	Notional		Weighted Average			Fair Market Value
Period of Time	Amounts		Fixed Interest Rates			at December 31, 2006
	($ in millions)					($ in thousands)
January 1, 2007 thru December 31, 2007	$	100		4.62	%	$	611
January 1, 2008 thru December 31, 2008	$	100		4.86	%		12
January 1, 2009 thru December 31, 2009	$	50		5.06	%		(86	)
January 1, 2010 thru October 31, 2010	$	50		5.15	%		(71	)
Total Fair Market Value						$	466

F-16

Commodity Price Sensitivity

Collars. Collars are contracts which combine both a put option or “floor” and a call option or “ceiling”. These contracts may or may not involve payment or receipt of cash at inception, depending on “ceiling” and “floor” pricing.

A summary of the Company’s collar positions at December 31, 2006 is as follows:

									Houston
			NyMex						Ship Channel				WAHA				Fair
	Barrels		Oil Prices				MMBtu of		Gas Prices				Gas Prices				Market
Period of Time	of Oil		Floor		Cap		Natural Gas		Floor		Cap		Floor		Cap		Value
																	($ in
																	thousands)
January 1, 2007 thru December 31, 2007		292,000	$	55.63	$	84.88		—	$	—	$	—	$	—	$	—	$	357
April 1, 2007 thru October 31, 2007		—	$	—	$	—		214,000	$	6.00	$	11.05	$	—	$	—		85
April 1, 2007 thru October 31, 2007		—	$	—	$	—		642,000	$	—	$	—	$	6.25	$	8.90		291
January 1, 2008 thru December 31, 2008		237,900	$	60.38	$	81.08		—	$	—	$	—	$	—	$	—		411
January 1, 2009 thru December 31, 2009		620,500	$	63.53	$	80.21		—	$	—	$	—	$	—	$	—		1,733
January 1, 2010 thru October 31, 2010		486,400	$	63.44	$	78.26		—	$	—	$	—	$	—	$	—		1,285
Total Fair Market Value																	$	4,162

Commodity Swaps. Generally, swaps are an agreement to buy or sell a specified commodity for delivery in the future, at an agreed fixed price. Swap transactions convert a floating or market price into a fixed price. For any particular swap transaction, the counterparty is required to make a payment to the Company if the reference price for any settlement period is less than the swap or fixed price for such contract, and the Company is required to make a payment to the counterparty if the reference price for any settlement period is greater than the swap or fixed price for such contract.

The Company has entered into oil and natural gas swap contracts with BNP Paribas. A recap for the period of time, number of barrels, and weighted average swap prices are as follows:

	Barrels of		Nymex Oil		Fair Market
Period of Time	Oil		Swap Price		Value
					($ in thousands)
January 1, 2007 thru December 31, 2007		474,500	$	34.36	$	(14,109	)
January 1, 2008 thru December 31, 2008		439,200	$	33.37		(13,826	)
Total fair market value					$	(27,935	)

(7)

Equity Investment and Property Acquisitions

The Company had three separate partnership investments to construct pipeline systems which gather natural gas primarily on its leaseholds in the Barnett Shale area – West Fork Pipeline Company I, L.P., West Fork Pipeline Company II, L.P. and West Fork Pipeline Company V, L.P. These investments were recorded as an equity investment in the accompanying consolidated balance sheet. In the fourth Quarter 2006, essentially all of the assets contained in West Fork Pipeline I and West Fork Pipeline V were sold. The Company received distributions of $16.6 million and $683,000, respectively, as a result of these asset sales. The company has invested $328,000 in the West Fork Pipeline II through 2006. West Fork Pipeline II is currently acquiring the necessary easements and permits to begin transmission of natural gas.

F-17

In 2006, the Company invested $6.7 million in the Hagerman Gas Gathering System (“Hagerman”) to construct pipelines on certain of its leaseholds in New Mexico. In late September 2006, transmission of natural gas commenced through the first phase of the system. The Hagerman Gas Gathering System is currently being extended to additional productive areas. The Company anticipates additional investments in Hagerman during 2007.

Our investment percentage in each of these ventures was as follows:

West Fork Pipeline Company I, L.P.	37.3000	%
West Fork Pipeline Company II, L.P.	35.8750	%
West Fork Pipeline Company V, L.P.	23.2585	%
Hagerman Gas Gathering System	76.5000	%

Our investment in the Hagerman is accounted for by the equity method because the Company does not have voting control. All significant actions taken by Hagerman must be approved by Parallel plus one of the two other equity owners. Consequently, the remaining equity owners can prevent voting control by Parallel.

Our equity investments consisted of the following:

	December 31,
	2006		2005
	($ in thousands)
West Fork Pipeline Company I, L.P.	$	—	$	3,120
West Fork Pipeline Company II, L.P.		280		21
West Fork Pipeline Company V, L.P.		—		185
Hagerman Gas Gathering System		6,174		—
	$	6,454	$	3,326

Our earnings from equity investments were as follows:

	Year Ended December 31,
	2006			2005			2004
	($ in thousands)
West Fork Pipeline Company I, L.P.(1)	$	9,286		$	(83	)	$	—
West Fork Pipeline Company II, L.P.		(50	)		(5	)		—
West Fork Pipeline Company V, L.P.(2)		(147	)		(1	)		—
Hagerman Gas Gathering System		(496	)		—			—
	$	8,593		$	(89	)	$	—

(1)	Included in our earnings from West Fork Pipeline Company I, L.P. is our proportionate gain in the sale of the partnership assets of approximately $9.1 million.
(2)	Included in our earnings from West Fork Pipeline Company V, L.P. is our proportionate loss in the sale of the partnership assets of approximately $90,000.

F-18

Summarized combined financial information for our equity investments (listed above) is reported below. Amounts represent 100% of the investees’ financial information:

	December 31,
	2006		2005
	($ in thousands)
Balance Sheet
Current assets	$	1,408	$	1,493
Non-current assets		8,361		10,567
Current liabilities		1,338		674
Owners’ equity		8,431		11,386

	Year Ended December 31,
	2006			2005			2004
	($ in thousands)
Income Statement
Revenues	$	2,402		$	627		$	1
Costs and expenses		(2,597	)		(699	)		(150	)
Gain/loss on sale of assets		23,780			—			—
Net income (loss)	$	23,585		$	(72	)	$	(149	)

(8)	Credit Facilities
	The Company has two separate credit facilities. The Company’s Third Amended and Restated Credit Agreement (or the “Revolving Credit Agreement”), dated as of December 23, 2005, with a group of bank lenders provides a revolving line of credit having a “borrowing base limitation” of $167.0 million at December 31, 2006. The total amount that the Company can borrow and have outstanding at any one time is limited to the lesser of $350.0 million or the borrowing base established by the lenders. At December 31, 2006, the principal amount outstanding under the Company’s revolving credit facility was $115.0 million, and $445,000 was reserved for the Company’s letters of credit. The second credit facility (or the “Second Lien Agreement”) is a five year term loan facility provided to the Company under a Second Lien Term Loan Agreement, dated November 15, 2005, with a group of banks and other lenders. At December 31, 2006, the Company’s term loan under the second lien agreement was fully funded in the principal amount of $50.0 million.
	The credit facilities have varying interest rates and consist of the following bank’s base rate and LIBOR tranches at December 31:

	2006		2005
	($ in thousands)
Revolving Facility note payable to banks,
Agent bank’s base lending rate of 8.25%	$	2,000	$	—
Libor Tranche at 7.61% and 6.40%		113,000		50,000
Term Loan (Second Lien) payable to banks,
Libor Tranche at 9.875% and 9.0%		50,000		50,000
Total notes payable to banks	$	165,000	$	100,000

F-19

Revolving Credit Facility

The Revolving Credit Agreement provides for a credit facility that allows the Company to borrow, repay and reborrow amounts available under the revolving credit facility. The amount of the borrowing base is based primarily upon the estimated value of the Company’s oil and natural gas reserves. The borrowing base amount is redetermined by the lenders semi-annually on or about April 1 and October 1 of each year or at other times required by the lenders or at the Company’s request. If, as a result of the lenders’ redetermination of the borrowing base, the outstanding principal amount of the Company’s loan exceeds the borrowing base, it must either provide additional collateral to the lenders or repay the principal of the revolving credit facility in an amount equal to the excess. Except for the principal payments that may be required because of the Company’s outstanding loans being in excess of the borrowing base, interest only is payable monthly.

Loans made to the Company under this revolving credit facility bear interest at the bank’s base rate or the LIBOR rate, at the Company’s election. Generally, the bank’s base rate is equal to the “prime rate” published in the Wall Street Journal.

The LIBOR rate is generally equal to the sum of (a) the rate designated as “British Bankers Association Interest Settlement Rates” and offered on one, two, three, six or twelve month interest periods for deposits of $1.0 million, and (b) a margin ranging from 2.00% to 2.50%, depending upon the outstanding principal amount of the loans. If the principal amount outstanding is equal to or greater than 75% of the borrowing base, the margin is 2.50%. If the principal amount outstanding is equal to or greater than 50%, but less than 75% of the borrowing base, the margin is 2.25%. If the principal amount outstanding is less than 50% of the borrowing base, the margin is 2.00%.

The interest rate the Company is required to pay on its borrowings, including the applicable margin, may never be less than 5.00%. At December 31, 2006, the Company’s base rate was 8.25% on $2.0 million and its Libor interest rate, plus margin, was 7.61% on $113.0 million.

In the case of base rate loans, interest is payable on the last day of each month. In the case of LIBOR loans, interest is payable on the last day of each applicable interest period.

If the total outstanding borrowings under the revolving credit facility are less than the borrowing base, an unused commitment fee is required to be paid to the lenders. The amount of the fee is .25% of the daily average of the unadvanced amount of the borrowing base. The fee is payable quarterly.

If the borrowing base is increased, the Company is required to pay a fee of .375% on the amount of any increase in the borrowing base.

The Revolving Credit Agreement contains various restrictive covenants, including (i) maintenance of a minimum current ratio, (ii) maintenance of a maximum ratio of funded indebtedness to earnings before interest, income taxes, depreciation, depletion and amortization, (iii) maintenance of a minimum net worth, (iv) prohibition of payment of dividends and (v) restrictions on incurrence of additional debt. The Company has pledged substantially all of its producing oil and natural gas properties to secure the repayment of its indebtedness under the Revolving Credit Agreement.

As of December 31, 2006 we were in compliance with all of the covenants in our Revolving Credit Agreement.

All outstanding principal under the revolving credit facility is due and payable on October 31, 2010. The maturity date of the Company’s outstanding loans may be accelerated by the lenders upon the occurrence of an event of default under the Revolving Credit Agreement.

Second Lien Term Loan Facility

The Second Lien Agreement provides a $50.0 million term loan to the Company. Loans made to the Company under this credit facility bear interest at an alternate base rate or the LIBO rate, at the Company’s election. The alternate base rate is the greater of (a) the prime rate in effect on such day and (b) the “Federal Funds Effective Rate” in effect on such day plus ¹/2 of 1%, plus a margin of 3.50% per annum.

F-20

	The LIBO rate is generally equal to the sum of (a) a designated rate appearing in the Dow Jones Market Service for the applicable interest periods offered in one, two, three or six month periods and (b) an applicable margin rate per annum equal to 4.50%.
	The Second Lien Agreement contains various restrictive covenants, including (i) maintenance of a maximum ratio of debt to earnings before interest, income taxes, depreciation, depletion and amortization, (ii) maintenance of a minimum ratio of oil and natural gas reserve value to debt, (iii) prohibition of payment of dividends, and (iv) restrictions on incurrence of additional debt. The Company’s producing oil and natural gas properties are also pledged to secure payment of its indebtedness under this facility, but the liens granted to the lender under the Second Lien Agreement are second and junior to the rights of the first lienholders under the Revolving Credit Agreement.
	At December 31, 2006, the Company’s LIBO interest rate was 9.875% on $50.0 million.
	In the case of alternate base rate loans, interest is payable the last day of each March, June, September and December. In the case of LIBO loans, interest is payable the last day of the tranche period not to exceed a three month period.
	As of December 31, 2006 we were in compliance with all of the covenants in our Second Lien Agreement.
	All outstanding principal under the second lien agreement is due and payable on November 15, 2010. The maturity date may be accelerated by the lenders upon the occurrence of an event of default under the second lien agreement.
	Prepayments in whole or in part if made prior to the first anniversary date will bear a premium of 1% of the amount prepaid; there is no premium after the first anniversary date.
(9)	Income Taxes
	The Company’s income tax provision consists of the following:

	Years ended December 31,
	2006		2005			2004
	($ in thousands)
Deferred income tax (benefit) expense	$	13,894	$	(1,676	)	$	1,162
Deferred income tax (benefit) expense related to loss/gain on derivatives in other comprehensive loss		3,318		515			(1,917	)
Total income tax provision (benefit)	$	17,212	$	(1,161	)	$	(755	)

Income tax expense differs from the amount computed at the federal statutory rate as follows:

	Years ended December 31,
	2006		2005			2004
	($ in thousands)
Income tax (benefit) expense at statutory rate	$	13,617	$	(1,110	)	$	1,167
Statutory depletion		37		(443	)		(29	)
State tax, net of federal benefit		101		16			6
Nondeductible expenses and other		139		(139	)		18
Income tax expense	$	13,894	$	(1,676	)	$	1,162

F-21

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

	2006			2005
	($ in thousands)
Current:
Deferred tax assets:
Fair market value losses on derivatives expected to be settled within one year	$	4,340		$	5,241
Noncurrent:
Deferred tax assets:
Net operating loss carryforwards, state and federal	$	16,942		$	3,734
Statutory depletion carryforwards		2,424			2,462
Alternative minimum tax credit carryforward		157			154
Fair market value losses on derivatives not expected to be settled within one year		4,102			9,331
Asset retirement obligations		233			149
Other		26			64
Total noncurrent deferred tax assets		23,884			15,894
Deferred tax liabilities:
Property and equipment, principally due to differences in basis, expensing of intangible drilling costs for tax purposes and depletion		(48,191	)		(23,930	)
Total deferred tax liabilities		(48,191	)		(23,930	)
Net noncurrent deferred income tax liability	$	(24,307	)	$	(8,036	)

As of December 31, 2006, the Company had net operating loss carry forwards for regular tax and alternative minimum taxable income (AMT) purposes available to reduce future taxable income. These carry forwards expire as follows:

	Net operating		AMT
	loss		operating loss
	($ in thousands)
2019	$	2,507	$	2,918
2021		4,576		4,498
2022		44		44
2023		8		332
2024		3,718		3,806
2026		38,977		37,943
	$	49,830	$	49,541

As of December 31, 2006, the Company had approximately $157,000 of AMT credit carryover that has no expiration date.

F-22

(10)	Equity Transactions
	Preferred Stock
	On June 6, 2005, outstanding shares of the Company’s 6% Convertible Preferred Stock, $0.10 par value per share were converted to common stock. Under terms of the Preferred Stock Agreement, all of the holders of the Convertible Preferred Stock elected to convert their shares into shares of the Company’s common stock based on the original contractual conversion rate of $10.00 divided by $3.50. The holders of the Preferred Stock received approximately 2.8571 shares of common stock of the Company for each share of Preferred Stock.
	Sale of Equity Securities
	On February 9, 2005, the Company sold 5,750,000 shares of its common stock, $.01 par value per share, pursuant to a public offering at a price of $5.27 per share. Gross cash proceeds were $30.3 million, and net proceeds were approximately $27.7 million. The common shares were issued under Parallel’s $100.0 million Universal Shelf Registration Statement on Form S-3 which became effective in November 2004. The proceeds were used to reduce the amount outstanding under the revolving credit facility.
	On August 16, 2006, the Company sold 2,500,000 shares of its common stock, $.01 par value per share, pursuant to a public offering at a price of $25.25 per share. Gross cash proceeds were $63.1 million, and net proceeds were approximately $60.3 million. The proceeds were used for general corporate purposes, including debt repayment and the acceleration of Parallel’s drilling and completion operations in certain core areas such as the Barnett Shale natural gas, New Mexico Wolfcamp natural gas and Permian Basin west Texas oil properties.
(11)	Stock Compensation, Warrants and Rights
	The Company awards both incentive stock options and nonqualified stock options to selected key employees, officers, and directors. The options are awarded at an exercise price equal to the closing price of the Company’s common stock on the date of grant. These options vest over a period of two to ten years with a ten-year exercise period. As of December 31, 2006, options expire beginning in2007 and extending through 2015. Options to purchase a total of 17,500 shares of common stock remain available for grant.

(a)	Stock Options
	A summary of the Company’s employee stock options as of December 31, 2006, 2005 and 2004, and changes during the years ended on those dates is presented below:

	Year ended					Year ended					Year ended
	December 31, 2006					December 31, 2005					December 31, 2004
	Number of			Weighted		Number of			Weighted		Number of			Weighted
	shares			average price		shares			average price		shares			average price
	(in thousands)					(in thousands)					(in thousands)
Stock options:
Outstanding at beginning of year		1,405		$	5.22		1,919		$	3.71		2,138		$	3.65
Options granted		—			—		200			12.27		—			—
Options exercised		(176	)		4.35		(714	)		3.15		(174	)		3.00
Options cancelled		(30	)		3.09		—			—		—			—
Options expired		—			—		—			—		(45	)		4.29
Outstanding at end of year		1,199		$	5.40		1,405		$	5.22		1,919		$	3.71
Exercisable at end of year		1,001		$	4.32		1,160		$	4.01		1,776		$	3.50
Weighted average fair value of options granted during the year				$	—				$	8.71				$	—

F-23

The following table summarizes information about the Company’s employee stock options outstanding and exercisable at December 31, 2006:

	Average
	Remaining		Fair Market
	Life		Value
			(in thousands)
Stock options outstanding as of December 31, 2006		4.5	$	14,587
Currently exercisable as of December 31, 2006		3.6	$	13,266

	Options outstanding					Options exercisable
Range of	Number		Weighted average	Weighted		Number		Weighted
exercise	Outstanding at		remaining	average		exercisable at		average
prices	December 31, 2006		contractual life	exercise price		December 31, 2006		exercise price
	(in thousands)					(in thousands)
$1.81 - $3.60		401	4 years	$	2.92		401	$	2.92
$4.09 - $5.50		598	4 years	$	4.76		560	$	4.75
$12.27		200	9 years	$	12.27		40	$	12.27
		1,199					1,001

For the twelve months ended December 31, 2006, 2005 and 2004, Parallel recognized compensation expense of approximately $531,000, $278,000 and $169,000 with tax benefits of approximately $181,000, $95,000 and $58,000, respectively, associated with its stock option grants.

The following table presents the future stock-based compensation expense expected to be recognized over the vesting period:

	($ in thousands)
2007	$	324
2008		194
2009 through 2010		144
Total	$	662

Nonvested options were 197,500 at December 31, 2006. During the twelve months ended December 31, 2006, 176,250 options were exercised; however, no options were granted, expired or forfeited. During 2006 the Company settled 30,000 options for approximately $511,000.

The fair value of each option award is estimated on the date of grant. The fair value of stock options granted prior to and remaining outstanding at January 1, 2006 and that had option shares subject to future vesting at that date was determined using the Black-Scholes option valuation method assumptions noted in the following table. Expected volatilities are based on historical volatility of the common stock. The expected term of the options granted used in the model represent the period of time that options granted are expected to be outstanding.

F-24

	Year ended December 31,
	2005			2001
Expected volatility		54.20	%		57.95	%
Expected dividends		0.00	%		0.00	%
Expected term (in years)		7			8
Risk free rate		4.200	%		5.050	%

	($ in thousands)
Intrinsic Value of Options Exercised Twelve Months Ending December 31, 2006	$	2,855
Intrinsic Value of Options Exercised Twelve Months Ending December 31, 2005	$	9,169
Intrinsic Value of Options Exercised Twelve Months Ending December 31, 2004	$	363
Fair Market Value of Options Granted Twelve Months Ending December 31, 2006	$	—
Fair Market Value of Options Granted Twelve Months Ending December 31, 2005	$	1,423
Fair Market Value of Options Granted Twelve Months Ending December 31, 2004	$	—

There were no stock options granted for the twelve months ended December 31, 2006. For the twelve months ended December 31, 2005 there were 200,000 options granted with a fair market value of $1.42 million.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement No. 123 to employee options awarded prior to 2003.

	Year Ended December 31,
	2005			2004
	( $ in thousands, except
	per share data)
Net income (loss)	$	(1,589	)	$	2,271
Add:
Stock-based compensation expense for employees included in reported net income (loss), net of related tax effects of $95 and $57		183			112
Less:
Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(610	)		(408	)
Pro forma net income (loss)	$	(2,016	)	$	1,975
Earnings (loss) per share:
Basic — as reported	$	(0.06	)	$	0.07
Basic — pro forma	$	(0.07	)	$	0.06
Diluted — as reported	$	(0.06	)	$	0.07
Diluted — pro forma	$	(0.07	)	$	0.05

(b)	Stock Warrants
	The Company has 300,030 warrants outstanding at December 31, 2006, 2005, and 2004, which were issued as part of the Company’s initial public offering in 1980. Each warrant allows the holder to buy one share of common

F-25

	stock for $6.00. The warrants are exercisable for a 30 day period commencing on the date a registration statement covering exercise is declared effective. The warrants contain antidilution provisions.
	The Company also had an additional 136,708 warrants outstanding at December 31, 2005 issued as partial payment for services rendered for financial and investment advice in 2001. The warrants had a term of five years from date of issuance and a vesting period of one year. The warrants have an exercise price of $2.95 per share and contain a provision for cashless exercise. The expense related to these warrants in the amount of $99,000 was recorded in other expenses in 2001 based on the estimated fair value on the date of grant using the Black-Scholes option pricing model. As of December 31, 2006 these warrants had been fully exercised.
	The Company has 100,000 warrants outstanding at December 31, 2006, 2005 and 2004, which were issued as partial payment for services rendered for financial and investment advice for the Company’s private placement offering in December, 2003. The warrants have a term of five years from date of issuance and vesting period of one year. The warrants have an exercise price of $3.98 per share and contain a provision for cashless exercise. The fair value related to these warrants in the amount of $157,000 was recorded in other expenses in 2003 based on the estimated fair value on the date of grant using the Black-Scholes option pricing model.
(c)	Stock Rights
	On October 5, 2000, the board of directors declared a dividend of one Stock Right for each outstanding share of the Company’s common stock. If a person acquires 15% or more of the Company’s common stock or a tender offer or exchange offer is made for 15% or more of the common stock, each Stock Right will entitle the holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock, par value $0.10 per share, at an exercise price of $26.00 per one one-thousandth of a share, subject to adjustment.
	Initially, the Stock Rights attach to all common stock certificates representing shares then outstanding, and no separate Stock Rights certificates will be distributed. The Stock Rights separate from the common stock upon the earlier of (1) ten business days following a public announcement that a person or group of affiliated or associated persons has acquired or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of common stock or (2) ten business days (or such later date as the board of directors shall determine) following the commencement of a tender or exchange offer that would result in a person or group beneficially owning 15% or more of such outstanding shares of common stock. The date the Stock Rights separate is referred to as the “distribution date”.
	Under certain circumstances the Stock Rights entitle the holders to buy the Company’s stock at a 50% discount. In the event that (1) the Company is the surviving corporation in a merger or other business combination with an entity that owns 15% or more of the Company’s outstanding stock; (2) any person shall acquire beneficial ownership of 15% of the Company’s outstanding stock; or, (3) there is any type of recapitalization of the Company that results in an increase by more than 1% the proportionate share of equity securities of the Company owned by a person who owns 15% or more of the Company’s outstanding stock, each Stock Right holder will have the option to buy for the purchase price common stock of the Company having a value equal to two times the purchase price of the Stock Right.
	Under certain circumstances the Stock Rights entitle the holders to buy shares of the acquirer’s common stock at a 50% discount. In the event that, at any time after a person has acquired 15% or more of the Company’s common stock, (1) the Company enters into a merger or other business combination transaction in which the Company is not the surviving corporation; (2) the Company is the surviving corporation in a transaction in which all or part of the common stock is exchanged for cash, property or securities of any other person; or, (3) more than 50% of the assets, cash flow or earning power of the Company is sold, each right holder will have the option to buy for the purchase price stock of the acquiring company having a value equal to two times the purchase price of the Stock Right.
	The Stock Rights are not exercisable until the distribution date and will expire at the close of business on October 5, 2010, unless earlier redeemed by the Company for $0.001 per Stock Right.

F-26

(d)

Non-Employee Director Stock Grant Plan

Effective July 1, 2004, the Company began paying an annual retainer fee to each non-employee Director in the form of shares of the Company’s common stock. Under the 2004 Non-Employee Director Stock Grant Plan, each non-employee Director is entitled to receive an annual retainer fee in the form of shares of common stock having a value of $25,000. The shares of stock are automatically granted on the first day of July in each year. The actual number of shares received is determined by dividing $25,000 by the average daily closing price of the common stock on the Nasdaq Stock Market for the ten consecutive trading days commencing fifteen trading days before the first day of July of each year. On July 1, 2006, and in accordance with the terms of the plan, the Company issued a total of 4,696 shares of common stock to four non-employee Directors as follows: Jeffrey G. Shrader — 1,174 shares; Dewayne E. Chitwood — 1,174 shares; Martin B. Oring — 1,174 shares; and Ray M. Poage — 1,174 shares. On July 1, 2005, and in accordance with the terms of the plan, the Company issued a total of 11,596 shares of common stock to four non-employee Directors as follows: Jeffrey G. Shrader — 2,899 shares; Dewayne E. Chitwood — 2,899 shares; Martin B. Oring — 2,899 shares; and Ray M. Poage — 2,899 shares. The Company has 78,820 remaining shares of common stock available to issue to directors under this arrangement.

(12)	Related Party Transactions
	An entity owned by Thomas R. Cambridge, the Company’s Chairman of the board of directors, is the owner and acted as the Company’s agent in performing the routine day to day operations on two wells. In 2006, 2005 and 2004 the Company was billed approximately $23,000, $20,000 and $15,000, respectively, for the Company’s pro rata share of lease operating and drilling expenses and received approximately $176,000, $161,000 and $165,000 in 2006, 2005, and 2004 respectively, in oil and natural gas revenues related to these wells. These two wells were acquired in 1984.
	An entity, of which Mr. Cambridge is the President, owned interests in certain wells that are administered by the Company. During 2006 the Company charged approximately $3,000 for lease operating expenses and paid approximately $8,000 in oil and natural gas revenues related to these wells.
	Dewayne E. Chitwood, a Director of the Company, also serves as director of an entity which owned 110,000 shares of preferred stock of the Company. In addition, a Foundation, where Mr. Chitwood is the Chairman of the board of directors of the Foundation; and a Trust where he is Trustee, owned a total of 55,000 shares each of preferred stock of the Company. These shares of preferred stock of the Company were purchased in 1998 at a price of $10 per share on the same terms as all other unaffiliated purchasers. On June 6, 2005 the 110,000 and the 55,000 shares of preferred stock were converted to 314,285 and 157,142 shares of common stock, respectively.
	An entity, in which Mr. Chitwood is an officer of the managing general partner, owned interests in certain wells that are operated by the Company. During 2005 and 2004 the Company charged approximately $4,000 and $14,000, respectively, for lease operating expenses and paid approximately $8,000, and $48,000, respectively, in oil and natural gas revenues related to these wells. In 2005 the Company paid to the entity approximately $140,000 in payment of net proceeds attributable to its pro rata share from the sale of the interests.
	In December, 2001, and prior to his employment with Parallel, Donald E. Tiffin, Parallel’s Chief Operating Officer, received a 3% working interest from an unaffiliated third party in the Diamond M Project in Scurry County, Texas for services rendered in connection with assembling the project. In August, 2002, shortly after his employment with Parallel, and due to the personal financial exposure in the Diamond M Project and to prevent the interest from being acquired by a third party, Mr. Tiffin assigned two-thirds of his ownership interest in the project to Parallel at no cost, leaving him with a 1% working interest. Parallel acquired its initial interest in the Diamond M Project in December, 2001. During 2006, the Company charged approximately $111,000 for capital expenditures and lease operating expenses and paid approximately $100,000 in oil and natural gas revenues related to this project.
(13)	Statements of Cash Flows
	In 2006, $40,000 was paid for estimated alternative minimum tax. No Federal income taxes were paid in 2005 and 2004.

F-27

	The Company made interest payments of approximately $12.5 million, $5.4 million, and $1.7 million in 2006, 2005 and 2004, respectively.
	At December 31, 2006, 2005 and 2004, there were $8.5 million, $2.5 million and $741,000, respectively, of property additions accrued in accounts payable.
(14)	Major Customers
	The following purchasers accounted for 10% or more of the Company’s oil and natural gas sales for the years ended December 31:

	2006			2005			2004
Company A		(1)			14	%		22	%
Company B		20	%		12	%		(1)
Company C		30	%		40	%		43	%
Company D		12	%		(1)			(1)
Company E		10	%		(1)			(1)

⁽¹⁾ Less than 10%.

(15)	Commitments and Contingencies
	On December 30, 2005, the Company was named as a defendant in a lawsuit filed in the 352nd Judicial District Court of Tarrant County, Texas, Cause No. 352-215616-05, AFE Oil and Gas, L.L.C. (aka AFE Oil and Gas, LLC) v. Premium Resources II, L.P., Premium Resources, Inc., Danay Covert, Nick Morris, William D. Middleton, Dale Resources, L.L.C., and Parallel Petroleum, Inc.
	In this suit, the plaintiff alleges breach of fiduciary duty, fraud and conspiracy to defraud, breach of contract, constructive trust, suit to remove cloud from title, declaratory judgment, alter ego, tortious interference with contract and statutory fraud and seeks recovery of an unspecified amount of actual damages, special damages, consequential damages, exemplary damages, attorneys’ fees, pre-judgment and post-judgment interest and costs. Generally, the plaintiff alleges that it owns a 5.5% overriding royalty interest in certain oil and natural gas properties including the “Square Top LP” and the “West Fork LP” leases located in Tarrant County, Texas. The plaintiff alleges that the defendants (other than Dale Resources and Parallel) wrongfully and intentionally allowed these original oil and natural gas leases to terminate; causing the termination of plaintiff’s overriding royalty interest in each lease. The plaintiff further alleges that the defendants (other than Dale Resources and Parallel) failed to drill wells necessary to maintain the original leases in force and that after the original leases were allowed to terminate, the defendants (other than Dale Resources and Parallel) then acquired new oil and natural gas leases covering these same oil and natural gas properties, which were subsequently assigned to Dale Resources. Thereafter, Dale Resources allegedly assigned a portion of these new leases to Parallel.
	In addition to seeking unspecified monetary damages, the plaintiff also seeks to impose a constructive trust for its benefit on the new oil and natural gas leases and seeks a judicial declaration that either (1) the plaintiff is the owner of an overriding royalty interest in the new leases or that (2) the original leases and plaintiff’s interest in the original leases are still in effect. The plaintiff also claims that the new leases constitute a cloud on plaintiff’s title and seeks to have that cloud removed. Based on Parallel’s present understanding of this case, Parallel believes that it has substantial defenses to the plaintiff’s claims and intends to vigorously assert these defenses. However, if the plaintiff is awarded an interest in the new leases, then Parallel could potentially become liable for the payment to plaintiff of the portion of production proceeds attributable to plaintiff’s interest received by Parallel. On the other hand, if the plaintiff prevails on its claim that the original leases are still in effect, Parallel’s interest in the new leases could become subject to forfeiture. Based on the information known to date, Parallel has not established a reserve for this matter.
	Prior to January 1, 2005, the Company had established a simplified employee pension plan (“SEP”) covering all salaried employees of the Company. The employees could voluntarily contribute a portion of their eligible compensation, not to exceed $13,000, to the SEP. In addition to this annual salary deferral limit, employees who had reached the age of 50 or older during the calendar year could have elected to take advantage of a catch-up salary deferral contribution.

F-28

	Eligible participants could have increased their salary deferral by $3,000 for the year 2004. The Company made discretionary contributions to the SEP; however, total contributions could not exceed $41,000 per employee. During 2004 the Company contributed an aggregate of approximately $133,000 to the SEP.
	On January 1, 2005 the Company established a 401(k) Plan and Trust for eligible employees. Employees may not participate in the SEP with the establishment of the 401(k) Plan and Trust. During 2006 and 2005, the Company contributed an aggregate of approximately $240,000 and $168,000, respectively, to the 401(k) Plan.
	The Company leases office space under a non-cancelable operating lease expiring in 2010. Future annual payments under this operating lease are approximately $204,000, $210,000, $216,000 and $36,000 for the years ending December 31, 2007 thru February 28, 2010, respectively. Rental expense under the Company’s current and former lease totaled approximately $194,000, $162,000, and $127,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
	The Company leases two field offices and storage facilities. These two facilities are located in Andrews and Snyder, Texas. The Andrews office is under a non-cancelable commercial lease expiring in 2007 and the Snyder office lease expires upon the cessation of production from the Diamond “M” area wells. Future annual payments under these lease agreements total approximately $23,000 for 2007 and $14,000 for 2008 thru 2011. Rental expense under these two leases totaled approximately $23,000, $23,000 and $15,000 for the year ended December 31, 2006, 2005 and 2004, respectively.
	The Company has an Incentive and Retention Plan which provides for the payment to eligible officers and employees a one time performance bonus and retention payment upon the occurrence of a change of control as defined in the Plan. Because of the uncertainty of the occurrence of a change of control or corporate transaction within the meaning of the plan, the amount of these bonuses is undeterminable. Although the amount of the bonus is undeterminable at this time, if the Plan was calculated using the December 31, 2006, stock price of $17.57 per share, the Plan would have a balance of approximately $18.5 million.
	In January 2006, the Company adopted a Non-officer Employee Severance Plan for the purpose of providing the Company’s non-officer employees with an incentive to remain employed by with the Company. This Plan provides for a one-time severance payment to the non-officer employees equal to one year of their then “current base salary” upon the occurrence of a change of control within the meaning of the Plan. Based on the aggregate non-officer base salaries in effect as of December 31, 2006, the total severance amount payable under the plan would have been approximately $3.3 million.
(16)	Supplemental Oil and Natural Gas Reserve Data (Unaudited)
	The Company has presented the reserve estimates utilizing an oil price of $54.67, $56.09 and $40.59 per Bbl and a natural gas price of $5.00, $8.68 and $5.65 per Mcf as of December 31, 2006, 2005 and 2004, respectively. Information for oil is presented in barrels (Bbl) and for natural gas in thousands of cubic feet (Mcf).
	The estimates of the Company’s proved natural gas reserves and related future net cash flows that are presented in the following tables are based upon estimates made by independent petroleum engineering consultants.
	The Company’s reserve information was prepared by independent petroleum engineering consultants as of December 31, 2006, 2005 and 2004. The Company cautions that there are many inherent uncertainties in estimating proved reserve quantities, projecting future production rates, and timing of development expenditures. Accordingly, these estimates are likely to change as future information becomes available. Proved oil and natural gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those reserves expected to be recovered through existing wells, with existing equipment and operating methods.

F-29

A summary of changes in reserve balances is presented below:

	Total proved						Proved developed
	BBL			MCF			BBL			MCF
				(in thousands)
Reserves as of December 31, 2003		12,084			16,271			8,944			12,066
Purchase of reserves in place		4,982			1,432			3,057			733
Sale of reserves in place		(18	)		(468	)		(18	)		(468	)
Extensions and discoveries		1,159			4,662			338			3,840
Revisions of previous estimates		1,438			(2,382	)		1,618			(323	)
Production		(729	)		(2,690	)		(729	)		(2,690	)
Reserves as of December 31, 2004		18,916			16,825			13,210			13,158
Purchase of reserves in place		2,299			456			619			122
Sale of reserves in place		(14	)		(205	)		(14	)		(205	)
Extensions and discoveries		944			13,106			69			8,502
Revisions of previous estimates		(30	)		(1,353	)		653			(739	)
Production		(923	)		(3,592	)		(923	)		(3,592	)
Reserves as of December 31, 2005		21,192			25,237			13,614			17,246
Purchase of reserves in place		3,270			4,355			915			2,255
Extensions and discoveries		8,182			38,159			699			13,948
Revisions of previous estimates		(2,786	)		(2,316	)		841			1,831
Production		(1,137	)		(6,539	)		(1,137	)		(6,539	)
Reserves as of December 31, 2006		28,721			58,896			14,932			28,741

The following is a standardized measure of the discounted net future cash flows and changes applicable to proved oil and natural gas reserves required by Statement of Financial Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities (SFAS No. 69). The future cash flows are based on estimated oil and natural gas reserves utilizing prices and costs in effect as of year end, discounted at 10% per year and assuming continuation of existing economic conditions.

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

F-30

Future income tax expense was computed by applying statutory rates less the effects of tax credits for each period presented to the difference between pre-tax net cash flows relating to the Company’s proved reserves and the tax basis of proved properties and available net operating loss and percentage depletion carryovers.

Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
($ in thousands)

	December 31,
	2006			2005			2004
Future cash inflows	$	1,864,860		$	1,407,153		$	862,945
Future costs:
Production		(606,138	)		(361,563	)		(260,312	)
Development		(138,715	)		(36,335	)		(25,131	)
Future income taxes		(292,954	)		(249,621	)		(137,765	)
Future net cash flows		827,053			759,634			439,737
10% annual discount for estimated timing of cash flows		(490,565	)		(398,844	)		(233,328	)
Standardized measure of discounted future net cash flows	$	336,488		$	360,790		$	206,409

Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
($ in thousands)

	December 31,
	2006			2005			2004
Increase (decrease):
Purchases of minerals in place	$	20,698		$	29,354		$	47,727
Extensions and discoveries and improved recovery, net of future production and development costs		104,622			87,790	(1)		41,755	(1)
Accretion of discount		47,281			26,625			14,779
Net change in sales prices net of production costs		(78,387	)		135,242			45,572
Changes in estimated future development costs		12,726			(10,886	)		(8,641	)
Revisions of quantity estimates		(44,561	)		(4,518	)		13,024
Net change in income taxes		(21,452	)		(52,181	)		(28,319	)
Sales, net of production costs		(86,130	)		(47,974	)		(26,356	)
Changes of production rates (timing) and other		20,901			(9,071	)(1)		(9,398	)(1)
Net increase		(24,302	)		154,381			90,143
Standardized measure of discounted future net cash flows:
Beginning of year		360,790			206,409			116,266
End of year	$	336,488		$	360,790		$	206,409

⁽¹⁾ During 2006, the Company revised its method of calculating “Extensions and discoveries and improved recovery, net of future production and development costs”. Consequently, related calculations in 2005 and 2004 have been adjusted to be consistent with the 2006 calculation.

F-31

(17) Selected Quarterly Financial Data (Unaudited)

	Quarter
	First			Second			Third		Fourth(1)
				($ in thousands, except per share data)
2006
Oil and gas revenues	$	20,543		$	26,342		$	26,211		$	23,929
Total costs and expenses		11,102			13,962			16,686			14,856
Operating income		9,441			12,380			9,525			9,073
Net income	$	1,611		$	2,464		$	10,996		$	11,084	(1)
Net income available to common stockholders	$	1,611		$	2,464		$	10,996		$	11,084	(1)
Net income per common share — basic	$	0.05		$	0.07		$	0.30		$	0.30	(1)
Net income per common share — diluted	$	0.05		$	0.07		$	0.30		$	0.29	(1)
2005
Oil and gas revenues	$	10,414		$	12,263		$	21,837		$	21,636
Total costs and expenses		7,048			7,060			8,836			9,861
Operating income		3,366			5,203			13,001			11,775
Net income (loss)	$	(10,704	)	$	(1,246	)	$	1,989		$	8,372
Net income (loss) available to common stockholders	$	(10,847	)	$	(1,374	)	$	1,989		$	8,372
Net income per share:
Net income (loss) per common share — basic	$	(0.38	)	$	(0.04	)	$	0.06		$	0.24
Net income (loss) per common share — diluted	$	(0.38	)	$	(0.04	)	$	0.06		$	0.24

⁽¹⁾ 2006 results include $9.0 million of equity in income of pipeline and gathering systems representing the Company’s share of net gain on sale of certain pipeline assets. See Note 7.

F-32

SIGNATURES

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

	PARALLEL PETROLEUM CORPORATION
February 28, 2007	By:	/s/ Larry C. Oldham
		Larry C. Oldham
		President and Chief Executive Officer
February 28, 2007	By:	/s/ Steven D. Foster
		Steven D. Foster
		Chief Financial Officer

S-1

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

/s/ Thomas R. Cambridge	Chairman of the Board of Directors	February 28, 2007
Thomas R. Cambridge
/s/ Larry C. Oldham	President and Chief Executive Officer	February 28, 2007
Larry C. Oldham	(Principal Executive Officer)
/s/ Steven D. Foster	Chief Financial Officer	February 28, 2007
Steven D. Foster	(Principal Financial and
	Accounting Officer)
/s/ Martin B. Oring	Director	February 28, 2007
Martin B. Oring
/s/ Ray M. Poage	Director	February 28, 2007
Ray M. Poage
/s/ Jeffrey G. Shrader	Director	February 28, 2007
Jeffrey G. Shrader

S-2

INDEX TO EXHIBITS

(a) Exhibits

No.	Description of Exhibit
3.1	Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)
*3.2	Bylaws of Registrant
3.3	Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
3.4	Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.4 of the Registrant’s Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
3.5	Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No. 3.5 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
3.6	Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No. 3.6 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
4.1	Certificate of Designations, Preferences and Rights of Serial Preferred Stock — 6% Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)
4.2	Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Incorporated by reference to Exhibit 4.2 of Form 10-K of the Registrant for the fiscal year ended December 31, 2000)
4.3	Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 1 of Form 8-A of the Registrant filed with the Securities and Exchange Commission on October 10, 2000)
4.4	Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No. 4.6 of the Registrant’s Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)
4.5	Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
4.6	Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
*4.7	Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American Stock Transfer, Inc.
*4.8	First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant, Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A.
	Executive Compensation Plans and Arrangements (Exhibit No.’s 10.1 through 10.7):
10.1	1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
10.2	Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee Pension Plan (Incorporated by reference to Exhibit 10.6 of the Registrant’s Form 10-K for the fiscal year ended December 31, 1995)
10.3	Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)
*10.4	1998 Stock Option Plan

No.	Description of Exhibit
10.5	2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of the Registrant’s Form 10-Q Report for the fiscal quarter ended March 31, 2004)
10.6	2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 22, 2004)
*10.7	Incentive and Retention Plan
10.8	First Amended and Restated Credit Agreement, dated December 20, 2002, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western National Bank and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form 8-K of the Registrant, dated December 20, 2002)
10.9	Guaranty dated December 20, 2002, between Parallel, L.L.C. and First American Bank, SSB, as Agent (Incorporated by reference to Exhibit 10.3 of Form 8-K of the Registrant, dated December 20, 2002)
10.10	First Amendment to First Amended and Restated Credit Agreement, dated as of September 12, 2003, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western National Bank, and BNP Paribas (Incorporated by reference to Exhibit 10.29 of Form 10-Q of the Registrant for the quarter ended September 30, 2003)
10.11	Second Amended and Restated Credit Agreement, dated September 27, 2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 27, 2004 and filed with the Securities and Exchange Commission on October 1, 2004)
10.12	Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
10.13	First Amendment to Second Amended and Restated Credit Agreement, dated as of December 27, 2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated December 30, 2004 and filed with the Securities and Exchange Commission on December 30, 2004)
10.14	Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated April 4, 2005 and filed with the Securities and Exchange Commission on April 8, 2005)
10.15	Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated October 4, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.16	Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy, Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney, Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.17	Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.18	Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit 10.4 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)
10.19	ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank, N.A. (Incorporated by reference to Exhibit 10.5 of the Registrant’s Form 8-K Report dated October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)

No.	Description of Exhibit
10.20	Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas, CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrant’s Form 8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on December 30, 2005)
10.21	Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference to Exhibit No. 10.4 of the Registrant’s Form 8-K Report, dated November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)
10.22	Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas, N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C. (Incorporated by reference to Exhibit No. 10.5 of the Registrant’s Form 8-K Report, dated November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)
*10.23	Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of Citibank Texas, N.A.
*10.24	Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between Parallel, L.L.C. and Citibank Texas, N.A.
*10.25	Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas
14	Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrant’s Form 10-K Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange Commission on March 22, 2004)
21	Subsidiaries (Incorporated by reference to Exhibit No. 21 of the Registrant’s Form 10-K Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange Commission on March 22, 2004)
*23.1	Consent of BDO Seidman, LLP
*23.2	Consent of Cawley Gillespie & Associates, Inc. Independent Petroleum Engineers
*31.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
*31.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
*32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.
*32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.

* Filed herewith

EX-3.2

Exhibit 3.2

BYLAWS
OF
PARALLEL PETROLEUM CORPORATION
(As Amended On May 15, 1986, May 4, 1994 and October 5, 2000)

ARTICLE I

OFFICES

     Section 1.1 Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, and the name of its registered agent shall be The Corporation Trust Company.

     Section 1.2 Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

     Section 2.1 Place of Meeting. All meetings of stockholders for the election of directors shall be held at such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.

     Section 2.2 Annual Meeting.

     (a) The annual meeting of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.

     (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days’ notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10 day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder’s notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to

be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and record address of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholders, and (d) any material interest of the stockholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.2(b). The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2.2(b) and if he should so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the board of directors. (As amended October 5, 2000).

     Section 2.3 Notice of Meeting. Written notice of the annual meeting shall be served upon or mailed to each stockholder entitled to vote thereat at such address as appears on the books of the corporation, at least ten (10) days prior to the meeting.

     Section 2.4 Voting List. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this Section 2.4 or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders.

     Section 2.5 Special Meeting. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board, the President or by the Board of Directors or by written order of a majority of the directors. The President or directors so calling any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting. (As amended May 4, 1994 and October 5, 2000).

     Section 2.6 Notice of Special Meeting. Written notice of a special meeting of stockholders, stating the time and place and object thereof, shall be served upon or mailed to each stockholder entitled to vote thereat at such address as appears on the books of the corporation, at least ten (10) days before such meeting.

     Section 2.7 Scope of Special Meeting. Business transacted at all special meetings shall be confined to the objects stated in the call.

     Section 2.8 Quorum. The holders of a majority of the shares of capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at

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any meeting of stockholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation or by these Bylaws. Notwithstanding the other provisions of these Bylaws, the holders of a majority of the shares of capital stock entitled to vote thereat, present in person or represented by proxy, whether or not a quorum is present, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting.

     Section 2.9 Voting. When a quorum is present at any meeting of the stockholders, the vote of the holders of a majority of the shares of capital stock entitled to vote thereon, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes, of the Certificate of Incorporation or of these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question.

     Section 2.10 Right to Vote. At any meeting of the stockholders, every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period, and filed with the Secretary of the corporation before or at the time of the meeting. If such instrument shall designate two or more persons to act as proxies, unless such instrument shall provide to the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of the shares proportionately.

     Section 2.11 Consent of Stockholders. Any action required by statute to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of all of the outstanding stock of the corporation.

     Section 2.12 Voting of Stock of Certain Holders. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the Bylaws of such corporation may prescribe, or in the absence of such provision, as the Board of Directors or a duly authorized managing director of such corporation may determine. Shares standing in the name of a deceased person may be voted by the executor or administrator of such deceased person, either in person or by proxy. Shares standing in the name of a guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no such fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares standing in the name of a receiver may be voted by such receiver. A stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledgor on the books of the corporation he has expressly

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empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent the stock and vote thereon.

     Section 2.13 Treasury Stock. The corporation shall not vote, directly or indirectly, shares of its own stock owned by it; and such shares shall not be counted in determining the total number of issued and outstanding shares for the purposes of determining the presence of a quorum at any meeting of stockholders.

     Section 2.14 Fixing Record Date.

     (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, no more than sixty (60) days prior to any other action, for the determination of the stockholders entitled to notice of, and to vote at, any such meeting or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action. If the Board of Directors fix, in advance, a record date as herein provided, then, in such case, such stockholders, and only such stockholders, as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, any such meeting or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date is fixed as aforesaid.

     (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date of which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of receipt of such request, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of stockholders’ meetings are recorded, to the attention of the secretary of the corporation. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in

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writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action.

     (c) In the event of the delivery, in the manner provided by Section 2.14(b), to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation shall engage independent inspectors of elections for the purpose of performing promptly a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the corporation that the consents delivered to the corporation in accordance with Section 2.14(b) represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this Section 2.14(c) shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).

     (d) Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated written consent received in accordance with Section 2.14(b), a written consent or consents signed by a sufficient number of holders to take such action are delivered to the corporation in the manner prescribed in Section 2.14(b). (As amended October 5, 2000).

     Section 2.15 Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in this Section 2.15 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.15. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder’s notice shall be delivered or mailed and received at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days’ notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder’s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder and (ii) the class and

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number of shares of the corporation which are beneficially owned by such stockholder. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.15. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (As amended October 5, 2000).

ARTICLE III

BOARD OF DIRECTORS

     Section 3.1 Powers. The property and business of the corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

     Section 3.2 Number, Selection and Term. The number of directors which shall constitute the whole Board shall from time to time be fixed and determined by resolution adopted by the Board of Directors. The number to be elected at any meeting of stockholders shall be set forth in the notice of any meeting of stockholders held for such purpose. The directors shall be elected at the annual meeting of stockholders, except as provided in Section 3.3, and each director elected shall hold office until his successor shall be elected and shall qualify, or until his earlier death, resignation, retirement, disqualification or removal. Directors need not be residents of Delaware or stockholders of the corporation.

     Section 3.3 Vacancies, Additional Directors and Removal From Office. If any vacancy occurs in the Board of Directors caused by the death, resignation, retirement, disqualification or removal from office of any director, or otherwise, or if any new directorship is created by an increase in the authorized number of directors, a majority of the directors then in office, though less than a quorum, or a sole remaining director, may choose a successor to fill such vacancy or the newly created directorship; and a director so chosen shall hold office until the term of the director whose vacancy is filled expires and until his successor shall be duly elected and shall qualify, or until his earlier death, resignation, retirement, disqualification or removal, or until the next annual meeting of stockholders, whichever shall first occur. Any director may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote for an election of directors at any special meeting of stockholders duly called and held for such purpose.

     Section 3.4 Resignation. Any director may resign at any time by written notice to the corporation. Any such resignation shall take effect at the date of receipt of such notice or at any other time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any director who does not, for any reason whatsoever, stand for election at any meeting of stockholders called for such purpose shall be conclusively deemed to have resigned, effective as of the date of such meeting, for the purposes of these Bylaws, and the corporation need not receive any written notice to evidence such resignation.

     Section 3.5 Meetings of the Board. The directors of the corporation may hold their meetings, both regular and special, either within or without the State of Delaware.

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     Section 3.6 Regular Meetings. A regular meeting of each newly elected board shall be held immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting provided a quorum shall be present. Other regular meetings of the board may be held without notice at such time and place as the Board of Directors may provide by resolution.

     Section 3.7 Special Meetings. A special meeting of the Board of Directors may be called by the Chairman of the Board or by the President. The Chairman or President so calling any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting.

     Section 3.8 Notice of Special Meeting. Written notice of special meetings of the Board of Directors shall be given to each director at least forty-eight (48) hours prior to the time of such meeting. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting solely for the purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting, except that notice shall be given with respect to any matter to be acted upon at such special meeting where notice is required by statute.

     Section 3.9 Quorum. A majority of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors, a majority of the directors present thereat, though less than a quorum, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

     Section 3.10 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof as provided in Article IV of these Bylaws, may be taken without a meeting, if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee.

     Section 3.11 Compensation. Directors, as such, shall not be entitled to any stated salary for their services unless voted by the stockholders or the Board of Directors; but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors or any meeting of a committee or directors. No provision of these Bylaws shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor.

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ARTICLE IV

COMMITTEE OF DIRECTORS

     Section 4.1 Designations, Powers and Name. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, including, if they shall so determine, an Executive Committee, each such committee to consist of two or more of the directors of the corporation. The committee shall have and may exercise such of the powers of the Board of Directors in the management of the business and affairs of the corporation as may be provided in such resolution; provided, however, that no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock in the corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, provided further, that, unless the resolution establishing the committee expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. The committee may authorize the seal of the corporation to be affixed to all papers which may require it. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors.

     Section 4.2 Minutes. Each committee of directors shall keep regular minutes of its proceedings and report the same to the Board of Directors when required.

     Section 4.3 Compensation. Members of special or standing committees may be allowed compensation for attending committee meetings, if the Board of Directors shall so determine.

ARTICLE V

NOTICE

     Section 5.1 Methods of Giving Notice. Whenever under the provisions of any statute, the Certificate of Incorporation or these Bylaws notice is required to be given to any director, member of any committee or stockholder, such notice shall be in writing and delivered personally or mailed to such director, member or stockholder; provided, however, that in the case of a director or a member of any committee, such notice, unless required by statute, the Certificate of Incorporation or these Bylaws to be in writing, may be given orally or by telephone or telegram. If mailed, notices to a director, member of a committee or stockholder shall be deemed to be given when deposited in the United States mail first class in a sealed envelope, with postage thereon prepaid, addressed, in the case of a stockholder, to the

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stockholder at the stockholder’s address as it appears on the records of the corporation or, in the case of a director or a member of a committee, to such person at his business address. If sent by telegraph, notice to a director or member of a committee shall be deemed to be given when the telegram, so addressed, is delivered to the telegraph company.

     Section 5.2 Written Waiver. Whenever any notice is required to be given under the provisions of any statute, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE VI

OFFICERS

     Section 6.1 Officers. The officers of the corporation shall be a president, vice president, a secretary and a treasurer. The board may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Two or more offices may be held by the same person, except that the offices of president and secretary shall not be held by the same person. No officer shall execute, acknowledge, verify or countersign any instrument on behalf of the corporation in more than one capacity, if such instrument is required by law, by these Bylaws or by any act of the corporation to be executed, acknowledged, verified or countersigned by two or more officers.

     Section 6.2 Election and Term of Office. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president from its members, and shall choose one or more vice-presidents, a secretary and a treasurer. None of the officers need be a director, and none of the officers need be a stockholder of the corporation. The officers of the corporation shall hold office until their successors are chosen and qualify in their stead.

     Section 6.3 Removal and Resignation. Any officer or agent elected or appointed by the Board of Directors may be removed without cause by the affirmative vote of a majority of the Board of Directors whenever, in its judgment, the best interests of the corporation shall be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

     Section 6.4 Vacancies. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

     Section 6.5 Salaries. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors or pursuant to its direction; and no officer shall be prevented from receiving such salary by reason of his also being a director.

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     Section 6.6 President. The president shall be the chief executive officer of the corporation; he shall preside at all meetings of the stockholders and directors, shall be ex officio a member of all standing committees, shall have general and active management of the business of the corporation, and shall see that all orders and resolutions of the board are carried into effect. He shall execute contracts, sales agreements, licensing and royalty agreements, bonds, mortgages, deeds of trust, deeds, leases, agreements and instruments necessary or desired in the transaction of the authorized business of the corporation and, if requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation.

     Section 6.7 Vice President. The vice presidents in the order of their seniority shall, in the absence or disability of the president, perform the duties and exercise the powers of the president, and shall perform such other duties as the Board of Directors shall prescribe.

     Section 6.8 Secretary and Assistant Secretaries. The secretary shall attend all sessions of the board and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall keep in safe custody the seal of the corporation and, when authorized by the board, affix the same to any instrument requiring it and, when so fixed, it shall be attested by his signature or by the signature of the treasurer or an assistant secretary. The assistant secretaries in order of their seniority shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties as the Board of Directors shall prescribe.

     Section 6.9 Treasurer and Assistant Treasurers. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the board, taking proper vouchers for such disbursements, and shall render to the president and directors, at the regular meetings of the board, or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control, belonging to the corporation. The assistant treasurers in the order of their seniority shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties as the Board of Directors shall prescribe.

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ARTICLE VII

CONTRACTS, CHECKS AND DEPOSITS

     Section 7.1 Contracts. Subject to the provisions of Section 6. 1, the Board of Directors may authorize any officer, officers, agent or agents to enter into any contract or execute and deliver any instrument for and in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

     Section 7.2 Checks, etc. All checks, demands, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers or such agent or agents of the corporation, and in such manner, as shall be determined by the Board of Directors.

     Section 7.3 Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select.

ARTICLE VIII

CERTIFICATES OF STOCK

     Section 8.1 Issuance. Each stockholder of this corporation shall be entitled to a certificate or certificates showing the number of shares of stock registered in such stockholder’s name on the books of the corporation. The certificates shall be in such form as may be determined by the Board of Directors, shall be issued in numerical order and shall be entered in the books of the corporation as they are issued. They shall exhibit the holder’s name and number of shares and shall be signed by the President or Vice President and by the Secretary or an Assistant Secretary. Any or all of the signatures on the certificate may be a facsimile. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock; provided, however, that except as otherwise provided by statute, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in the case of a lost, stolen, destroyed or mutilated certificate a new one may be issued therefor upon such terms and with such indemnity, if any, to the corporation as the Board of Directors may prescribe. Certificates shall not be issued representing fractional shares of stock. If any stock certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a

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transfer clerk acting on behalf of the corporation and a registrar, the signature of any such officer may be facsimile.

     Section 8.2 Lost Certificates. The corporation may issue a new certificate or certificates in place of any certificate or certificates heretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. The corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a bond sufficient to indemnify it against any claim that may be made against the corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed or the issuance of such new certificate.

     Section 8.3 Transfers. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Transfer of shares shall be made only on the books of the corporation by the registered holder thereof, or by such holder’s attorney thereunto authorized by power of attorney and filed with the Secretary of the corporation or the transfer agent.

     Section 8.4 Registered Stockholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware.

ARTICLE IX

DIVIDENDS

     Section 9.1 Declaration. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the Certificate of Incorporation.

     Section 9.2 Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created.

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ARTICLE X

INDEMNIFICATION
(As Amended May 15, 1986)

     Section 10.1 Indemnification of Directors, Officers and Employees. The corporation shall indemnify to the full extent authorized by law any person who may be or is involved, as a party or otherwise, in an action, suit or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the corporation or any predecessor of the corporation or serves or served any other enterprise as a director, officer or employee at the request of the corporation or any predecessor of the corporation. In addition to the foregoing, the corporation shall, upon request of any such person described above and to the fullest extent permitted by law, pay or reimburse the reasonable expenses incurred by such person in any action, suit, or proceeding described above in advance of the final disposition of such action, suit, or proceeding.

     Section 10.2 Insurance. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability.

ARTICLE XI

MISCELLANEOUS

     Section 11.1 Fiscal Year. The fiscal year of the corporation shall be fixed by the resolution of the Board of Directors.

     Section 11.2 Books. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at the offices of the corporation at Midland, Texas, or at such other place or places as may be designated from time to time by the Board of Directors.

     Section 11.3 Annual Statement. The Board of Directors shall present at each annual meeting and when called for by vote of the stockholders at any special meeting of the stockholders, a full and clear statement of the business and conditions of the corporation.

     Section 11.4 Seal. The corporate seal shall have ascribed thereon the name of the corporation, and the words “Corporate Seal, Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.

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ARTICLE XII

AMENDMENT

     These Bylaws may be altered, amended or repealed at any regular or special meeting of the Board of Directors, without prior notice, by resolution adopted thereat.

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EX-4.7

Exhibit 4.7

PARALLEL PETROLEUM CORPORATION

AND

AMERICAN STOCK TRANSFER, INC.

                          Warrant Agent

PURCHASE WARRANT AGREEMENT

Dated as of October 1, 1980

     THIS AGREEMENT dated as of October 1, 1980, between PARALLEL PETROLEUM CORPORATION, a Texas corporation (the “Company”), and AMERICAN STOCK TRANSFER, INC., a Colorado corporation, (the “Warrant Agent”).

     WHEREAS:

     1. In connection with a public offering of 1,500,000 Units (the “Units”), each consisting of 10 common shares of the Company, $.001 par value (the “Common Shares”), and 2 detachable purchase warrants (the “Warrants”) to purchase one Common Share each, the Company proposes to issue 3,000,000 Warrants to purchase initially up to an aggregate of 3,000,000 Common Shares.

     2. The Company desires to provide for the issuance of Purchase Warrant Certificates (the “Warrant Certificates”) representing the Warrants.

     3. The Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, registration of transfer and exchange of Warrant Certificates and the exercise of Warrants.

     NOW, THEREFORE, in consideration of the promises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrant Certificates and the Warrants, and the respective rights and obligations thereunder of the Company, the registered holder of the Warrant Certificates and the Warrant Agent, the parties hereto agree as follows:

     Section 1. Definitions. As used herein:

     A. “Common Shares” shall mean shares of the Company of any class, whether now or hereafter authorized, which have the right to participate in the distribution of earnings and assets of the Company without limit as to amount or percentage, which as of the date hereof consists of the Company’s Common Shares, $.001 par value.

     B. “Corporate Office” shall mean the principal place of business of the Warrant Agent (or its successor) in Denver, Colorado, which office is presently located at 1825 Lawrence Street, Denver, Colorado 80202.

     C. “Initial Exercise Date” shall mean August 21, 1981 (9 months after the close of the Company’s public offering of the Units) prior to which date the Warrants are not exercisable.

     D. “Expiration Date” shall mean 5:00 P.M. (Denver time) 30 days after the Initial Exercise Date or, if such day shall in the State of Colorado be a holiday or a day on which banks are authorized to close, then 5:00 P.M. (Denver time) on the next following day which in the State of Colorado is not a holiday or a day on which banks are authorized to close.

     E. “Exercise Price” shall mean $.60 per Common Share.

     F. “Registered Holder” shall mean the person in whose name any Warrant Certificate shall be registered on the books maintained by the Warrant Agent pursuant to Section 6.

     G. “Subsidiary” shall mean any corporation of which shares having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time shares of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries.

     H. “Trading Date” shall mean 5:00 P.M. (Denver time) 14 days after the closing of the public offering of the Units.

     I. “Transfer Agent” shall mean the Company’s transfer agent, American Stock Transfer, Inc., or its successor.

     J. “Warrant Shares” shall mean and include (i) up to 3,000,000 shares of authorized and unissued Common Shares initially reserved for issuance upon exercise of the Warrants; and (ii) any additional Common Shares or other property which may hereafter be issuable or deliverable upon exercise of the Warrants pursuant to Section 8.

     Section 2. Warrants and Issuance of Warrant Certificates. Each Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one Common Share upon the exercise thereof, subject to modification and adjustment as provided in Section 8. Upon execution of this Agreement, Warrant Certificates representing up to an aggregate of 3,000,000 Warrants to purchase the Warrant Shares, attached to certificates representing 15,000,000 Common Shares in Units each consisting of 10 Common Shares and two Warrants, shall be executed by the Company and delivered to the Warrant Agent and, after the attached certificates for Common Shares shall have been duly countersigned by the Transfer Agent of the Company’s Common Shares, shall be countersigned, issued and delivered by the Warrant Agent upon written order of the Company signed by its President or a Vice President and its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary.

     From time to time, up to the Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement. Except as provided in Section 7 hereof, no Warrant Certificates shall be issued except (i) Warrant Certificates initially, up to the Trading Date, issued hereunder and attached to certificates for a number of Common Shares equal to 5 times the number of Warrants represented thereby, (ii) Warrant Certificates issued on or after the Trading Date, upon transfer thereof by the holder pursuant to Section 6, (iii) Warrant Certificates issued on or after the Initial Exercise Date, upon the partial exercise of any Warrant to evidence the portion of such Warrant not exercised, and (iv) Warrant Certificates issued on or after the Exercise Date, upon any transfer or exchange of Warrants.

     Section 3. Form and Execution of Warrant Certificates. The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved hereon as the Company may deem

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appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated as of the date of their issuance (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates).

     The Warrant Certificates initially shall be issued only when attached to certificates for a number of Common Shares equal to 5 times the number of Warrants represented thereby. Such Warrants shall be numbered serially in accordance with the Common Shares with letter “W” on Warrant Certificates. Thereafter the Warrants may be issued by number preceded by the letter “W” without regard to the number of the Common Shares.

     The Warrant Certificates shall be executed on behalf of the Company by its President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company’s seal. The Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company.

     Section 4. Exercise. Each Warrant represented by a Warrant Certificate may be exercised at any time on or after the Initial Exercise Date, but not after the Expiration Date, upon the terms and subject to the conditions set forth herein and in such Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of the surrender for exercise (the “Exercise Date”) of the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the registered holder thereof or his attorney duly authorized in writing, together with payment to the Warrant Agent, in cash or by official bank or certified check, of an amount in lawful money of the United States of America equal to the Purchase Price, and the person entitled to receive the number of Warrant Shares deliverable upon such exercise shall be treated for all purposes as the holder of such Warrant Shares as of the close of business on the Exercise Date. The Company shall not be obligated to issue any fractional share interests in Warrant Shares issuable or deliverable upon the exercise of any Warrant or Warrants. If more than one Warrant shall be exercised at one time by the same registered holder, the number of full shares which shall be issuable upon exercise thereof shall be computed on the basis of the aggregate number of full shares issuable upon such exercise. As soon as practicable on or after the Exercise Date and in any event within 30 days after such date, the Warrant Agent on behalf of the Company shall cause to be issued to the person or persons entitled to receive the same, a certificate or certificates for the number of Warrant Shares deliverable upon such exercise, and the Warrant Agent shall deliver the same to the person or persons entitled thereto. No adjustment shall be made in respect of cash dividends on Warrant Shares delivered upon exercise of any Warrant. Upon the exercise of any Warrant the Warrant Agent shall promptly notify the Company in writing of such fact and of the number of Warrant Shares delivered upon such exercise and shall cause payment of an amount in cash equal to the Exercise Price, to be made promptly to or on the order of the Company.

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     Section 5. Reservation of Shares; Listing; Payment of Taxes; Etc. The Company covenants that it will at all times reserve and keep available out of its authorized Common Shares solely for the purpose of issue upon exercise of Warrants as herein provided, such number of Common Shares as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all Warrant Shares which shall be so issuable shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchanged, if any, on which the other outstanding Common Shares of the Company are then listed.

     If any Common Shares to be reserved for the purpose of exercise of Warrants hereunder require registration with or approval of any governmental authority under any federal or state law, before such shares may be validly issued or delivered upon such exercise, then the Company covenants that it will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be; however, Warrants may not be exercised by, or shares issued to, any registered holder in any state in which such exercise would be unlawful.

     The Warrant holder shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect of the issuance of the Warrants, or the issuance, transfer or delivery of any Warrant Shares upon exercise of the Warrants; provided, however, that if Warrant Shares are to be delivered in a name other than the name of the registered holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of any such taxes or charges incident thereto.

     The Warrant Agent is hereby irrevocably authorized to requisition the Company’s Transfer Agent from time to time for certificates of Warrant Shares required upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of its Transfer Agent for Common Shares or other capital shares issuable upon exercise of the Warrants and of each successor Transfer Agent.

     Section 6. Registration of Transfer. The Warrant Certificates may be transferred in whole or in part. Warrant Certificates to be so exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or certificates which the holder making the transfer shall be entitled to receive.

     The Warrant Agent shall keep, at such office, books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants.

     All Warrant Certificates presented for registration of transfer or exercise on the subscription form on the reverse thereof shall be duly endorsed by, or be accompanied by a written instrument or instruments of transfer and subscription in form satisfactory to the Company and the Warrant Agent duly executed by the registered holder thereof or his attorney duly authorized in writing.

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     A $3.00 fee shall be paid by the registered holder for any registration of transfer of Warrant Certificates, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith.

     All Warrant Certificates so surrendered or surrendered for exercise in case of mutilated Warrant Certificates shall be promptly cancelled by the Warrant Agent and thereafter delivered or disposed of as directed by the Company in writing.

     Prior to due presentment for registration of transfer thereof the Company and the Warrant Agent may deem and treat the registered holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary.

     Section 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and (in the case of loss, theft or destruction) of indemnity satisfactory to them, and in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall countersign and deliver in lieu thereof a new Warrant Certificate representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe.

     Section 8. Adjustment of Exercise Price and Number of Shares Deliverable. After each adjustment of the Exercise Price pursuant to this Section 8, the number of Common Shares purchasable upon the exercise of each Warrant shall be the number derived by dividing such adjusted Purchase Price into the original Exercise Price as defined in Section 1.E above. The Exercise Price shall be subject to adjustment as follows:

          (a) In the event, prior to the expiration of the Warrant by exercise or by its terms, the Company shall issue any of its Common Shares as a stock dividend or shall subdivide the number of outstanding Common Shares into a greater number of shares, then, in either of such events, the then applicable Exercise Price per Common Share purchasable pursuant to this Warrant in effect at the time of such action be reduced proportionately and the number of Common Shares at that time purchasable pursuant to this Warrant shall be increased proportionately; and conversely, in the event that the Company shall reduce the number of its outstanding Common Shares by combining such shares into a smaller number of shares, then, in such event, the then applicable Exercise Price per Common Share purchasable pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of Common Shares at that time purchasable pursuant to the Warrant proportionately shall be decreased. Any dividend paid or distributed upon the Common Shares in shares of any other class of the Company or securities convertible into Common Shares shall be treated as a dividend paid in Common Shares to the extent that such Common Shares are issuable upon the conversion thereof.

          (b) In the event, prior to the expiration of this Warrant by exercise or by its terms, the Company shall be recapitalized by reclassifying its outstanding Common Shares into shares with a different par value, or by changing its outstanding Common Shares to shares without par value, or in the

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event the Company or a successor corporation shall consolidate or merge with or convey all or substantially all of its, or of any successor corporation’s property and assets to any other corporation or corporations (any such other corporation being included within the meaning of the term “successor corporation” hereinbefore used in the context of any consolidation or merger of any other corporation with, or the sale of all or substantially all of the property of any such other corporation to, another corporation or corporations), or in the event of any other material change of the capital structure of the Company or of any successor corporation by reason of any reclassification, reorganization, recapitalization, consolidation, merger or conveyance, a prompt, proportionate, equitable, lawful and adequate provision shall be made whereby the Holder of this Warrant shall thereafter have the right to purchase, upon the basis and the terms and conditions specified in this Warrant, in lieu of the Common Shares of the Company theretofore purchasable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of Common Shares of the Company theretofore purchasable upon the exercise of this Warrant had such reclassification, reorganization, recapitalization, consolidation, merger or conveyance not taken place; and in any such event, the rights of the Holder of this Warrant to any adjustment in the number of^, shares of Common Shares purchasable upon exercise of this Warrant, as hereinbefore provided, shall continue and be preserved in respect of any stock, securities or assets which the Holder becomes entitled to purchase.

          (c) In the event the Company, at any time while this Warrant shall remain unexpired and unexercised, shall sell all or substantially all of its property, or dissolves, liquidates or winds up its affairs, prompt, proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such sale, dissolution, liquidation, or winding up such that the Holder of this warrant may thereafter receive, upon exercise hereof, in lieu of each Common Share of the Company which he would have been entitled to receive, the same kind and amount of any stock, securities or assets as may be issuable, distributable or payable upon any such sale, dissolution, liquidation or winding up with respect to each Common Share of the Company; provided however, that in the event of any such sale, dissolution, liquidation or winding up, the right to exercise this Warrant shall terminate on a date fixed by the Company, such date so fixed to be not earlier than 5:00 P.M., Mountain Time, on the 30th day next succeeding the date on which notice of such termination of the right to exercise this Warrant has been given by mail to the Holder of this Warrant at his address as it appears on the books of the Company.

          (d) In the event, prior to the expiration of this Warrant by exercise or by its terms, the Company shall take a record of the holders of its Common Shares for the purpose of entitling them to purchase its Common Shares at a price per share more than 10% below the then current market price per share (as defined below) of its Common Shares at the date of taking such record, then, (i) the number of Common Shares purchasable pursuant to the Warrant shall be redetermined as follows: the number of Common Shares purchasable pursuant to this Warrant immediately prior to such adjustment (taking into account fractional interests to the nearest one-thousandth of a share) shall be multiplied by a fraction, the numerator of which shall be the number of Common Shares of the Company then outstanding (excluding the Common Shares then owned by the Company) immediately prior to taking of such record, plus the number of additional shares offered for purchase, and the denominator of which shall be the number of Common Shares of the Company outstanding (excluding the Common Shares owned by the Company) immediately prior to the taking of such record, plus the number of shares which the aggregate offering price of the total number of additional shares so offered would purchase at such current market price; and (ii) the Exercise Price per Common Share purchasable pursuant to this Warrant shall be redetermined as follows: the Exercise Price in effect immediately prior to the taking of such record, shall be

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multiplied by a fraction, the numerator of which is the number of Common Shares purchasable hereunder immediately prior to the taking of such record, and the denominator of which is the number of Common Shares purchasable hereunder immediately after the taking of such record as determined pursuant to clause (i) above. For the purpose hereof, the current market price per Common Share of the Company at any date shall be deemed to be the average of the daily closing prices for 30 consecutive business days commencing 45 business days before the day in question. The closing price for each day shall be the average of the highest bid-and-asked prices as reported by NASDAQ or, if the Common Shares are not admitted to listing for trading thereon, then in the “pink sheets” of the National Association of Securities Dealers, Inc., for the over-the-counter market in Denver, Colorado, or in the local daily newspapers for such city, or if not reported, the average of the highest bid-and-asked prices as furnished by any member firm of the New York Stock Exchange, Inc. selected from time to time by the Company for such purpose.

          (e) Upon any exercise of this Warrant by the Holder, the Company shall not be required to deliver fractions of the Common Shares; but prompt proportionate, equitable, lawful and adequate adjustment in the Exercise Price payable by the Holder shall be made in respect of any such fraction of one Common Share on the basis of the Exercise Price per share then applicable upon the exercise of this Warrant.

          (f) In the event, prior to the expiration of this Warrant by exercise or by its terms, the Company shall determine to take a record of the holders of its Common Shares for the purpose of determining shareholders entitled to receive any stock dividend, distribution or other right which will cause any change or adjustment in the number, amount, price or nature of the Common Shares or other stock, securities or assets deliverable upon the exercise of this Warrant pursuant to the foregoing provisions, the Company shall give to the registered Holder of this Warrant at his address as it appears on the books of the Company at least 15 days prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken; the purpose for which such record is to be taken; and the number, amount, price and nature of the Common Shares or other stock, securities or assets which will be deliverable upon exercise of this Warrant after the action for which such record will be taken has been consummated. Without limiting the obligation of the Company to provide notice to the registered holders of the Warrant Certificates of corporate action hereunder, the failure of the Company to give notice shall not invalidate such corporate action of the Company.

          (g) The Company may deem and treat the registered Holder of this Warrant at any time as the absolute owner hereof for all purposes, and the Company shall not be affected by any notice to the contrary.

          (h) This Warrant shall not entitle the Holder hereof to any of the rights of shareholders or to any dividend declared upon the Common Shares unless the Holder shall have exercised this Warrant and purchased the Common Shares prior to the record date fixed by the Board of Directors of the Company for the determination of holders of Common Shares entitled to such dividend or other right.

          (i) No adjustment of the Exercise Price shall be made as a result of or in connection with (i) the issuance of Common Shares of the Company pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the granting of additional option plans

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of the Company as currently or thereafter in effect or as hereafter modified, renewed or extended, or the issuance of Common Shares of the Company upon exercise of any such options, or (iii) the issuance of Common Shares in connection with acquisition of any type, in connection with compensation arrangements with officers, employees or agents of the Company or any Subsidiary, or under any circumstances other than those set forth in subsection (i) above.

          (j) The foregoing subparagraphs (a)-(i) shall be included on the back side of the Warrant Certificate as a “Statement of Rights of Warrant Holders.”

     Section 9. Concerning the Warrant Agent. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not be issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity or value or authorization of the Warrant Certificate or the Warrants represented thereby or of any Common Shares or other property delivered upon exercise of any Warrant or whether any such share is fully paid and nonassessable. The Warrant Agent shall not at time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Exercise Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of fact contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in the Warrant Certificates, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct.

     The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel.

     Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the President, a Vice President, its Secretary, an Assistant Secretary, its Treasurer, or an Assistant Treasurer (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand.

     The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent’s negligence or willful misconduct.

     The Warrant Agent may resign its duties or the Company may terminate the Warrant Agent and the Warrant Agent shall be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent’s own negligence or wilful misconduct), after giving 30 days’

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prior written notice to the other party. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the registered holder of each Warrant Certificate. Upon such resignation or termination the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the registered holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $1,000,000 and having its principal office in the City of Denver, State of Colorado. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the registered holder of each Warrant Certificate.

     Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the corporate trust business of the Warrant Agent shall be a successor Warrant Agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor Warrant Agent shall promptly cause notice of its succession as Warrant Agent to be mailed to the Company and to the registered holder of each Warrant Certificate.

     The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effect as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity.

     Section 10. Modification of Agreement. The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (ii) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; but this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the registered holders of Warrant Certificates representing not less than 66-2/3% of the Warrants outstanding; provided, however, that no change in the number or nature of the Warrant Shares purchasable upon the exercise of a Warrant, or the Exercise Price therefor, or the Expiration Date of a Warrant, shall be made without the consent in writing of the registered holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed.

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     Section 11. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid or delivered to a telegraph office for transmission:

          (i) if to the registered holder of a Warrant Certificate at the address of such holder as shown on the registry books maintained by the Warrant Agent; or

          (ii) if to the Company at 119 North Colorado Street, Midland, Texas 79701, Attention: President, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; or

          (iii) if to the Warrant Agent at the Corporate Office.

     Section 12. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Colorado.

     Section 13. Persons Benefiting. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and their respective successors and assigns, and the holders from time to time of the Warrant Certificates or any of them. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim or to impose upon any other person any duty, liability or obligation.

     Section 14. Execution. This Agreement may be executed in several counterparts, which taken together shall constitute a single document.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above mentioned.

PARALLEL PETROLEUM CORPORATION
By:	/s/ Frank S. Delay
	Frank S. Delay, President

AMERICAN STOCK TRANSFER, INC., as Warrant Agent
By:	/s/ Signature Illegible
	Authorized Officer

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EX-4.8

Exhibit 4.8

FIRST AMENDMENT TO WARRANT AGREEMENT

     This First Amendment to Warrant Agreement (this “Amendment”), dated as of February 22, 2007, is made and entered into by and between Parallel Petroleum Corporation, a Delaware corporation (the “Company”), and Computershare Shareholder Services, Inc., a Delaware corporation (the “Warrant Agent”), and its fully owned subsidiary Computershare Trust Company, N.A., a federally chartered trust company.

     WHEREAS, the Company and the Warrant Agent’s predecessor, American Stock Transfer, Inc., entered into that certain Purchase Warrant Agreement, dated as of October 1, 1980 (the “Warrant Agreement”);

     WHEREAS, under and in accordance with the terms of the Company’s final prospectus, dated October 1, 1980 (the “Prospectus”), the Company completed its initial public offering (the “Offering”) of shares of common stock and warrants to purchase common stock;

     WHEREAS, in connection with the closing of the transactions contemplated by the Offering, the Company issued and sold a total of 3,000,000 warrants at an exercise price of $.60 per share which, after giving effect to the Company’s one-for-ten reverse stock split effective on August 6, 1982, are now 300,030 warrants having an exercise price of $6.00 per share (the “Warrants”);

     WHEREAS, the Prospectus provides that each outstanding Warrant could be exercised to purchase one share of the Company’s common stock commencing nine months after the Offering was closed, or on such later date as a registration statement covering such exercise is declared effective by the Securities and Exchange Commission, but for a period of 30 days only;

     WHEREAS, the Warrant Agreement provides that each Warrant could be exercised at any time on or after August 21, 1981, but not after September 30, 1981, upon the terms and subject to the conditions set forth in the Warrant Agreement and in such Warrant;

     WHEREAS, the Company and the Warrant Agent desire to amend the Warrant Agreement, pursuant to the provisions of Section 10 thereof, to more accurately reflect the intent of the original parties thereto and to cure and correct the ambiguity and inconsistency between (a) the terms of exercise of the Warrants as contained and described in the Prospectus, and (b) the terms of exercise of the Warrants as contained and described in the Warrant Agreement.

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

     Section 1. Definitions. Except as otherwise expressly provided herein, all capitalized terms used but not defined herein shall have the same meanings as given them in the Warrant Agreement.

     Section 2. Amendment of Section 4. The first sentence of Section 4 of the Warrant Agreement is hereby amended to read in its entirety as follows:

     Section 4. Exercise. Each Warrant represented by a Warrant Certificate may be exercised at any time or from time to time at or after such date as a registration statement covering exercise thereof is declared effective by the Securities and Exchange Commission, but only for a thirty-day period after such date, upon the terms and subject to the conditions set forth herein and in such Warrant Certificate.

     Section 3. Miscellaneous.

     3.1 Ratification. Except as expressly amended hereby, the Warrant Agreement is and shall be unchanged and all of the terms, provisions, covenants, conditions, schedules and exhibits thereof shall remain and continue in full force and effect and are hereby ratified and confirmed by the Company and the Warrant Agent.

     3.2 Legal Expenses. The Company hereby agrees to pay on demand all reasonable fees and expenses of counsel to the Warrant Agent incurred by the Warrant Agent in connection with the preparation and execution of this Amendment and all related documents.

     3.3 Multiple Counterparts. Multiple counterparts of this Amendment may be signed by the parties hereto (including by facsimile transmission), each of which shall be an original but all of which together shall constitute one and the same instrument.

     3.4 Governing Law. This Amendment shall be governed by and construed in accordance with the laws of Delaware.

     IN WITNESS WHEREOF, the Borrower and the Lender have caused this instrument to be effective as of the date first above written.

COMPANY:                 

PARALLEL PETROLEUM CORPORATION
By:	/s/ Larry C. Oldham
	Larry C. Oldham, President

WARRANT AGENT:

COMPUTERSHARE TRUST COMPANY, N.A.
By:	/s/ Kellie Gwinn
	Name:	Kellie Gwinn
	Title:	Vice President

COMPUTERSHARE SHAREHOLDER SERVICES, INC.
By:	/s/ Kellie Gwinn
	Name:	Kellie Gwinn
	Title:	Vice President

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EX-10.4

Exhibit 10.4

PARALLEL PETROLEUM CORPORATION

1998 STOCK OPTION PLAN

I. Purpose of the Plan

     The Parallel Petroleum Corporation 1998 Stock Option Plan (the “Plan”) is intended to provide a means whereby certain employees of Parallel Petroleum Corporation, a Delaware corporation (the “Company”), and its subsidiaries may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. Accordingly, the Plan provides for granting certain employees the option (“Option”) to purchase shares of the common stock of the Company (“Stock”), as hereinafter set forth. Options granted under the Plan to employees may be either incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), (“Incentive Stock Options”) or options which do not constitute Incentive Stock Options.

II. Administration

     The Plan shall be administered by the Board of Directors of the Company (the “Board”) or by a committee (the “Committee”) of two or more directors of the Company appointed by the Board. If a Committee is not appointed by the Board, the Board shall act as and be deemed to be the Committee for all purposes of the Plan. The Committee shall have sole authority (within the limitations described herein) to select the employees who are to be granted Options hereunder and to establish the number of shares which may be issued to employees under each Option and to prescribe the form of the agreement embodying awards of Options. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, consistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. All decisions made by the Committee in selecting the employees to whom Options shall be granted, in establishing the number of shares which may be issued to employees under each Option and in construing the provisions of the Plan shall be final. No member of the Board shall be liable for anything done or omitted to be done by such member or by any other member of the Board in connection with the Plan, except for such member’s own willful misconduct or as expressly provided by statute.

III. Option Agreements; Terms and Conditions

     Each Option granted under the Plan shall be evidenced by an agreement and shall contain such terms and conditions, and may be exercisable for such periods, as the Committee shall prescribe from time to time in accordance with this Plan, and shall comply with the following terms and conditions:

     (a) The Option exercise price shall be the fair market value of the Stock subject to the Option on the date the Option is granted. For all purposes under the Plan, the fair market of a share of Stock on a particular date shall be equal to the average of the high and low sales prices of the Stock on the date of grant as reported on the Nasdaq National Market tier of The Nasdaq Stock Market (“NMS”), or on the stock exchange composite tape if the Stock is traded on a national stock exchange on that date, or if no prices are reported on that date, on the last preceding date on which such prices of the Stock are so reported. If the Stock is not traded on the NMS or other stock exchange on that date, but is otherwise traded over the counter at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the reported high and low or closing bid and asked prices of the Stock on the most recent date on which the Stock was publicly traded. If the Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate.

     (b) The Option shall not be transferable otherwise than by will or the laws of descent and distribution, and may be exercised only by the employee during the employee’s lifetime and while the employee remains employed by the Company, except that: (i) if the employee ceases to be an employee of the Company because of disability, the Option may be exercised in full by the employee (or the employee’s estate or the person who acquires the Option by will or the laws of descent and distribution or otherwise by reason of the death of the employee) at any time during the period of one year following such termination; (ii) if the employee dies while he is an employee of the Company, the employee’s estate, or the person who acquires the Option by will or the laws of descent and distribution or otherwise by reason of the death of the employee, may exercise the Option in full at any time during the period of one year following the date of the employee’s death; and (iii) if the employee ceases to be an employee of the Company for any reason other than as described in clause (i) or (ii) above, unless the employee is removed for cause, the Option may be exercised by the employee at any time during the period of three months following the date the employee ceases to be an employee of the Company, or by the employee’s estate (or the person who acquires the Option by will or the laws of descent and distribution or otherwise by reason of the death of the employee) during a period of one year following the employee’s death if the employee dies during such three-month period, but in each case only as to the number of shares the employee was entitled to purchase hereunder upon exercise of the Option as of the date the employee ceases to be an employee.

     (c) The Option shall not be exercisable in any event after the expiration of ten years from the date of grant.

     (d) The purchase price of shares as to which the Option is exercised shall be paid in full at the time of exercise (a) in cash, (b) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, or (c) any combination of cash or Stock, as shall be established by the Committee. Unless and until a certificate or certificates representing such shares shall have been issued

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by the Company to the employee, the employee (or the person permitted to exercise the Option in the event of the employee’s death) shall not be or have any of the rights or privileges of a stockholder of the Company with respect to shares acquirable upon an exercise of the Option.

     (e) The terms and conditions of the respective employee stock option agreements need not be identical.

IV. Eligibility of Optionee

     (a) Subject to the provisions of paragraph (b) below, Options may be granted only to individuals who are employees (including officers and directors who are also employees) of the Company or any parent or subsidiary corporation (as defined in Section 424 of the Code) of the Company at the time the Option is granted. Options may be granted to the same employee on more than one occasion.

     (b) No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of Section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the fair market value of the Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. To the extent that the aggregate fair market value (determined at the time the respective Incentive Stock Option is granted) of stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an employee optionee’s Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the employee optionee of such determination as soon as practicable after such determination.

V. Shares Subject to the Plan

     The aggregate number of shares which may be issued under Options granted under the Plan shall not exceed 850,000 shares of Stock. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the

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termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option hereunder expire or terminate prior to its exercise in full, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Article VII hereof with respect to shares of Stock subject to Options then outstanding. Exercise of an Option in any manner shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to any one individual, by the number of shares as to which the Option is exercised. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option.

VI. Term of Plan

     The Plan shall be effective upon the date of its approval and adoption by the stockholders of the Company. Except with respect to Options then outstanding, if not sooner terminated under the provisions of Article VIII, the Plan shall terminate upon and no further Options shall be granted after the expiration of ten years from the date of its adoption by the Board.

VII. Recapitalization or Reorganization

     (a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting the Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding.

     (b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased.

     (c) If the Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise of an Option theretofore granted the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be

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exercisable, the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the optionee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a “group” as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of Stock, or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a “Corporate Change”), then upon the occurrence of any such Corporate Change, any outstanding Options held by employees shall become fully exercisable and upon any exercise of an Option theretofore granted the employee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be exercisable, the number and class of shares of stock or other securities or property to which the employee would have been entitled pursuant to the terms of the Corporate Change if, immediately prior to such Corporate Change, the employee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable.

     (d) Any adjustment provided for in Subparagraphs (b) or (c) above shall be subject to any required stockholder action.

     (e) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the purchase price per share.

VIII. Amendment or Termination of the Plan

     The Board in its discretion may terminate the Plan at any time with respect to any shares for which Options have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time, provided, that no change in any Option theretofore granted may be made which would impair the rights of the optionee without the consent of such optionee.

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IX. Miscellaneous Provisions

     (a) Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the service of the Company.

     (b) An optionee’s rights and interest under the Plan may not be assigned or transferred in whole or in part either directly or by operation of law or otherwise (except in the event of an optionee’s death or disability, by will or the laws of descent and distribution, all as provided in Article III), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no such right or interest of any participant in the Plan shall be subject to any obligation or liability of such participant.

     (c) No shares of Stock shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable Federal, state, and other securities laws and regulations.

     (d) It shall be a condition to the obligation of the Company to issue shares of Stock upon exercise of an Option, that the optionee (or any beneficiary or person entitled to act under or through Optionee as provided herein) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any liability to withhold Federal, state, local, or foreign income or other taxes. If the amount requested is not paid, the Company may refuse to issue shares of Stock.

     (e) By accepting any Option under the Plan, each optionee and each person claiming under or through such person shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board of Directors or the Committee.

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EX-10.7

Exhibit 10.7

PARALLEL PETROLEUM CORPORATION

INCENTIVE AND RETENTION PLAN
(as amended on August 23, 2005 and February 27, 2007)

Purpose

     The purpose of the Parallel Petroleum Corporation Incentive and Retention Plan (the “Plan”) is to advance the interests of Parallel Petroleum Corporation, a Delaware corporation, and its stockholders by providing certain officers, employees and consultants to Parallel with incentive bonus compensation which is linked to the sale of the Company (as defined in Article I hereof) or all or substantially all of the assets of the Company, a merger or business combination or other transaction. In addition, recognizing the possibility of a proposed or threatened transaction, the aggregate effect of which may be a Corporate Transaction or a Change of Control (both as defined in Article I hereof), the Board of Directors of the Company and the Compensation Committee of the Board have determined that it is imperative that the Company be able to rely upon participating officers, employees and consultants to continue in their employment by or service to the Company or its Subsidiaries (as defined in Article I hereof), and that the Company be able to receive and rely upon their advice as to the best interests of the Company and its stockholders without concern that they might be distracted by the personal uncertainties and risks created by any such transaction.

ARTICLE I
DEFINITIONS

     In addition to the terms defined in the preamble and elsewhere in this Plan, the following definitions are applicable throughout this Plan:

     “Additional Base Price” means $8.62 per share of common stock.

     “Additional Base Shares” means 400,000 shares of common stock of the Company.

     “Affiliate” means with respect to any Person, any other Person who is, or would be deemed to be, an “affiliate” or an “associate” of such Person within the respective meanings given to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “1934 Act”), as in effect on the date of this Agreement.

     “Base Price” means the volume weighted average closing price of the Company’s common stock for the fiscal quarter ended December 31, 2003, or $3.73 per share.

     “Base Shares” means the weighted average shares of common stock (basic) of the Company outstanding for the fiscal quarter ended December 31, 2003, or 1,080,362 shares.

     A person will be deemed the “Beneficial Owner” of any securities which such Person or any of such Person’s Affiliates would be deemed to beneficially own, directly or indirectly, within the meaning given to such term in Rule 13d-3 under the 1934 Act as in effect on the date of this Agreement.

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     “Board” means the Board of Directors of the Company.

     “Change of Control” means the occurrence of either one or both of the following events:

     (a) the acquisition of beneficial ownership (within the meaning of Rule 13d-3 under the 1934 Act) of an aggregate of 60% or more of the Voting Power of the Company’s outstanding Voting Securities by any person or group (as such term is used in Rule 13d-5 under the 1934 Act) who beneficially owned less than 50% of the Voting Power of the Company’s outstanding Voting Securities on the date of this Plan; provided, however, that notwithstanding the foregoing, an acquisition shall not constitute a Change in Control hereunder if the acquiror is (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company and acting in such capacity, or (ii) a Subsidiary of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Voting Securities of the Company; or

     (b) A change in the composition of the Board such that the individuals who, as of the effective date of this Plan, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason (other than by way of voluntary resignation) to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the effective date of this Plan, whose election, or nomination for election, by the Company’s stockholders was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board.

     “Change of Control Date” means the date on which a Change of Control occurs.

     “Committee” shall have the meaning given to such term in Section 2.1 of this Plan.

     “Company” means Parallel Petroleum Corporation or any Successor.

     “Corporate Transaction” means the occurrence of any one or more of the following events:

     (a) an acquisition of the Company by any Person or group of Persons (other than the Participants) by way of purchase, merger, consolidation, reorganization or other business combination, whether by way of tender offer or negotiated transaction, as a result of which the outstanding securities of the Company are exchanged or converted into cash, property and/or securities not issued by the Company (other than a merger, consolidation or reorganization the sole purpose of which is to change the Company’s domicile solely within the United States, and other than a merger, consolidation or reorganization of the Company in which the holders of the securities of the Company immediately prior to such transaction have the same proportionate ownership of the securities of the surviving corporation immediately after such transaction);

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     (b) a sale, lease, exchange or other disposition by the Company (excluding disposition by way of pledge, hypothecation or foreclosure) to any Person or group of Persons (other than the Participants) in one transaction or a series of related transactions, of all or substantially all of the assets of the Company;

     (c) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or

     (d) any combination of any of the foregoing.

     “Executive Group” means all executive officers of the Company and any other officer employee of the Company or its Subsidiaries selected by the Compensation Committee in its sole discretion for participation in the Plan.

     “Market Value” means, as of any specified date, an amount equal to the per share closing price of the Company’s common stock on the Nasdaq Stock Market at the close of business on the day immediately preceding the Change of Control Date. If the common stock is not publicly traded on the Nasdaq Stock Market at the time a determination of its value is required to be made, the market value of the common stock shall be the per share closing price reported on the stock exchange composite tape of the exchange on which the common stock is then publicly traded, or if the common stock is not publicly traded on any such other exchange, the determination of fair market value of the common stock shall be made by the Committee in such manner as it deems appropriate.

     “Participant” means a member of the Executive Group and any other employee of or consultant to the Company or its Subsidiaries selected by the Compensation Committee in its sole discretion for participation in the Plan.

     “Performance Bonus” means a positive amount determined in accordance with the following formula:

[(Transaction Proceeds — Base Price) x Base Shares], plus
[(Transaction Proceeds — Additional Base Price) x Additional Base Shares]

     “Person” means any natural person, corporation, trust, company, organization, association, partnership or other entity of any kind, and any successors or assigns thereof, and shall also include any group of Persons acting jointly or in concert.

     “Proportionate Share” means the amount of the Performance Bonus or Retention Payment allocated to each Participant upon the occurrence of a Corporate Transaction or Change of Control, as the case may be, as provided for in Section 4.1 and Section 4.2 of this Plan.

     “Retention Payment” means a positive amount determined in accordance with the following formula:

[(Market Value — Base Price) x Base Shares], plus
[(Market Value — Additional Base Price) x Additional Base Shares]

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     “Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company or another Subsidiary.

     “Successor” means any Person into or with which Parallel shall be merged, consolidated or otherwise combined, or any Person which acquires all or substantially all the assets of Parallel and in connection therewith assumes all or substantially all of Parallel’s obligations and liabilities, including Parallel’s obligations under this Agreement.

     “Transaction Date” means the date on which a Corporate Transaction is consummated. If a Corporate Transaction occurs in a manner providing for multiple closings or steps, the Transaction Date will be deemed to be the date on which the first closing or step is consummated and the Corporate Transaction will be deemed to have been consummated in its entirety on such Transaction Date.

     “Transaction Proceeds” means the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the price per share of common stock offered to stockholders of the Company in any merger, consolidation, share exchange, reorganization, combination, sale of assets, liquidation or dissolution transaction, (ii) the price per share of common stock offered to stockholders of the Company in any tender offer or exchange offer, or (iii) if a transaction occurs other than as described in clause (i) or (ii), the per share price determined in good faith by the Committee. If the consideration offered to holders of common stock of the Company in any transaction consists of anything other than cash, the Committee shall determine in good faith the fair cash equivalent of the portion of the consideration offered which is other than cash.

     “Voting Securities” means all securities of a company entitling the holders thereof to vote in an annual election of directors (without consideration of the rights of any class of stock other than the common stock to elect directors by a separate class vote); and a specified percentage of the “Voting Power” of a company means such number of the Voting Securities as will enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors (without consideration of the rights of any class of stock other than the common stock to elect directors by a separate class vote).

ARTICLE II
ADMINISTRATION

     2.1 Administration by Compensation Committee. Subject to the terms of this Article II, this Plan shall be administered by the Compensation Committee (the “Committee”) of the Board of Directors of the Company.

     2.2 Committee Action. A majority of the Committee shall constitute a quorum, and the act of a majority of the members of the Committee present at a meeting at which a quorum is present shall be the act of the Committee. Any action taken by the Committee may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by all of the members of the Committee.

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     2.3 Committee’s Powers. The Committee shall have the power, in its sole discretion, to take such actions as may be necessary to carry out the provisions and purposes of this Plan and shall have the authority to control and manage the operation and administration of this Plan. In order to effectuate the purposes of this Plan, the Committee shall have the discretionary power and authority to construe and interpret this Plan, to supply any omissions therein, to reconcile and correct any errors or inconsistencies, to decide any questions in the administration and application of this Plan, and to make equitable adjustments for any mistakes or errors made in the administration of the Plan. All such actions or determinations made by the Committee, in good faith, shall not be subject to review by anyone, but shall be final, binding and conclusive on all persons ever interested hereunder.

     In construing this Plan and in exercising its powers, the Committee will attempt to ascertain the purpose of any provision in question, and when the purpose is known or reasonably ascertainable, the purpose will be given effect to the extent feasible. Likewise, the Committee is authorized to determine all questions with respect to the individual rights of all Participants under this Plan (which need not be identical), including, but not limited to, all issues with respect to eligibility. The Committee shall have all powers necessary or appropriate to accomplish its duties under this Plan including, but not limited to, the power and duty to:

          (a) designate the officers and employees of the Company and its Subsidiaries, and consultants to the Company and its Subsidiaries, who shall participate in this Plan, in addition to the “Executive Group”;

          (b) maintain complete and accurate records and data in the manner necessary for proper administration of this Plan;

          (c) adopt rules of procedure and regulations necessary for the proper and efficient administration of this Plan, provided the rules and regulations are not inconsistent with the terms of this Plan as set out herein. The Committee shall exercise its discretion hereunder in a nondiscriminatory manner;

          (d) enforce the terms of this Plan and the rules and regulations it adopts;

          (e) employ agents, attorneys, accountants or other Persons (who also may be employed by or represent the Company) for such purposes as the Committee considers necessary or desirable in connection with its duties hereunder; and

          (f) perform any and all other acts necessary or appropriate for the proper management and administration of this Plan.

ARTICLE III
PARTICIPATION

     All members of the Executive Group are Participants in this Plan and are eligible to receive a Proportionate Share of the Performance Bonus or Retention Payment upon the occurrence of a Corporate Transaction or a Change of Control as provided in this Plan. The Committee may from time to time select and designate (with the advice and assistance of the Executive Group, if requested by the Committee) other non-officer employees of, and consultants to, the Company and its Subsidiaries as Participants in the Plan who shall also be eligible

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to receive a Proportionate Share of the Performance Bonus or Retention Payment. Participants in the Plan may also participate in other incentive or benefit plans of the Company or any Subsidiary, subject to the terms and conditions of such plans.

ARTICLE IV
BONUS AND RETENTION PAYMENTS

     4.1 Performance Bonus. Subject to the terms and conditions of Article VIII of this Plan, on the Transaction Date, or as soon as practicable thereafter, the Company shall set aside an amount equal to the Performance Bonus. The Committee, with the assistance and non-binding recommendations of one designee appointed by the Executive Group, shall then allocate for payment to and among each member of the Executive Group such portion of the Performance Bonus as the Committee shall determine in its sole discretion. After making such allocations, and if and to the extent any part of the Performance Bonus remains unallocated, the Committee, with the assistance and non-binding recommendations of the designee appointed by the Executive Group, shall next allocate any such remaining portion of the Performance Bonus among all other Participants in the Plan. After all allocations of the Performance Bonus have been made, each Participant’s Proportionate Share of the Performance Bonus shall be paid in a cash lump sum on the Transaction Date or as soon as practicable thereafter.

     4.2 Retention Payment. Subject to the terms and conditions of Article VIII of this Plan, on the Change of Control Date, or as soon as practicable thereafter, the Company shall set aside an amount equal to the Retention Payment. The Committee, with the assistance and non-binding recommendations of one designee appointed by the Executive Group, shall then allocate for payment to and among each member of the Executive Group such portion of the Retention Payment as the Committee shall determine in its sole discretion. After making such allocations, and if and to the extent any part of the Retention Payment remains unallocated, the Committee, with the assistance and non-binding recommendations of the designee appointed by the Executive Group, shall next allocate any such remaining portion of the Retention Payment among all other Participants in the Plan. After all allocations of the Retention Payment have been made, each Participant’s Proportionate Share of the Retention Payment shall be paid in a cash lump sum on the Change of Control Date or as soon as practicable thereafter.

ARTICLE V
NONALIENATION

     A Participant may not alienate, assign, pledge, encumber, transfer, sell or otherwise dispose of any rights or benefits awarded hereunder prior to the actual receipt thereof; and any attempt by any Participant to alienate, assign, pledge, encumber, transfer, sell or otherwise dispose of any rights or benefits prior to such receipt, or any levy, attachment, execution or similar process upon any rights or benefits conferred hereunder will immediately be null and void.

ARTICLE VI
UNFUNDED OBLIGATION

     The Plan shall at all times be entirely unfunded and no provision shall at any time be made with respect to segregating assets of the Company for payment of any amounts hereunder.

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This Plan and any setting aside of amounts by the Company with which to discharge its obligations hereunder shall not be deemed to create a trust of any kind or a fiduciary relationship between the Company and a Participant or any other Person. The benefits provided under this Plan shall be a general, unsecured obligation of the Company payable solely from the general assets of the Company, and neither any Participant nor any Participant’s beneficiaries or estate shall have any interest in any particular assets of the Company or any Subsidiary by virtue of this Plan. Participants and beneficiaries shall have only the rights of a general unsecured creditor of the Company.

ARTICLE VII
REIMBURSEMENT OF EXPENSES

     If, after the occurrence of a Corporate Transaction or a Change of Control, a Participant brings any action, whether at law or in equity, to obtain or enforce any payment, benefit or right provided by this Plan, such Participant shall be entitled to recover reasonable attorneys’ fees and related expenses upon issuance by a court of competent jurisdiction of a final non-appealable order to the effect that such Participant is the prevailing party.

ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE COMPANY

     The Company will have no obligation to pay or cause to be paid to any Participant the Performance Bonus or Retention Payment described herein if (a) the payment of the Performance Bonus or Retention Payment would, in the sole determination of the Committee, cause the Company to be in violation or breach of any law, statute, rule or regulation or any determination of an arbitrator or a court or other governmental authority, or any covenant, limitation, prohibition or restriction of any nature contained in any agreement to which the Company is a party or by which it is bound, or (b) Participant dies, retires, resigns or is terminated or removed by the Company as an officer or employee of, or consultant to, the Company or any of its Subsidiaries prior to the date on which a Corporate Transaction or Change of Control occurs, as applicable, except that if a Corporate Transaction or Change of Control occurs at any time during the period of one year following the date a Participant ceases to be an employee or officer of, or consultant to, the Company for any reason (other than by reason of such Participant’s termination of employment or service or removal from office by the Company, whether with or without cause), such former Participant (or such former Participant’s estate) may, but shall not be entitled to, be designated by the Committee in its sole discretion as a Participant eligible to receive the Performance Bonus or Retention Payment, as applicable.

ARTICLE IX
PAYMENT OF OBLIGATION ABSOLUTE

     Subject to the terms and conditions of Article VIII of this Plan, the obligations of the Company to pay the Performance Bonus or Retention Payment described in Article IV of this Plan shall be absolute and unconditional and will not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right that the Company may have against a Participant. In no event will a Participant be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Participants under any of the provisions of this Plan, nor will the amount of any payment

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hereunder be reduced by any compensation earned by Participants as a result of employment by another employer.

ARTICLE X
NO RIGHT TO CONTINUED EMPLOYMENT

     This Plan does not, and shall not be construed to, give any Participant any right to remain in the employ of the Company or any Subsidiary. The Company and its Subsidiaries reserve the right to terminate any employee or other Participant at any time, with or without cause.

ARTICLE XI
TERM OF PLAN

     Unless earlier terminated in accordance with Section 12.5 of this Plan, this Plan shall automatically terminate and expire upon the date on which all Participants have received their respective Proportionate Share of the Performance Bonus or their respective Retention Payment following the occurrence of a Corporate Transaction or Change of Control, as the case may be. Upon termination of this Plan, Participants shall have no rights, benefits or claims under or pursuant to this Plan.

ARTICLE XII
MISCELLANEOUS

     12.1 No Adverse Actions. Upon the occurrence of a Corporate Transaction or a Change of Control, no action, including, but not by way of limitation, the amendment, suspension or termination of this Plan, shall be taken which would adversely affect the rights of Participants or the operation of this Plan with respect to the Performance Bonus or Retention Payment to which Participants may have become entitled hereunder as a result of a Corporate Transaction or Change of Control.

     12.2 Simultaneous Transactions. If a transaction or event or series of related transactions or events constitutes both a Corporate Transaction and a Change of Control, then for purposes of this Plan, a Corporate Transaction shall be deemed to have occurred.

     12.3 Recapitalization or Reorganization.

     (a) The existence of the Plan shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding.

     (b) If the Company shall effect a subdivision or consolidation of shares of common stock or the payment of a stock dividend on common stock without receipt of consideration by the Company, the number of Base Shares and Additional Base Shares (i) in the event of an increase of the number of outstanding shares of common stock shall be proportionately increased, and the Base Price and Additional Base Price shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares of common stock

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shall be proportionately reduced, and the Base Price and Additional Base Price shall be proportionately increased.

     (c) If the Company after the date hereof recapitalizes or otherwise changes its capital structure, and such recapitalization or change in corporate structure would in the opinion of the Committee materially affect the rights of Participants, the Base Price and Additional Base Price and the number of Base Shares and Additional Base Shares shall be adjusted in such manner, if any, and at such time as the Committee, in good faith, may determine to be equitable in the circumstances.

     (d) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefore, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Base Shares and Additional Base Shares or the Base Price and Additional Base Price.

     12.4 Construction of Agreement. Nothing in this Plan shall be construed to amend any provision of any other plan or policy of the Company. This Plan is not and nothing herein shall be deemed to create, a commitment of continued service by any Participant as an officer or employee of, or consultant to, the Company or its Subsidiaries, or in any other capacity. The benefits provided under this Plan are in addition to any other compensation agreements or arrangements that the Company may have with the Participants.

     12.5 Amendment or Discontinuance. At any time and from time to time, by action of the Board, subject to the limitations hereinafter provided, any or all provisions of the Plan may be amended. Each amendment of the Plan shall be in writing and shall become effective on the date specified therein. No amendment of the Plan may be made which shall deprive any Participant of amounts that may become payable with respect to events occurring after the date of this Plan; provided, however, and notwithstanding the foregoing, the Plan may be amended from time to time by the Board if, in the sole discretion of the Board, any such amendment is necessary, advisable or required in order to comply with any law, statute, rule or regulation or any determination of an arbitrator or a court or other governmental entity.

     The Plan may not be discontinued or terminated by the Board, but shall continue until terminated as provided in Article XI; provided, however, and notwithstanding the foregoing, the Plan may be discontinued or terminated by the Board if, in the sole discretion of the Board, such discontinuation or termination is necessary, advisable or required in order to comply with any law, statute, rule or regulation or any determination of an arbitrator or a court or other governmental entity.

     12.6 Successors.

          (a) This Plan is binding upon any Successor to the Company, and any Person that acquires substantially all of the Company’s assets or substantially all its business (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place.

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          (b) This Plan inures to the benefit of, and is enforceable by, a Participant’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If a Participant dies after the occurrence of a Corporate Transaction or Change of Control, as the case may be, but before the receipt of the Performance Bonus or Retention Payment payable hereunder with respect to events occurring prior to death, such Performance Bonus or Retention Payment shall be paid in accordance with the last beneficiary designation executed by the Participant and filed with the Company. If no beneficiary form has been filed with the Company, any payment due to a Participant hereunder shall be paid to the deceased Participant’s estate.

     12.7 Taxes. The Company will withhold from all payments due to a Participant (or such Participant’s beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom.

     12.8 Indemnification of Committee. No member of the Committee nor any director, officer or employee, or consultant to, of the Company or any Subsidiary acting on behalf of the Committee, shall be personally liable for any action, determination or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and each director, officer or employee, or consultant to, of the Company or any Subsidiary acting on its behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation.

     12.9 Governing Law. This Plan will be governed by and construed in accordance with the laws of the State of Texas.

     12.10 Headings. The headings of the Sections herein are included solely for reference convenience, and will not in any way affect the meaning or interpretation of this Agreement.

     12.11 Expenses of the Plan. All costs and expenses of the adoption and administration of this Plan shall be borne by the Company and none of such expenses shall be charged to any Participant.

     12.12 Date of Plan. The effective date of this Plan is September 23, 2004, the date of adoption by the Board, except with respect to amendments to this Plan adopted on August 23, 2005, which are effective as of such date, and except with respect to amendments to this Plan adopted on February 27, 2007, which are effective as of such date.

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EX-10.23

Exhibit 10.23

GUARANTY

     THIS GUARANTY (this “Guaranty”) is made as of the 23rd day of December, 2005, by PARALLEL, L.L.C., a Delaware limited liability company (the “Guarantor”) in favor of the Agent, for the benefit of the Lenders, under the Credit Agreement referred to below;

WITNESSETH:

     WHEREAS, PARALLEL PETROLEUM CORPORATION, a Delaware corporation (“PPC”) and PARALLEL, L.P., a Texas limited partnership (“PLP”) (PPC and PLP collectively are hereinafter referred to as the “Principal”), Guarantor, CITIBANK TEXAS, N.A., a national banking association, having its principal office in Midland, Texas, as Joint Lead Arranger and Administrative Agent (the “Agent”), BNP PARIBAS, as Joint Lead Arranger and Syndication Agent, and certain other financial institutions from time to time parties thereto (the “Lenders”) have entered into a certain Third Amended and Restated Credit Agreement dated of even date herewith (as same may be amended, modified or restated from time to time, the “Credit Agreement”), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Principal;

     WHEREAS, it is a condition precedent to the Agent and the Lenders executing the Credit Agreement that Guarantor execute and deliver this Guaranty whereby the Guarantor shall guarantee the payment when due, subject to Section 9 hereof, of all Guaranteed Obligations and Rate Management Obligations, as defined below; and

     WHEREAS, in consideration of the financial and other support that the Principal has provided, and such financial and other support as the Principal may in the future provide, to the Guarantor, and in order to induce the Lenders and the Agent to enter into the Credit Agreement, and the Lenders and their Affiliates to enter into one or more Rate Management Transactions with the Principal, and because the Guarantor has determined that executing this Guaranty is in its interest and to its financial benefit, the Guarantor is willing to guarantee the obligations of the Principal under the Credit Agreement, any Note, any Rate Management Transaction, and the other Loan Documents;

     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     SECTION l.1. Selected Terms Used Herein.

     “Guaranteed Obligations” is defined to mean (i) all indebtedness, obligations and liabilities of either Principal to Agent or any Lender arising out of or pursuant to the provisions of the Credit Agreement, the Notes and other Loan Documents, (ii) all Rate Management Obligations, (iii) all indebtedness, obligations and liabilities of either Principal to any Lender of any kind or character now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, and regardless of whether such indebtedness, obligations and liabilities may, prior to their acquisition by any Lender, be or have been payable to or in favor of a

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third party and subsequently acquired by any Lender (it being contemplated that any Lender may make such acquisitions from third parties), including without limitation all indebtedness, obligations and liabilities of either Principal to any Lender now existing or hereafter arising by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, purchase, overdraft, discount, indemnity agreement or otherwise, (iv) all accrued but unpaid interest on any of the indebtedness described in (i), (ii) and (iii) above, (v) all obligations of either Principal to any Lender under any documents evidencing, securing, governing and/or pertaining to all or any part of the indebtedness described in (i), (ii), (iii) or (iv) above, (vi) all costs and expenses incurred by any Lender in connection with the collection and administration of all or any part of the indebtedness and obligations described in (i), (ii), (iii), (iv) or (v) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness and obligations, including without limitation all reasonable attorneys’ fees, and (vii) all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii), (iv), (v) and (vi) above.

     “Rate Management Obligations” means any and all obligations of either Principal, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Management Transactions with Agent or a Lender or an Affiliate of Agent or a Lender, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Management Transactions.

     SECTION 1.2. Terms in Credit Agreement. Other capitalized terms used herein but not defined herein shall have the meaning set forth in the Credit Agreement.

     SECTION 2.1. Representations and Warranties. The Guarantor represents and warrants (which representations and warranties shall be deemed to have been renewed upon each Borrowing Date under the Credit Agreement) that:

     (a) It is a limited liability company duly and properly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted.

     (b) It has the power and authority and legal right to execute and deliver this Guaranty and to perform its obligations hereunder. The execution and delivery by it of this Guaranty and the performance of its obligations hereunder have been duly authorized by proper corporate, partnership or limited liability company proceedings, and this Guaranty constitutes a legal, valid and binding obligation of Guarantor enforceable against it in accordance with its terms, except as enforceability may be limited by general principles of equity and bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

     (c) Neither the execution and delivery by it of this Guaranty, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on it or any of its subsidiaries or (ii) its articles or certificate of incorporation, partnership agreement, limited liability company agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or

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(iii) the provisions of any indenture, instrument or agreement to which it or any of its subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the property of Guarantor or a subsidiary thereof pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by it or any of its subsidiaries, is required to be obtained by it or any of its subsidiaries in connection with the execution and delivery of this Guaranty or the performance by it of its obligations hereunder or the legality, validity, binding effect or enforceability of this Guaranty.

     SECTION 2.2. Covenants. The Guarantor covenants that, so long as any Lender has any Commitment outstanding under the Credit Agreement, any Reimbursement Obligations remain outstanding, any Rate Management Transaction remains in effect or any of the Guaranteed Obligations shall remain unpaid, that it will, and, if necessary, will enable the Principal to, fully comply with those covenants and agreements set forth in the Credit Agreement.

     SECTION 3. The Guaranty. Subject to Section 9 hereof, the Guarantor hereby absolutely and unconditionally guarantees, as primary obligor and not as surety, the full and punctual payment (whether at stated maturity, upon acceleration or early termination or otherwise, and at all times thereafter) and performance of the Guaranteed Obligations, including without limitation any such Guaranteed Obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, whether or not allowed or allowable in such proceeding. Upon failure by the Principal to pay punctually any such amount, the Guarantor agrees that it shall forthwith on demand pay to the Agent for the benefit of the Lenders and, if applicable, their Affiliates, the amount not so paid at the place and in the manner specified in the Credit Agreement, any Note, any Rate Management Transaction or the relevant Loan Document, as the case may be. This Guaranty is a guaranty of payment and not of collection. The Guarantor waives any right to require any Lender, or any Affiliate of any Lender, to sue the Principal, any other guarantor, or any other Person obligated for all or any part of the Guaranteed Obligations, or otherwise to enforce its payment against any Collateral securing all or any part of the Guaranteed Obligations.

     SECTION 4. Guaranty Unconditional. Subject to Section 9 hereof, the obligations of the Guarantor hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by:

     (i) any extension, renewal, settlement, compromise, waiver or release in respect of any of the Guaranteed Obligations, by operation of law or otherwise, or any obligation of any other guarantor of any of the Guaranteed Obligations, or any default, failure or delay, willful or otherwise, in the payment or performance of the Guaranteed Obligations;

     (ii) any modification or amendment of or supplement to the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document;

     (iii) any release, nonperfection or invalidity of any direct or indirect security for any obligation of the Principal under the Credit Agreement, any Note, the Security Instrument, any

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Rate Management Transaction, any other Loan Document, or any obligations of any other guarantor of any of the Guaranteed Obligations, or any action or failure to act by the Agent, any Lender or any Affiliate of any Lender with respect to any collateral securing all or any part of the Guaranteed Obligations;

     (iv) any change in the corporate existence, structure or ownership of the Principal or any other guarantor of any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Principal, or any other guarantor of the Guaranteed Obligations, or its assets or any resulting release or discharge of any obligation of the Principal, or any other guarantor of any of the Guaranteed Obligations;

     (v) the existence of any claim, setoff or other rights which the Guarantor may have at any time against the Principal, any other guarantor of any of the Guaranteed Obligations, the Agent, any Lender or any other Person, whether in connection herewith or any unrelated transactions;

     (vi) any invalidity or unenforceability relating to or against the Principal, or any other guarantor of any of the Guaranteed Obligations, for any reason related to the Credit Agreement, any Rate Management Transaction, any other Loan Document, or any provision of applicable law or regulation purporting to prohibit the payment by the Principal, or any other guarantor of the Guaranteed Obligations, of the principal of or interest on any Note or any other amount payable by the Principal under the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document; or

     (vii) any other act or omission to act or delay of any kind by the Principal, any other guarantor of the Guaranteed Obligations, the Agent, any Lender or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of Guarantor’s obligations hereunder.

     SECTION 5. Discharge Only Upon Payment In Full: Reinstatement In Certain Circumstances. The Guarantor’s obligations hereunder shall remain in full force and effect until all Guaranteed Obligations shall have been indefeasibly paid in full, the Commitments under the Credit Agreement shall have terminated or expired and all Rate Management Transactions have terminated or expired. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Principal or any other party under the Credit Agreement, any Rate Management Transaction or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Principal or otherwise, the Guarantor’s obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time.

     SECTION 6. Waivers. The Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Principal, any other guarantor of any of the Guaranteed Obligations, or any other Person.

     SECTION 7. Subrogation. The Guarantor hereby agrees not to assert any right, claim or cause of action, including, without limitation, a claim for subrogation, reimbursement, indemnification or

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otherwise, against the Principal arising out of or by reason of this Guaranty or the obligations hereunder, including, without limitation, the payment or securing or purchasing of any of the Guaranteed Obligations by the Guarantor unless and until the Guaranteed Obligations are indefeasibly paid in full, any commitment to lend under the Credit Agreement and any other Loan Documents is terminated and all Rate Management Transactions have terminated or expired.

     SECTION 8. Stay of Acceleration. If acceleration of the time for payment of any of the Guaranteed Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Principal, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement, any Note, any Rate Management Transaction or any other Loan Document shall nonetheless be payable by the Guarantor hereunder forthwith on demand by the Agent made at the request of the Majority Lenders.

     SECTION 9. Limitation on Obligations.

     (a) The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of Guarantor under this Guaranty would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of Guarantor’s liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Guarantor, the Agent or any Lender, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding (such highest amount determined hereunder being the Guarantor’s “Maximum Liability”). This Section 9(a) with respect to the Maximum Liability of the Guarantor is intended solely to preserve the rights of the Agent hereunder to the maximum extent not subject to avoidance under applicable law, and neither the Guarantor nor any other person or entity shall have any right or claim under this Section 9(a) with respect to the Maximum Liability, except to the extent necessary so that the obligations of the Guarantor hereunder shall not be rendered voidable under applicable law.

     (b) The Guarantor agrees that the Guaranteed Obligations may at any time and from time to time exceed the Maximum Liability of the Guarantor, without impairing this Guaranty or affecting the rights and remedies of the Agent hereunder. Nothing in this Section 9(b) shall be construed to increase Guarantor’s obligations hereunder beyond its Maximum Liability.

     SECTION 10. Application of Payments. All payments received by the Agent hereunder shall be applied by the Agent to payment of the Guaranteed Obligations in the following order unless a court of competent jurisdiction shall otherwise direct:

     (a) FIRST, to payment of all costs and expenses of the Agent incurred in connection with the collection and enforcement of the Guaranteed Obligations or of any security interest granted to the Agent in connection with any Collateral securing the Guaranteed Obligations;

     (b) SECOND, to payment of that portion of the Guaranteed Obligations constituting accrued and unpaid interest and fees, pro rata among the Lenders and their Affiliates in accordance with the amount of such accrued and unpaid interest and fees owing to each of them;

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     (c) THIRD, to payment of the principal of the Guaranteed Obligations then due and unpaid from the Principal to any of the Lenders or their Affiliates, Pro Rata among the Lenders and their Affiliates in accordance with the amount of such principal then due and unpaid to each of them; and

     (d) FOURTH, to payment of any Guaranteed Obligations (other than those listed above) Pro Rata among those parties to whom such Guaranteed Obligations are due in accordance with the amounts owing to each of them.

     SECTION 11. Notices. All notices, requests and other communications to any party hereunder shall be given or made by telecopier or other writing and telecopied, or mailed or delivered to the intended recipient at its address or telecopier number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify for such purpose by notice to the Agent in accordance with the provisions of Section 17 of the Credit Agreement. Except as otherwise provided in this Guaranty, all such communications shall be deemed to have been duly given when transmitted by telecopier, or personally delivered or, in the case of a mailed notice sent by certified mail return-receipt requested, on the date set forth on the receipt (provided, that any refusal to accept any such notice shall be deemed to be notice thereof as of the time of any such refusal), in each case given or addressed as aforesaid.

     SECTION 12. No Waivers. No failure or delay by the Agent or any Lender in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Guaranty, the Credit Agreement, any Note, any Rate Management Transaction and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by law.

     SECTION 13. No Duty to Advise. The Guarantor assumes all responsibility for being and keeping itself informed of the Principal’s financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that the Guarantor assumes and incurs under this Guaranty, and agrees that neither the Agent nor any Lender has any duty to advise the Guarantor of information known to it regarding those circumstances or risks.

     SECTION 14. Successors and Assigns. This Guaranty is for the benefit of the Agent and the Lenders and their respective successors and permitted assigns and in the event of an assignment of any amounts payable under the Credit Agreement, any Note, any Rate Management Transaction, or the other Loan Documents, the rights hereunder, to the extent applicable to the indebtedness so assigned, shall be transferred with such indebtedness. This Guaranty shall be binding upon the Guarantor and its successors and permitted assigns.

     SECTION 15. Changes in Writing. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Guarantor and the Agent with the consent of the Majority Lenders.

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     SECTION 16. Costs of Enforcement. The Guarantor agrees to pay all costs and expenses including, without limitation, all court costs and attorneys’ fees and expenses paid or incurred by the Agent or any Lender or any Affiliate of any Lender in endeavoring to collect all or any part of the Guaranteed Obligations from, or in prosecuting any action against, the Principal, the Guarantor or any other guarantor of all or any part of the Guaranteed Obligations.

     SECTION 17. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS. THE GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS (MIDLAND DIVISION) AND OF ANY TEXAS STATE COURT SITTING IN MIDLAND, TEXAS AND FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS GUARANTY (INCLUDING, WITHOUT LIMITATION, ANY OF THE OTHER LOAN DOCUMENTS) OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE GUARANTOR HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.

     SECTION 18. Taxes, etc. All payments required to be made by the Guarantor hereunder shall be made without setoff or counterclaim and free and clear of and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political or taxing authority thereof (but excluding income and franchise taxes), provided, however, that if the Guarantor is required by law to make such deduction or withholding, Guarantor shall forthwith (i) pay to the Agent or any Lender, as applicable, such additional amount as results in the net amount received by the Agent or any Lender, as applicable, equaling the full amount which would have been received by the Agent or any Lender, as applicable, had no such deduction or withholding been made, (ii) pay the full amount deducted to the relevant authority in accordance with applicable law, and (iii) furnish to the Agent or any Lender, as applicable, certified copies of official receipts evidencing payment of such withholding taxes within 30 days after such payment is made.

     SECTION 19. Setoff. Without limiting the rights of the Agent or the Lenders under applicable law, if all or any part of the Guaranteed Obligations is then due, whether pursuant to the occurrence of a Default or otherwise, then the Guarantor authorizes the Agent and the Lenders to apply any sums standing to the credit of the Guarantor with the Agent or any Lender toward the payment of the Guaranteed Obligations.

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     IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed, under seal, by its authorized officer as of the day and year first above written.

GUARANTOR: PARALLEL, L.L.C., a Delaware limited liability company
By:	/s/ Steven D. Foster
	Steven D. Foster
	Chief Financial Officer

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EX-10.24

Exhibit 10.24

THIRD AMENDED AND RESTATED PLEDGE AGREEMENT

     THIS THIRD AMENDED AND RESTATED PLEDGE AGREEMENT (this “Pledge Agreement”), dated as of December 23, 2005, is between PARALLEL, L.L.C. (the “Pledgor”), a Delaware limited liability company whose address is 2215-B Renaissance Dr., Suite 5, Las Vegas, Nevada 89119, and CITIBANK TEXAS, N.A., a national banking association whose address is 1004 N. Big Spring, Suite 121, Midland, Texas 79701, as Administrative Agent (in such capacity, the “Agent”), for the banks and other financial institutions (the “Lenders”) from time to time parties to that certain Third Amended and Restated Credit Agreement dated of even date herewith, among Parallel Petroleum Corporation and Parallel, L.P. (collectively, “Borrowers”), Pledgor, as Guarantor, Citibank Texas, N.A., as Joint Lead Arranger and Administrative Agent, BNP Paribas, as Joint Lead Arranger and Syndication Agent, and the Lenders (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).

WITNESSETH:

     WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make loans to the Borrowers upon the terms and subject to the conditions set forth therein, to be evidenced by the Notes issued by the Borrowers thereunder; and

     WHEREAS, it is a condition precedent to the Agent and Lenders executing the Credit Agreement that the Pledgor execute this Pledge Agreement to amend and restate that certain Second Amended and Restated Pledge Agreement dated September 27, 2004 by and between Agent and Pledgor (the “Original Pledge Agreement”).

     NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Pledgor hereby agrees with the Agent, for the ratable benefit of the Lenders, as follows:

     1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings:

     “Code” means the Uniform Commercial Code from time to time in effect in the State of Texas.

     “Obligations” means the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loans and interest on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrowers or the Pledgor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes, the obligations of the Pledgor to the Agent and Lenders pursuant to that certain Guaranty dated of even date herewith executed by the Pledgor in favor of the Agent for the benefit of the Lenders, and all other obligations and liabilities of any of the Borrowers or the Pledgor to the Agent, to any Lender, or to any Affiliate

of any Lender, whether direct or indirect, joint or several, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with the Credit Agreement, the Notes, any other Loan Document, any other document made, delivered or given in connection herewith or therewith or any Rate Management Transaction, including all renewals, restatements, extensions, substitutions and rearrangements of any of the aforementioned, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to the Agent or to the Lenders that are required to be paid by the Borrowers or the Pledgor pursuant to the terms of the Credit Agreement) or otherwise.

     “Partnership” means Parallel, L.P., a Texas limited partnership.

     “Pledge Agreement” means this Pledge Agreement, as amended, supplemented or otherwise modified from time to time.

     “Pledged Property” means all (i) partnership interests now owned or hereafter acquired by the Pledgor in the Partnership, including, without limitation, the partnership interest evidenced by Certificate No. LP-1, (ii) all rights to receive from time to time Pledgor’s share of profits, income, surplus, compensation, return of capital, distributions and other reimbursements and payments from the Partnership (including, without limitation, specific properties of the Partnership upon dissolution, merger or otherwise) and (iii) all Proceeds of and from any and all of the foregoing.

     “Proceeds” means all “proceeds” as such term is defined in Section 9.102(a)(65) of the Code and, in any event, shall include, without limitation, all dividends, distributions or other income from the Pledged Property, and collections thereon or distributions with respect thereto.

     2. Pledge, Grant of Security Interest. The Pledgor hereby delivers to the Agent, for the ratable benefit of the Lenders, all the Pledged Property and hereby grants to the Agent, for the ratable benefit of the Lenders, a first and prior security interest and Lien in the Pledged Property, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations.

     3. Stock/Partnership Powers. Concurrently with the delivery to the Agent of each certificate representing the Pledged Property, the Pledgor shall deliver an undated stock/ partnership power or assignment in blank covering such certificate, duly executed in blank by the Pledgor with, if the Agent so requests, signature guaranteed.

     4. Representations and Warranties. The Pledgor represents and warrants that:

     (a) the Pledged Property constitutes 99% of the total issued and outstanding partnership interests of the Partnership;

     (b) the Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Property, free of any and all Liens or options in favor of, or claims of, any other person, except Permitted Liens;

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     (c) upon delivery to the Agent of the certificates evidencing the Pledged Property, the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected first priority Lien on the Pledged Property, enforceable as such against all creditors of the Pledgor and any Person purporting to purchase any Pledged Property from the Pledgor;

     (d) with respect to the Pledged Property, the Pledgor has obtained from the Partnership and has delivered to the Agent an Acknowledgment and Consent, substantially in the form attached hereto as Annex 1, executed by the Partnership;

     (e) no consent or authorization of, filing with or other act by or in respect of any Person is required in connection with the execution, delivery or validity of this Pledge Agreement.

     5. Covenants. The Pledgor covenants and agrees with the Agent and the Lenders that, from and after the date of this Pledge Agreement until the Obligations are paid in full and the Commitments are terminated:

     (a) If the Pledgor shall, as a result of its ownership of the Pledged Property, become entitled to receive or shall receive any partnership interest or other security, whether certificated or uncertificated, (including, without limitation, any certificate representing a dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any portion of the Pledged Property, or otherwise in respect thereof, the Pledgor shall accept the same as the agent of the Agent and the Lenders, hold the same in trust for the Agent and the Lenders, and deliver the same forthwith to the Agent in the exact form received, duly indorsed by the Pledgor to the Agent, if required, together with an undated stock/ partnership power or assignment in blank covering such certificate duly executed in blank by the Pledgor and with, if the Agent so requests, signature guaranteed, to be held by the Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Property upon the liquidation or dissolution of the Partnership shall be paid over to the Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Property or any property shall be distributed upon or with respect to the Pledged Property pursuant to the recapitalization or reclassification of the capital of the Partnership, or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Agent to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Property shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Agent, hold such money or property in trust for the Lenders, segregated from other funds of the Pledgor, as additional collateral security for the Obligations.

     (b) Without the prior written consent of the Agent, the Pledgor will not (i) vote to enable, or take any other action to permit, the Partnership to issue any partnership interests or other securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any partnership interest, or other securities of any nature of the Partnership, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with

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respect to, the Pledged Property, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Property, or any interest therein, except for Permitted Liens. The Pledgor will defend the right, title and interest of the Agent and the Lenders in and to the Pledged Property against the claims and demands of all Persons whomsoever.

     (c) At any time and from time to time, upon the written request of the Agent, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Pledged Property shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent, to be held as Pledged Property pursuant to this Pledge Agreement.

     (d) The Pledgor agrees to pay, and to save the Agent and the Lenders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Pledged Property or in connection with any of the transactions contemplated by this Pledge Agreement.

     (e) The Agent shall have the right, without the consent or joinder of the Pledgor, to execute and file with any governmental authority such financing statements, financing statement amendments and continuation statements as may, in the sole discretion of the Agent, be necessary or advisable to maintain, perfect or otherwise evidence the Lien of the Lenders in and to any of the Pledged Property. The Pledgor hereby expressly authorizes the Agent to file any such financing statement without the signature of the Pledgor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Pledge Agreement shall be sufficient as a financing statement for filing in any jurisdiction. In addition, and without limiting the foregoing, this Pledge Agreement may be attached to and made a part of any financing statement filed by the Agent.

     6. Cash Dividends and Distributions, Voting Rights. Unless an Event of Default shall have occurred and be continuing and the Agent shall have given notice to the Pledgor of the Agent’s intent to exercise its corresponding rights pursuant to paragraph 7 below, the Pledgor shall be permitted to receive all cash dividends and distributions paid in the normal course of business of the Partnership, to the extent permitted in the Credit Agreement and the other Loan Documents, in respect of the Pledged Property and to exercise all voting and partnership rights with respect to the Pledged Property; provided, however, that no vote shall be cast or partnership right exercised or other action taken which, in the Agent’s reasonable judgment, would impair the Pledged Property or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, the Notes, the Security Instruments, this Pledge Agreement or the other Loan Documents.

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     7. Rights of the Lenders and the Agent.

     (a) If an Event of Default shall occur and be continuing and the Agent shall give notice of its intent to exercise such rights to the Pledgor, (i) the Agent shall have the right to receive any and all dividends and distributions paid in respect of the Pledged Property and make application thereof to the Obligations in such order as the Agent may determine and (ii) the Pledged Property or portion thereof designated by the Agent shall be registered in the name of the Agent or its nominee, and the Agent or its nominee may thereafter exercise (A) all voting, partnership and other rights pertaining to the Pledged Property at any meeting of partners of the Partnership or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to the Pledged Property as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Property upon the merger, conversion, consolidation, reorganization, recapitalization or other fundamental change in the entity structure of the Partnership , or upon the exercise by the Pledgor or the Agent of any rights, privileges or options pertaining to the Pledged Property, and in connection therewith, the right to deposit and deliver any and all of the Pledged Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine) all without liability except to account for property actually received by it, but the Agent shall have no duty to the Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.

     (b) The rights of the Agent and the Lenders hereunder shall not be conditioned or contingent upon the pursuit by the Agent or any Lender of any right or remedy against the Borrowers, any Guarantor or any other Person which may be or become liable in respect of all or any part of the Obligations or against any collateral security or guarantee therefor or right of offset with respect thereto. Neither the Agent nor any Lender shall be liable for any failure to demand, collect or realize upon all or any part of the Pledged Property or for any delay in doing so, nor shall the Agent or any Lender be under any obligation to sell or otherwise dispose of any Pledged Property upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Pledged Property or any part thereof.

     8. Remedies. If an Event of Default shall occur and be continuing, the Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, the Partnership or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived) may in such circumstances forthwith collect, receive, appropriate and realize upon the Pledged Property, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Pledged Property or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker’s board or office of the Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to

5

purchase the whole or any part of the Pledged Property so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived and released. The Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Pledged Property or in any way relating to the Pledged Property or the rights of the Agent and the Lenders hereunder, including, without limitation, reasonable attorneys’ fees and disbursements of counsel to the Agent, to the payment in whole or in part of the Obligations, in such order as the Agent may elect, and only after such application and after the payment by the Agent of any other amount required by any provision of law, including, without limitation, Section 9.615(a)(3) of the Code, need the Agent account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Pledged Property shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

     9. Private Sales.

     (a) If the Agent shall determine to exercise its right to sell any or all of the Pledged Property pursuant to paragraph 8 hereof, the Pledgor recognizes that the Agent may be unable to effect a public sale of any or all the Pledged Property, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the “Securities Act”), and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Agent shall be under no obligation to delay a sale of any of the Pledged Property for the period of time necessary to permit the Partnership to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the Partnership would agree to do so.

     (b) The Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Property pursuant to this paragraph 9 valid and binding and in compliance with any and all other applicable requirements of law. The Pledgor further agrees that a breach of any of the covenants contained in this paragraph 9 will cause irreparable injury to the Agent and the Lenders, that the Agent and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this paragraph 9 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants, except for a defense that no Event of Default has occurred under the Credit Agreement.

     10. Limitation on Duties Regarding Pledged Property. The Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Pledged Property in its possession, under

6

Section 9.207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar securities and property for its own account. Neither the Agent, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Pledged Property or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Pledged Property upon the request of the Pledgor or otherwise.

     11. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Pledged Property are irrevocable and powers coupled with an interest.

     12. Severability. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     13. Paragraph Headings. The paragraph headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

     14. No Waiver, Cumulative Remedies. Neither the Agent nor any Lender shall by any act (except by a written instrument pursuant to paragraph 15 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default under the Credit Agreement or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or such Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.

     15. Waivers and Amendments: Successors and Assigns: Governing Law. None of the terms or provisions of this Pledge Agreement may be amended, supplemented or otherwise modified, except by a written instrument executed by the Pledgor and the Agent, provided that any provision of this Pledge Agreement may be waived by the Agent in a letter or agreement executed by the Agent or by telex or facsimile transmission from the Agent. This Pledge Agreement shall be binding upon the permitted successors and assigns of the Pledgor and shall inure to the benefit of the Agent and the Lenders and their respective successors and assigns.

     THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

     16. Notices. Notices by the Agent to the Pledgor or the Partnership may be given by mail, by telegraph or by facsimile transmission, addressed or transmitted to the appropriate party at the Pledgor’s address set forth in the preamble of this Pledge Agreement and shall be effective (a) in the case of mail, three days after deposit in the postal system, postage prepaid, (b) in the case of facsimile notices, when

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sent and (c) in the case of telegraphic notice, when delivered to the telegraph company. The Pledgor and the Partnership may change their respective addresses and transmission numbers by written notice to the Agent.

     17. Irrevocable Authorization and Instruction to Partnership. The Pledgor hereby authorizes and instructs the Partnership to comply with any instruction received by it from the Agent in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that the Partnership shall be fully protected in so complying.

     18. Authority of Agent. The Pledgor acknowledges that the rights and responsibilities of the Agent under this Pledge Agreement with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Pledge Agreement shall, as between the Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Agent and the Pledgor, the Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and neither the Pledgor nor the Partnership shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

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     19. Amendment and Restatement of Original Pledge Agreement. This Pledge Agreement constitutes an amendment and restatement, but not a replacement, of the Original Pledge Agreement in its entirety, and renews and extends all liens, rights and security interests existing by virtue of the Original Pledge Agreement without interruption or lapse.

     [THE REMAINDER OF THIS PAGE INTENTINALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above written.

PARALLEL, L.L.C.
By:	/s/ Steven D. Foster
	Steven D. Foster
	Chief Financial Officer
CITIBANK TEXAS, N.A., as Administrative Agent and as a Lender
By:	/s/ Frank K. Stowers
	Frank K. Stowers
	Senior Vice President

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ANNEX 1

ACKNOWLEDGMENT AND CONSENT

     The Partnership referred to in the foregoing Pledge Agreement hereby (i) consents to the pledge of the Pledged Property and waives any and all restrictions applicable thereto, (iii) acknowledges receipt of a copy of the Pledge Agreement and (iii) agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. The Partnership agrees to notify the Agent promptly in writing of the occurrence of any of the events described in paragraph 5(a) of the Pledge Agreement.

PARALLEL,	L.P.
By:	Parallel Petroleum Corporation,
	its general partner
By:
	Steven D. Foster
	Chief Financial Officer

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EX-10.25

Exhibit 10.25

SECOND LIEN GUARANTEE AND COLLATERAL AGREEMENT

Dated as of
November 15, 2005

made by

Parallel Petroleum Corporation,
Parallel, L.P.

and

each of the other Obligors (as defined herein)

in favor of

BNP Paribas,
as Administrative Agent

ALL LIENS AND RIGHTS GRANTED BY THIS INSTRUMENT SHALL, TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AND SUBORDINATION AGREEMENT DATED NOVEMBER 15, 2005 BY AND AMONG PARALLEL PETROLEUM CORPORATION, PARALLEL, L.P., PARALLEL, L.L.C., BNP PARIBAS, AS THE SUBORDINATE ADMINISTRATIVE AGENT AND CITIBANK, TEXAS, N.A., AS THE SENIOR ADMINISTRATIVE AGENT, BE SUBORDINATE AND JUNIOR TO ALL LIENS AND RIGHTS GRANTED BY OBLIGOR TO SECURE THE SENIOR INDEBTEDNESS REGARDLESS OF THE RELATIVE PRIORITY OF SUCH LIENS, THE PROVISIONS OF WHICH AGREEMENT BEING INCORPORATED HEREIN AND BY THIS REFERENCE BEING MADE A PART HEREOF.

TABLE OF CONTENTS

			Page
ARTICLE I Definitions				1
	Section 1.01	Definitions		1
	Section 1.02	Other Definitional Provisions		3
	Section 1.03	Rules of Interpretation		4
ARTICLE II Guarantee				4
	Section 2.01	Guarantee		4
	Section 2.02	Right of Contribution		4
	Section 2.03	No Subrogation Amendments, Etc. with respect to the Borrower		5
	Section 2.04	Obligations		5
	Section 2.05	Waivers		6
	Section 2.06	Guarantee Absolute and Unconditional		6
	Section 2.07	Reinstatement		7
	Section 2.08	Payments		8
ARTICLE III Grant of Security Interest				8
	Section 3.01	Grant of Security Interest		8
	Section 3.02	Transfer of Pledged Securities		8
ARTICLE IV Representations and Warranties				8
	Section 4.01	Representations in Credit Agreement		8
	Section 4.02	Title; No Other Liens		9
	Section 4.03	Perfected Priority Liens		9
	Section 4.04	Obligor Information		9
	Section 4.05	Pledged Securities		9
	Section 4.06	Benefit to the Guarantor		10
	Section 4.07	Solvency		10
ARTICLE V Covenants				10
	Section 5.01	Covenants in Credit Agreement Maintenance of Perfected Security Interest;		10
	Section 5.02	Further Documentation		10
	Section 5.03	Changes in Locations, Name, Etc		11
	Section 5.04	Pledged Securities		11
ARTICLE VI Remedial Provisions				13
	Section 6.01	Code and Other Remedies		13
	Section 6.02	Pledged Securities		14
	Section 6.03	Registration Rights		16
	Section 6.04	Private Sales of Pledged Securities		16
	Section 6.05	Waiver; Deficiency		17
	Section 6.06	Non-Judicial Enforcement		17
ARTICLE VII The Administrative Agent				17
	Section 7.01	Administrative Agent's Appointment as Attorney-in-Fact, Etc		17
	Section 7.02	Duty of Administrative Agent		19
	Section 7.03	Filing of Financing Statements		19
	Section 7.04	Authority of Administrative Agent		20
ARTICLE VIII Subordination of Indebtedness				20
	Section 8.01	Subordination of All Obligor Claims		20

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			Page
	Section 8.02	Claims in Bankruptcy		20
	Section 8.03	Payments Held in Trust		21
	Section 8.04	Liens Subordinate		21
	Section 8.05	Notation of Records		21
ARTICLE IX Miscellaneous				21
	Section 9.01	Waiver		21
	Section 9.02	Notices		21
	Section 9.03	Payment of Expenses, Indemnities, Etc		21
	Section 9.04	Amendments in Writing		22
	Section 9.05	Successors and Assigns		22
	Section 9.06	Survival; Revival; Reinstatement		22
	Section 9.07	Counterparts; Integration; Effectiveness		23
	Section 9.08	Severability		23
	Section 9.09	Set-Off		23
	Section 9.10	Governing Law; Submission to Jurisdiction		24
	Section 9.11	Headings		25
	Section 9.12	Acknowledgments		25
	Section 9.13	Additional Obligors and Pledgors		26
	Section 9.14	Releases		26
	Section 9.15	Acceptance		27
	Section 9.16	Intercreditor Agreement		27

ANNEXES:

I            Form of Assumption Agreement

II            Form of Supplement

EXHIBITS:

Exhibit A            Form of Acknowledgment and Consent

SCHEDULES:

1	Notice Addresses of Obligors
2	Description of Pledged Securities
3	Filings and Other Actions Required to Perfect Security Interests
4	Location of Jurisdiction of Organization and Chief Executive Office

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     This SECOND LIEN GUARANTEE AND COLLATERAL AGREEMENT is dated as of November 15, 2005 made by Parallel Petroleum Corporation, a Delaware Corporation (“PPC”), Parallel, L.P., a Texas limited partnership (“PLP” and with PPC, the “Borrowers”), and each of the signatories hereto (the Borrowers and each of the signatories hereto, together with any other Subsidiary of the Borrowers that becomes a party hereto from time to time after the date hereof, the “Obligors”), in favor of BNP Paribas, as administrative agent (in such capacity, together with its successors in such capacity, the “Administrative Agent”), for the banks and other financial institutions (the “Lenders”) from time to time parties to the Second Lien Term Loan Agreement dated of even date herewith (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among the Borrowers, the Lenders, the Administrative Agent, and the other Agents party thereto.

R E C I T A L S

     A. The Borrowers, the Administrative Agent and other financial institutions named and defined therein as lenders and agents, are parties to that certain Second Lien Term Loan Agreement dated as of November 15, 2005, pursuant to which such lenders will provide certain loans to the Borrowers (as heretofore amended, modified or supplemented, the “Credit Agreement”).

     B. It is a condition precedent to the effectiveness of the Credit Agreement that the parties hereto enter into this Second Lien Guarantee and Collateral Agreement, subject to the terms and conditions of this Agreement.

     C. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and of the loans hereinafter referred to, the parties hereto agree as follows:

ARTICLE I
Definitions

     Section 1.01 Definitions.

          (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein have the meanings given to them in the Credit Agreement, and all uncapitalized terms which are defined in the UCC on the date hereof are used herein as so defined.

          (b) The following terms have the following meanings:

     “Agreement” means this Second Lien Guarantee and Collateral Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

     “Bankruptcy Code” means Title 11, United States Code, as amended from time to time.

     “Borrower Obligations” means the collective reference to the payment and performance when due of all indebtedness, liabilities, obligations and undertakings of the Borrowers and their Subsidiaries (including, without limitation, all Indebtedness) of every kind or description arising out of or outstanding under, advanced or issued pursuant, or evidenced by, the Guaranteed Documents, including, without limitation, the unpaid principal of and interest on the Loans and

all other obligations and liabilities of the Borrowers and their Subsidiaries (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrowers, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to the Guaranteed Creditors, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, arising out of or outstanding under, advanced or issued pursuant, or evidenced by, the Guaranteed Documents, whether on account of principal, interest, premium, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all costs, fees and disbursements of counsel to the Guaranteed Creditors that are required to be paid by the Borrowers pursuant to the terms of any Guaranteed Documents).

     “Collateral” has the meaning assigned such term in Section 3.01.

     “Guaranteed Creditors” means the collective reference to the Administrative Agent and the Lenders.

     “Guaranteed Documents” means the collective reference to the Credit Agreement, the other Loan Documents, and any other document made, delivered or given in connection with any of the foregoing.

     “Guarantor Obligations” means with respect to any Guarantor, the collective reference to (a) the Borrower Obligations and (b) the payment and performance when due of all indebtedness, liabilities, obligations and undertakings of such Guarantor of every kind or description, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, arising out of or outstanding under, advanced or issued pursuant, or evidenced by, any Guaranteed Document to which such Guarantor is a party, in each case, whether on account of principal, interest, guarantee obligations, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to any Guaranteed Creditor under any Guaranteed Document).

     “Guarantors” means the collective reference to each Obligor other than the Borrowers.

     “Issuers” means the collective reference to each issuer of a Pledged Security.

     “LLC” means, with respect to each Pledgor, each limited liability company described or referred to in Schedule 2 in which such Pledgor has an interest.

     “LLC Agreement” means each operating agreement relating to an LLC, as each agreement has heretofore been, and may hereafter be, amended, restated, supplemented or otherwise modified from time to time.

     “Obligations” means: (a) in the case of the Borrowers, the Borrower Obligations and (b) in the case of each Guarantor, its Guarantor Obligations.

     “Obligor Claims” has the meaning assigned to such term in Section 8.01.

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     “Partnership” means, with respect to each Pledgor, each partnership described or referred to in Schedule 2 in which such Pledgor has an interest.

     “Partnership Agreement” means each partnership agreement governing a Partnership, as each such agreement has heretofore been, and may hereafter be, amended, restated, supplemented or otherwise modified.

     “Pledged LLC Interests” means, with respect to each Pledgor, all right, title and interest of such Pledgor as a member of each LLC and all right, title and interest of any Pledgor in, to and under each LLC Agreement.

     “Pledged Partnership Interests” means, with respect to each Pledgor, all right, title and interest of such Pledgor as a limited or general partner in all Partnerships and all right, title and interest of any Pledgor in, to and under the Partnership Agreements.

     “Pledged Securities” means: (a) the Equity Interests described or referred to in Schedule 2 (as the same may be supplemented from time to time pursuant to a Supplement in substantially the form of Annex II); and (b) (i) the certificates or instruments, if any, representing such Equity Interests, (ii) all dividends (cash, Equity Interests or otherwise), cash, instruments, rights to subscribe, purchase or sell and all other rights and Property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities, (iii) all replacements, additions to and substitutions for any of the Property referred to in this definition, including, without limitation, claims against third parties, (iv) the proceeds, interest, profits and other income of or on any of the Property referred to in this definition, (v) all security entitlements in respect of any of the foregoing, if any and (vi) all books and records relating to any of the Property referred to in this definition.

     “Pledgor” means any Obligor that now or hereafter pledges Pledged Securities hereunder.

     “Proceeds” means all “proceeds” as such term is defined in Section 9-102(65) of the Uniform Commercial Code in effect in the State of Texas on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions or payments with respect thereto.

     “Securities Act” means the Securities Act of 1933, as amended.

     “UCC” means the Uniform Commercial Code as from time to time in effect in the State of Texas; provided, however, that, in the event that, by reason of mandatory provisions of law, any of the attachment, perfection or priority of the Administrative Agent’s and the Guaranteed Creditors’ security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Texas, the term “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, the effect thereof or priority and for purposes of definitions related to such provisions.

     Section 1.02 Other Definitional Provisions. Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Pledgor, refer to such Pledgor’s Collateral or the relevant part thereof.

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     Section 1.03 Rules of Interpretation. Section 1.04 and Section 1.05 of the Credit Agreement are hereby incorporated herein by reference and shall apply to this Agreement, mutatis mutandis.

ARTICLE II
Guarantee

     Section 2.01 Guarantee.

          (a) Each of the Guarantors hereby jointly and severally, unconditionally and irrevocably, guarantees to the Guaranteed Creditors and each of their respective successors, indorsees, transferees and assigns, the prompt and complete payment in cash and performance by the Borrowers when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations. This is a guarantee of payment and not collection and the liability of each Guarantor is primary and not secondary.

          (b) Anything herein or in any other Guaranteed Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Guaranteed Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.02).

          (c) Each Guarantor agrees that the Borrower Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this ARTICLE II or affecting the rights and remedies of any Guaranteed Creditor hereunder.

          (d) Each Guarantor agrees that if the maturity of the Borrower Obligations is accelerated by bankruptcy or otherwise, such maturity shall also be deemed accelerated for the purpose of this guarantee without demand or notice to such Guarantor. The guarantee contained in this ARTICLE II shall remain in full force and effect until all the Borrower Obligations shall have been satisfied by payment in full in cash.

          (e) No payment made by any Obligor, any other guarantor or any other Person or received or collected by any Guaranteed Creditor from any Obligor, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Borrower Obligations or any payment received or collected from such Guarantor in respect of the Borrower Obligations), remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until the Borrower Obligations are paid in full in cash.

     Section 2.02 Right of Contribution. Each Guarantor hereby agrees that to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each

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Guarantor’s right of contribution shall be subject to the terms and conditions of Section 2.03. The provisions of this Section 2.02 shall in no respect limit the obligations and liabilities of any Guarantor to the Guaranteed Creditors, and each Guarantor shall remain liable to the Guaranteed Creditors for the full amount guaranteed by such Guarantor hereunder.

     Section 2.03 No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by any Guaranteed Creditor, no Guarantor shall be entitled to be subrogated to any of the rights of any Guaranteed Creditor against either Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by any Guaranteed Creditor for the payment of the Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any indemnity, exoneration, participation, contribution or reimbursement from either Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Guaranteed Creditors on account of the Borrower Obligations are irrevocably and indefeasibly paid in full in cash. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have been irrevocably and indefeasibly paid in full in cash, such amount shall be held by such Guarantor in trust for the Guaranteed Creditors, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against the Borrower Obligations, whether matured or unmatured, in accordance with Section 10.02(c) of the Credit Agreement.

     Section 2.04 Amendments, Etc. with respect to the Borrower Obligations. Each Guarantor shall remain obligated hereunder, and such Guarantor’s obligations hereunder shall not be released, discharged or otherwise affected, notwithstanding that, without any reservation of rights against any Guarantor and without notice to, demand upon or further assent by any Guarantor (which notice, demand and assent requirements are hereby expressly waived by such Guarantor), (a) any demand for payment of any of the Borrower Obligations made by any Guaranteed Creditor may be rescinded by such Guaranteed Creditor or otherwise and any of the Borrower Obligations continued; (b) the Borrower Obligations, the liability of any other Person upon or for any part thereof or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by, or any indulgence or forbearance in respect thereof granted by, any Guaranteed Creditor; (c) any Guaranteed Document may be amended, modified, supplemented or terminated, in whole or in part, as the Guaranteed Creditors may deem advisable from time to time; (d) any collateral security, guarantee or right of offset at any time held by any Guaranteed Creditor for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released; (e) any additional guarantors, makers or endorsers of the Borrower Obligations may from time to time be obligated on the Borrower Obligations or any additional security or collateral for the payment and performance of the Borrower Obligations may from time to time secure the Borrower Obligations; and (f) any other event shall occur which constitutes a defense or release of sureties generally. No Guaranteed Creditor shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this ARTICLE II or any Property subject thereto.

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     Section 2.05 Waivers. Each Guarantor hereby waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by any Guaranteed Creditor upon the guarantee contained in this ARTICLE II or acceptance of the guarantee contained in this ARTICLE II; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this ARTICLE II and no notice of creation of the Borrower Obligations or any extension of credit already or hereafter contracted by or extended to the Borrowers need be given to any Guarantor; and all dealings between the Borrowers and any of the Guarantors, on the one hand, and the Guaranteed Creditors, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this ARTICLE II. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon either Borrower or any of the Guarantors with respect to the Borrower Obligations.

     Section 2.06Guarantee Absolute and Unconditional.

          (a) Each Guarantor understands and agrees that the guarantee contained in this ARTICLE II is, and shall be construed as, a continuing, completed, absolute and unconditional guarantee of payment, and each Guarantor hereby waives any defense of a surety or guarantor or any other obligor on any obligations arising in connection with or in respect of any of the following and hereby agrees that its obligations hereunder shall not be discharged or otherwise affected as a result of, any of the following:

               (i) the invalidity or unenforceability of any Guaranteed Document, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by any Guaranteed Creditor;

               (ii) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrowers or any other Person against any Guaranteed Creditor;

               (iii) the insolvency, bankruptcy arrangement, reorganization, adjustment, composition, liquidation, disability, dissolution or lack of power of either Borrower or any other Guarantor or any other Person at any time liable for the payment of all or part of the Obligations, including any discharge of, or bar or stay against collecting, any Obligation (or any part of them or interest therein) in or as a result of such proceeding;

               (iv) any sale, lease or transfer of any or all of the assets of the either Borrower or any other Guarantor, or any changes in the shareholders of either Borrower or any Guarantor;

               (v) any change in the corporate existence (including its constitution, laws, rules, regulations or power), structure or ownership of any Obligor;

               (vi) the fact that any Collateral or Lien contemplated or intended to be given, created or granted as security for the repayment of the Obligations shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other Lien, it being recognized and agreed by each of the Guarantors that it is not entering into this Agreement in

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reliance on, or in contemplation of the benefits of, the validity, enforceability, collectability or value of any of the Collateral for the Obligations;

               (vii) the absence of any attempt to collect the Obligations or any part of them from any Obligor;

               (viii) (A) any Guaranteed Creditor’s election, in any proceeding instituted under chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code; (B) any borrowing or grant of a Lien by either Borrower, as debtor-in-possession, or extension of credit, under Section 364 of the Bankruptcy Code; (C) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of any Guaranteed Creditor’s claim (or claims) for repayment of the Obligations; (D) any use of cash collateral under Section 363 of the Bankruptcy Code; (E) any agreement or stipulation as to the provision of adequate protection in any bankruptcy proceeding; (F) the avoidance of any Lien in favor of the Guaranteed Creditors or any of them for any reason; or (G) failure by any Guaranteed Creditor to file or enforce a claim against either Borrower or its estate in any bankruptcy or insolvency case or proceeding; or

               (ix) any other circumstance or act whatsoever, including any action or omission of the type described in Section 2.04 (with or without notice to or knowledge of such Borrower or such Guarantor), which constitutes, or might be construed to constitute, an equitable or legal discharge of either Borrower for the Borrower Obligations, or of such Guarantor under the guarantee contained in this ARTICLE II, in bankruptcy or in any other instance.

     (b) When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, any Guaranteed Creditor may, but shall be under no obligation to, join or make a similar demand on or otherwise pursue or exhaust such rights and remedies as it may have against either Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by any Guaranteed Creditor to make any such demand, to pursue such other rights or remedies or to collect any payments from either Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of either Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of any Guaranteed Creditor against any Guarantor. For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

     Section 2.07 Reinstatement. The guarantee contained in this ARTICLE II shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by any Guaranteed Creditor upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of either Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, either Borrower or any Guarantor or any substantial part of its Property, or otherwise, all as though such payments had not been made.

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     Section 2.08 Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Administrative Agent, for the ratable benefit of the Guaranteed Creditors, without set-off, deduction or counterclaim in dollars, in immediately available funds, at the offices of the Administrative Agent specified in Section 12.01 of the Credit Agreement.

ARTICLE III
Grant of Security Interest

     Section 3.01 Grant of Security Interest. Each Pledgor hereby pledges, assigns and transfers to the Administrative Agent, and hereby grants to the Administrative Agent, for the ratable benefit of the Guaranteed Creditors, a second lien security interest in all of the following Property now owned or at any time hereafter acquired by such Pledgor or in which such Pledgor now has or at any time in the future may acquire any right, title or interest (collectively, the “Collateral”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Pledgor’s Obligations:

     (1) all Pledged Securities;

     (2) all books and records pertaining to the Collateral; and

     (3) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing.

     Section 3.02 Transfer of Pledged Securities. Upon termination of all loans and commitments under the Senior Revolving Credit Documents, all certificates or instruments representing or evidencing the Pledged Securities shall be delivered to and held pursuant hereto by the Administrative Agent or a Person designated by the Administrative Agent and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, and accompanied by any required transfer tax stamps to effect the pledge of the Pledged Securities to the Administrative Agent. During the continuance of an Event of Default, the Administrative Agent shall have the right, at any time in its discretion and without notice, to transfer to or to register in the name of the Administrative Agent or any of its nominees any or all of the Pledged Securities, subject only to the revocable rights specified in Section 6.04. In addition, during the continuance of an Event of Default, the Administrative Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Securities for certificates or instruments of smaller or larger denominations.

ARTICLE IV
Representations and Warranties

     To induce the Administrative Agent and the Lenders to enter into the Credit Agreement, each Obligor hereby represents and warrants to the Administrative Agent and each Lender that:

     Section 4.01 Representations in Credit Agreement. In the case of each Guarantor, the representations and warranties set forth in Article VII of the Credit Agreement as they relate to such Guarantor or to the Loan Documents to which such Guarantor is a party are true and correct in all material respects, provided that each reference in each such representation and warranty to

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the Borrowers’ knowledge shall, for the purposes of this Section 4.01, be deemed to be a reference to such Guarantor’s knowledge.

     Section 4.02 Title; No Other Liens. Except for the security interest granted to the Administrative Agent for the ratable benefit of the Guaranteed Creditors pursuant to this Agreement and except for Liens permitted under the Credit Agreement, such Pledgor is the record and beneficial owner of its respective items of the Collateral free and clear of any and all Liens and has the power to transfer each item of the Collateral in which a Lien is granted by it hereunder, free and clear of any Lien. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Administrative Agent, for the ratable benefit of the Guaranteed Creditors, pursuant to this Agreement or the Security Instruments and except for such financing statements or notices relating to Liens permitted under the Credit Agreement.

     Section 4.03 Perfected Priority Liens. The security interests granted pursuant to this Agreement (a) upon the completion of the filings and the other actions specified on Schedule 3 constitute valid perfected security interests in all of the Collateral in favor of the Administrative Agent, for the ratable benefit of the Guaranteed Creditors, as collateral security for such Pledgor’s Obligations, enforceable in accordance with the terms hereof against all creditors of such Pledgor and any Persons purporting to purchase any Collateral from such Pledgor and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for Liens securing the loans and commitments under the Senior Revolving Credit Documents.

     Section 4.04 Obligor Information. On the date hereof, the correct legal name of such Obligor, all names and trade names that such Obligor has used in the last five years, such Obligor’s jurisdiction of organization and each jurisdiction of organization of such Obligor over the last five years, organizational number, taxpayor identification number, and the location(s) of such Obligor’s chief executive office or sole place of business over the last five years are specified on Schedule 4.

     Section 4.05 Pledged Securities.

          (a) The Pledged Securities required to be pledged hereunder and under the Credit Agreement by such Pledgor are listed in Schedule 2. The shares of Pledged Securities pledged by such Pledgor hereunder constitute all the issued and outstanding shares of all classes of the Equity Interests of each Issuer owned by such Pledgor (or in the case of any Issuer that is a Foreign Subsidiary, 65% of all the issued and outstanding shares of all classes of the Equity Interests of such Issuer). All the shares of the Pledged Securities have been duly and validly issued and are fully paid and nonassessable; and such Pledgor is the record and beneficial owner of, has good title to, and has the power to transfer, the Pledged Securities pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by the Liens securing the loans and commitments under the Senior Revolving Credit Documents and this Agreement.

          (b) There are no restrictions on transfer (that have not been waived or otherwise consented to) in the applicable LLC Agreement governing any Pledged LLC Interest and the applicable Partnership Agreement governing any Pledged Partnership Interest or any

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other agreement relating thereto which would limit or restrict (i) the grant of a security interest in the Pledged LLC Interests and the Pledged Partnership Interests, (ii) the perfection of such security interest or (iii) the exercise of remedies in respect of such perfected security interest in the Pledged LLC Interests and the Pledged Partnership Interests, in each case, as contemplated by this Agreement, except for such restrictions set forth in the Senior Revolving Credit Documents. Upon the exercise of remedies in respect of the Pledged LLC Interests and the Pledged Partnership Interests, a transferee or assignee of a membership interest or partnership interest, as the case may be, of such LLC or Partnership, as the case may be, shall become a member or partner, as the case may be, of such LLC or Partnership, as the case may be, entitled to participate in the management thereof and, upon the transfer of the entire interest of such Pledgor, such Pledgor ceases to be a member or partner, as the case may be.

     Section 4.06 Benefit to the Guarantor. The Borrowers are members of an affiliated group of companies that includes each Guarantor and the Borrowers and the other Guarantors are engaged in related businesses. Each Guarantor is a Subsidiary of one of the Borrowers and its guarantee and surety obligations pursuant to this Agreement reasonably may be expected to benefit, directly or indirectly, it; and it has determined that this Agreement is necessary and convenient to the conduct, promotion and attainment of the business of such Guarantor and the Borrowers.

     Section 4.07 Solvency. Each Obligor (a) is not insolvent as of the date hereof and will not be rendered insolvent as a result of this Agreement (after giving effect to Section 2.02), (b) is not engaged in business or a transaction, or about to engage in a business or a transaction, for which any Property remaining with it constitute unreasonably small capital, and (c) does not intend to incur, or believe it will incur, Debt that will be beyond its ability to pay as such Debt matures.

ARTICLE V
Covenants

     Each Obligor covenants and agrees with the Administrative Agent and the Lenders that, from and after the date of this Agreement until the Borrower Obligations shall have been paid in full in cash:

     Section 5.01 Covenants in Credit Agreement. In the case of each Guarantor, such Guarantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default is caused by the failure to take such action or to refrain from taking such action by such Guarantor or any of its Subsidiaries.

     Section 5.02 Maintenance of Perfected Security Interest; Further Documentation. In the case of each Pledgor, such Pledgor agrees that:

          (a) it shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 4.03 and shall defend such security interest against the claims and demands of all Persons whomsoever;

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          (b) it will furnish to the Administrative Agent and the Lenders from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail;

          (c) at any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of such Pledgor, it will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably deem necessary for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the delivery of certificated securities (subject to Section 3.02) and the filing of any financing or continuation statements under the UCC (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby.

     Section 5.03 Changes in Locations, Name, Etc. Such Obligor recognizes that financing statements pertaining to the Collateral have been or may be filed where such Obligor maintains any Collateral or is organized. Without limitation of Section 8.01(n) of the Credit Agreement or any other covenant herein, such Obligor will not cause or permit any change in its (a) corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its Properties, (b) the location of its chief executive office or principal place of business, (c) its identity or corporate structure or in the jurisdiction in which it is incorporated or formed, (d) its jurisdiction of organization or its organizational identification number in such jurisdiction of organization or (e) its federal taxpayer identification number, unless, in each case, such Obligor shall have first (i) notified the Administrative Agent of such change at least thirty (30) days prior to the effective date of such change, and (ii) taken all action reasonably requested by the Administrative Agent for the purpose of maintaining the perfection and priority of the Administrative Agent’s security interests under this Agreement. In any notice furnished pursuant to this Section 5.03, such Obligor will expressly state in a conspicuous manner that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of the Administrative Agent’s security interest in the Collateral. At the request of the Administrative Agent, on or prior to the occurrence of such event, the Borrowers will provide to the Administrative Agent and the Lenders an opinion of counsel, in form and substance reasonably satisfactory to the Administrative Agent, to the effect that such event will not impair the validity of the security interests hereunder, the perfection and priority thereof, the enforceability of the Loan Documents, and such other matters as may be reasonably requested by the Administrative Agent.

     Section 5.04 Pledged Securities. Upon the termination of all loans and commitments under the Senior Revolving Credit Documents, each Pledgor agrees that:

          (a) if such Pledgor shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Equity Interests of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Securities, or otherwise in respect thereof, such Pledgor shall accept the same as the agent of the Guaranteed Creditors, hold the same in trust for the

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Guaranteed Creditors, segregated from other Property of such Pledgor, and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by such Pledgor to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Pledgor and with, if the Administrative Agent so requests, signature guaranteed, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations;

          (b) without the prior written consent of the Administrative Agent, such Pledgor will not (i) unless otherwise expressly permitted hereby or under the other Loan Documents, vote to enable, or take any other action to permit, any Issuer to issue any Equity Interests of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any Equity Interests of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Securities or Proceeds thereof (except pursuant to a transaction expressly permitted by the Credit Agreement), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Securities or Proceeds thereof, or any interest therein, except for Liens securing the loans and commitments under the Senior Revolving Credit Documents and the security interests created by this Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of such Pledgor or the Administrative Agent to sell, assign or transfer any of the Pledged Securities or Proceeds thereof;

          (c) in the case of each Pledgor that is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Pledged Securities issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify the Administrative Agent promptly in writing of the occurrence of any of the events described in Section 5.04(a) with respect to the Pledged Securities issued by it and (iii) the terms of Sections Section 6.02(a) and Section 6.04 shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.02(d) or Section 6.04 with respect to the Pledged Securities issued by it. In the case of any Issuer that is not a Pledgor hereunder, such Pledgor shall promptly cause such Issuer to execute and deliver to the Administrative Agent an Acknowledgment and Consent in substantially the form of Exhibit A;

          (d) in the case of each Pledgor that is a partner in a Partnership, such Pledgor hereby consents to the extent required by the applicable Partnership Agreement to the pledge by each other Pledgor, pursuant to the terms hereof, of the Pledged Partnership Interests in such Partnership and to the transfer of such Pledged Partnership Interests to the Administrative Agent or its nominee and to the substitution of the Administrative Agent or its nominee as a substituted partner in such Partnership with all the rights, powers and duties of a general partner or a limited partner, as the case may be. In the case of each Pledgor that is a member of an LLC, such Pledgor hereby consents to the extent required by the applicable LLC Agreement to the pledge by each other Pledgor, pursuant to the terms hereof, of the Pledged LLC Interests in such LLC and to the transfer of such Pledged LLC Interests to the Administrative Agent or its nominee and to the substitution of the Administrative Agent or its nominee as a substituted member of the LLC with all the rights, powers and duties of a member of such LLC;

          (e) such Pledgor shall not agree to any amendment of a Partnership Agreement or LLC Agreement that in any way adversely affects the perfection of the security

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interest of the Administrative Agent in the Pledged Partnership Interests or Pledged LLC Interests pledged by such Pledgor hereunder, including any amendment electing to treat the membership interest or partnership interest of such Pledgor as a security under Section 8-103 of the UCC;

          (f) such Pledgor shall furnish to the Administrative Agent such stock powers and other instruments as may be required by the Administrative Agent to assure the transferability of the Pledged Securities when and as often as may be reasonably requested by the Administrative Agent; and

          (g) the Pledged Securities will at all times constitute not less than 100% of the Equity Interests of the Issuer thereof owned by any Pledgor (or in the case of any Issuer owned by any Pledgor that is a Foreign Subsidiary, not less than 65% of the Equity Interests of such Issuer). Such Pledgor will not, to the extent available to do so under the terms of the appropriate governing instruments, permit any Issuer of any of the Pledged Securities to issue any new shares of any class of Equity Interests of such Issuer without the prior written consent of the Administrative Agent.

ARTICLE VI
Remedial Provisions

     Section 6.01 Code and Other Remedies.

          (a) Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent, on behalf of the Guaranteed Creditors, may exercise, in addition to all other rights and remedies granted to them in this Agreement, the other Loan Documents and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the UCC or any other applicable law or otherwise available at law or equity. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Pledgor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of any Guaranteed Creditor or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Any Guaranteed Creditor shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Pledgor, which right or equity is hereby waived and released. If applicable to any particular item of Collateral, each Pledgor further agrees, at the Administrative Agent’s request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at such Pledgor’s premises or elsewhere. Any such sale or transfer by the Administrative Agent either to itself or to any other Person shall be absolutely free from any claim of right by Pledgor,

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including any equity or right of redemption, stay or appraisal which Pledgor has or may have under any rule of law, regulation or statute now existing or hereafter adopted (and such Pledgor hereby waives any rights it may have in respect thereof). Upon any such sale or transfer, the Administrative Agent shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. The Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.01, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Guaranteed Creditors hereunder, including, without limitation, reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations, in accordance with Section 10.02(c) of the Credit Agreement, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-615 of the UCC, need the Administrative Agent account for the surplus, if any, to any Pledgor. To the extent permitted by applicable law, each Pledgor waives all claims, damages and demands it may acquire against the Administrative Agent or any Guaranteed Creditor arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

          (b) In the event that the Administrative Agent elects not to sell the Collateral, the Administrative Agent retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Agreement shall constitute disposition in a commercially reasonable manner.

          (c) The Administrative Agent may appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer of the Collateral.

     Section 6.02 Pledged Securities. Upon termination of all loans and commitments under the Senior Revolving Credit Documents:

          (a) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the relevant Pledgor of the Administrative Agent’s intent to exercise its corresponding rights pursuant to Section 6.02(b), each Pledgor shall be permitted to receive all cash dividends paid in respect of the Pledged Securities paid in the normal course of business of the relevant Issuer (other than liquidating or distributing dividends), to the extent permitted in the Credit Agreement, and to exercise all voting, consent and corporate, partnership or limited liability rights with respect to the Pledged Securities; provided, however, that no vote shall be cast, consent given or right exercised or other action taken by such Pledgor that would impair the Collateral, be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document or, without the prior consent of the Administrative Agent and the Lenders, enable or permit any issuer of Pledged Securities to issue any Equity Interest or to issue any other securities convertible into or granting the right to purchase or exchange for any Equity Interest of any issuer of Pledged Securities other than as permitted by the Credit Agreement. Any sums paid upon or in respect of

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any Pledged Securities upon the liquidation or dissolution of any issuer of any Pledged Securities, any distribution of capital made on or in respect of any Pledged Securities or any property distributed upon or with respect to any Pledged Securities pursuant to the recapitalization or reclassification of the capital of any issuer of Pledged Securities or pursuant to the reorganization thereof shall, unless otherwise subject to a perfected security interest in favor of the Administrative Agent, be delivered to the Administrative Agent to be held by it hereunder as additional collateral security for the Obligations. If any sum of money or property so paid or distributed in respect of any Pledged Securities shall be received by such Pledgor, such Pledgor shall, until such money or property is paid or delivered to the Administrative Agent, hold such money or property in trust for the Administrative Agent, segregated from other funds of such Pledgor, as additional security for the Obligations.

          (b) Upon the occurrence and during the continuance of an Event of Default, upon notice by the Administrative Agent of its intent to exercise such rights to the relevant Pledgor or Pledgors, (i) the Administrative Agent shall have the right to receive any and all cash dividends, payments, Property or other Proceeds paid in respect of the Pledged Securities and make application thereof to the Borrower Obligations in accordance with Section 10.02(c) of the Credit Agreement, and (ii) any or all of the Pledged Securities shall be registered in the name of the Administrative Agent or its nominee, and (iii) the Administrative Agent or its nominee may exercise (A) all voting, consent, corporate, partnership or limited liability and other rights pertaining to such Pledged Securities at any meeting of shareholders, partners or members (or other equivalent body) of the relevant Issuer or Issuers or otherwise and (B) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the organizational structure of any Issuer, or upon the exercise by any Pledgor or the Administrative Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine), all without liability except to account for Property actually received by it, but the Administrative Agent shall have no duty to any Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.

          (c) In order to permit the Administrative Agent to exercise the voting and other consensual rights that it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions that it may be entitled to receive hereunder, (i) each Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to the Administrative Agent all such proxies, dividend payment orders and other instruments as the Administrative Agent may from time to time reasonably request and (ii) without limiting the effect of clause (i) above, such Pledgor hereby grants to the Administrative Agent an irrevocable proxy to vote all or any part of the Pledged Securities and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Securities would be entitled (including giving or withholding written consents of shareholders, partners or members, as the case may be, calling special meetings of shareholders, partners or members, as the case may be, and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action

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(including any transfer of any Pledged Securities on the record books of the Issuer thereof) by any other Person (including the Issuer of such Pledged Securities or any officer or agent thereof) upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full in cash of the Obligations.

          (d) Each Pledgor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Pledgor hereunder to (i) comply with any instruction received by it from the Administrative Agent in writing that (A) states that an Event of Default has occurred and is continuing and (B) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Pledgor, and each Pledgor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Pledged Securities directly to the Administrative Agent.

          (e) Upon the occurrence and during the continuance of an Event of Default, if the Issuer of any Pledged Securities is the subject of bankruptcy, insolvency, receivership, custodianship or other proceedings under the supervision of any Governmental Authority, then all rights of the Pledgor in respect thereof to exercise the voting and other consensual rights which such Pledgor would otherwise be entitled to exercise with respect to the Pledged Securities issued by such Issuer shall cease, and all such rights shall thereupon become vested in the Administrative Agent who shall thereupon have the sole right to exercise such voting and other consensual rights, but the Administrative Agent shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing.

     Section 6.03 Registration Rights. Upon termination of all loans and commitments under the Senior Revolving Credit Documents, if the Administrative Agent shall determine to exercise its right to sell any Collateral pursuant to Section 6.01, and if in the opinion of the Administrative Agent it is necessary or advisable to have the Pledged Securities, or any portion thereof to be registered under the provisions of the Securities Act, the relevant Pledgor shall cause the issuer thereof to (a) execute and deliver, and cause the directors and officers of such issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Administrative Agent, necessary or advisable to register the Pledged Securities, or that portion thereof to be sold, under the provisions of the Securities Act, (b) use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Securities, or that portion thereof to be sold and (c) make all amendments thereto or to the related prospectus that, in the opinion of the Administrative Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the SEC applicable thereto. Each Pledgor agrees to cause such issuer to comply with the provisions of the securities or “Blue Sky” laws of any jurisdiction that the Administrative Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) satisfying the provisions of Section 11(a) of the Securities Act.

     Section 6.04 Private Sales of Pledged Securities.

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          (a) Each Pledgor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Securities, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise or may determine that a public sale is impracticable or not commercially reasonable and, accordingly, may resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Securities for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.

          (b) Each Pledgor agrees to use its best efforts to do or cause to be done all such other acts as may reasonably be necessary to make such sale or sales of all or any portion of the Pledged Securities pursuant to this Section 6.04 valid and binding and in compliance with any and all other applicable Governmental Requirements. Each Pledgor further agrees that a breach of any of the covenants contained in this Section 6.04 will cause irreparable injury to the Guaranteed Creditors, that the Guaranteed Creditors have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 6.04 shall be specifically enforceable against such Pledgor, and such Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Credit Agreement.

     Section 6.05 Waiver; Deficiency. Each Pledgor waives and agrees not to assert any rights or privileges which it may acquire under the UCC. Each Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any Guaranteed Creditor to collect such deficiency.

     Section 6.06 Non-Judicial Enforcement. The Administrative Agent may enforce its rights hereunder without prior judicial process or judicial hearing, and to the extent permitted by law, each Pledgor expressly waives any and all legal rights which might otherwise require the Administrative Agent to enforce its rights by judicial process.

ARTICLE VII
The Administrative Agent

     Section 7.01 Administrative Agent’s Appointment as Attorney-in-Fact, Etc.

          (a) Each Pledgor hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Pledgor and in the name of such Pledgor or in its own name, for the purpose of carrying out

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the terms of this Agreement, to take any and all reasonably appropriate action and to execute any and all documents and instruments which may be reasonably necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Pledgor hereby gives the Administrative Agent the power and right, on behalf of such Pledgor, without notice to or assent by such Pledgor, to do any or all of the following:

          (i) unless being disputed under Section 8.04 of the Credit Agreement, pay or discharge Taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement or any other Loan Document and pay all or any part of the premiums therefor and the costs thereof;

          (ii) execute, in connection with any sale provided for in Section 6.01 or Section 6.04, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and

          (iii) (A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (B) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) in the name of such Pledgor or its own name, or otherwise, take possession of and indorse and collect any check, draft, note, acceptance or other instrument for the payment of moneys due with respect to any Collateral and commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (D) defend any suit, action or proceeding brought against such Pledgor with respect to any Collateral; (E) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; and (F) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and do, at the Administrative Agent’s option and such Pledgor’s expense, at any time, or from time to time, all acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent’s and the Guaranteed Creditors’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Pledgor might do.

     Anything in this Section 7.01(a) to the contrary notwithstanding, the Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.01(a) unless an Event of Default shall have occurred and be continuing.

          (b) If any Obligor fails to perform or comply with any of its agreements contained herein within the applicable grace periods, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.

          (c) The expenses of the Administrative Agent incurred in connection with actions undertaken as provided in this Section 7.01, together with interest thereon at a rate per

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annum equal to the post-default rate specified in Section 3.02(c) of the Credit Agreement, but in no event to exceed the Highest Lawful Rate, from the date of payment by the Administrative Agent to the date reimbursed by the relevant Obligor, shall be payable by such Obligor to the Administrative Agent on demand.

          (d) Each Obligor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue and in compliance hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

     Section 7.02 Duty of Administrative Agent. The Administrative Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar Property for its own account and shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral. Neither the Administrative Agent, any Guaranteed Creditor nor any of their Related Parties shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the Guaranteed Creditors hereunder are solely to protect the Administrative Agent’s and the Guaranteed Creditors’ interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Guaranteed Creditor to exercise any such powers. The Administrative Agent and the Guaranteed Creditors shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their Related Parties shall be responsible to any Obligor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. To the fullest extent permitted by applicable law, the Administrative Agent shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Pledgor or other Person or ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not it has or is deemed to have knowledge of such matters. Each Obligor, to the extent permitted by applicable law, waives any right of marshaling in respect of any and all Collateral, and waives any right to require the Administrative Agent or any Guaranteed Creditor to proceed against any Obligor or other Person, exhaust any Collateral or enforce any other remedy which the Administrative Agent or any Guaranteed Creditor now has or may hereafter have against each Obligor, any Obligor or other Person.

     Section 7.03 Filing of Financing Statements. Pursuant to the UCC and any other applicable law, each Pledgor authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral in such form and in such offices as the Administrative Agent reasonably determines appropriate to perfect the security interests of the Administrative Agent under this Agreement. A

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photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction.

     Section 7.04 Authority of Administrative Agent. Each Obligor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Guaranteed Creditors, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Obligors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Guaranteed Creditors with full and valid authority so to act or refrain from acting, and no Obligor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

ARTICLE VIII
Subordination of Indebtedness

     Section 8.01 Subordination of All Obligor Claims. As used herein, the term “Obligor Claims” shall mean all debts and obligations of the Borrowers or any other Obligor to any other Obligor, whether such debts and obligations now exist or are hereafter incurred or arise, or whether the obligation of the debtor thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or obligations be evidenced by note, contract, open account, or otherwise, and irrespective of the Person or Persons in whose favor such debts or obligations may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by. After and during the continuation of an Event of Default, no Obligor shall receive or collect, directly or indirectly, from any obligor in respect thereof any amount upon the Obligor Claims.

     Section 8.02 Claims in Bankruptcy. In the event of receivership, bankruptcy, reorganization, arrangement, debtor’s relief, or other insolvency proceedings involving any Obligor, the Administrative Agent on behalf of the Administrative Agent and the Guaranteed Creditors shall have the right to prove their claim in any proceeding, so as to establish their rights hereunder and receive directly from the receiver, trustee or other court custodian, dividends and payments which would otherwise be payable upon Obligor Claims. Each Obligor hereby assigns such dividends and payments to the Administrative Agent for the benefit of the Administrative Agent and the Guaranteed Creditors for application against the Borrower Obligations as provided under Section 10.02(c) of the Credit Agreement. Should any Agent or Guaranteed Creditor receive, for application upon the Obligations, any such dividend or payment which is otherwise payable to any Obligor, and which, as between such Obligors, shall constitute a credit upon the Obligor Claims, then upon payment in full in cash of the Borrower Obligations, the intended recipient shall become subrogated to the rights of the Administrative Agent and the Guaranteed Creditors to the extent that such payments to the Administrative Agent and the Lenders on the Obligor Claims have contributed toward the liquidation of the Obligations, and such subrogation shall be with respect to that proportion of the Obligations which would have been unpaid if the Administrative Agent and the Guaranteed Creditors had not received dividends or payments upon the Obligor Claims.

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     Section 8.03 Payments Held in Trust. In the event that notwithstanding Section 8.01 and Section 8.02, any Obligor should receive any funds, payments, claims or distributions which is prohibited by such Sections, then it agrees: (a) to hold in trust for the Administrative Agent and the Guaranteed Creditors an amount equal to the amount of all funds, payments, claims or distributions so received, and (b) that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions except to pay them promptly to the Administrative Agent, for the benefit of the Guaranteed Creditors; and each Obligor covenants promptly to pay the same to the Administrative Agent.

     Section 8.04 Liens Subordinate. Each Obligor agrees that, until the Borrower Obligations are paid in full in cash, any Liens securing payment of the Obligor Claims shall be and remain inferior and subordinate to any Liens securing payment of the Obligations, regardless of whether such encumbrances in favor of such Obligor, the Administrative Agent or any Guaranteed Creditor presently exist or are hereafter created or attach. Without the prior written consent of the Administrative Agent, no Obligor, during the period in which any of the Borrower Obligations are outstanding, shall (a) exercise or enforce any creditor’s right it may have against any debtor in respect of the Obligor Claims, or (b) foreclose, repossess, sequester or otherwise take steps or institute any action or proceeding (judicial or otherwise, including without limitation the commencement of or joinder in any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any Lien held by it.

     Section 8.05 Notation of Records. Upon the request of the Administrative Agent, all promissory notes and all accounts receivable ledgers or other evidence of the Obligor Claims accepted by or held by any Obligor shall contain a specific written notice thereon that the indebtedness evidenced thereby is subordinated under the terms of this Agreement.

ARTICLE IX
Miscellaneous

     Section 9.01 Waiver. No failure on the part of the Administrative Agent or any Guaranteed Creditor to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, privilege or remedy or any abandonment or discontinuance of steps to enforce such right, power, privilege or remedy under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy under this Agreement or any other Loan Document preclude or be construed as a waiver of any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. The remedies provided herein are cumulative and not exclusive of any remedies provided by law or equity.

     Section 9.02 Notices. All notices and other communications provided for herein shall be given in the manner and subject to the terms of Section 12.01 of the Credit Agreement; provided that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1.

     Section 9.03 Payment of Expenses, Indemnities, Etc.

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          (a) Each Guarantor agrees to pay or reimburse each Guaranteed Creditor and the Administrative Agent for all out-of-pocket expenses incurred by such Person, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Guaranteed Creditor, in connection with the enforcement or protection of its rights in connection with this Agreement or any other Loan Document, including, without limitation, all costs and expenses incurred in collecting against such Guarantor under the guarantee contained in ARTICLE II or otherwise enforcing or preserving any rights under this Agreement and the other Loan Documents to which such Guarantor is a party.

          (b) Each Guarantor agrees to pay, and to save the Administrative Agent and the Guaranteed Creditors harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all Other Taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.

          (c) Each Guarantor agrees to pay, and to save the Administrative Agent and the Guaranteed Creditors harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrowers would be required to do so pursuant to Section 12.03 of the Credit Agreement.

     Section 9.04 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 12.02 of the Credit Agreement.

     Section 9.05 Successors and Assigns. The provisions of this Agreement shall be binding upon the Obligors and their successors and assigns and shall inure to the benefit of the Administrative Agent and the Guaranteed Creditors and their respective successors and assigns; provided that except as set forth in Section 9.12 of the Credit Agreement, no Obligor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and the Lenders, and any such purported assignment, transfer or delegation shall be null and void.

     Section 9.06 Survival; Revival; Reinstatement.

          (a) All covenants, agreements, representations and warranties made by any Obligor herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document to which it is a party shall be considered to have been relied upon by the Administrative Agent, the other Agents and the Lenders and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the other Agents or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under the Credit Agreement is outstanding and unpaid. The provisions of Section 9.03 shall survive and remain

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in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans or the termination of this Agreement, any other Loan Document or any provision hereof or thereof.

          (b) To the extent that any payments on the Guarantor Obligations or proceeds of any Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Guarantor Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received and the Administrative Agent’s and the Guaranteed Creditors’ Liens, security interests, rights, powers and remedies under this Agreement and each other Loan Document shall continue in full force and effect. In such event, each Loan Document shall be automatically reinstated and the Borrowers shall take such action as may be reasonably requested by the Administrative Agent and the Guaranteed Creditors to effect such reinstatement.

     Section 9.07 Counterparts; Integration; Effectiveness.

          (a) This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.

          (b) This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and thereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof and thereof. This Agreement and the other Loan Documents represent the final agreement among the parties hereto and thereto and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

          (c) This Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto, the Lenders and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

     Section 9.08 Severability. Any provision of this Agreement or any other Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof or thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

     Section 9.09 Set-Off. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to

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the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations (of whatsoever kind) at any time owing by such Lender or Affiliate to or for the credit or the account of any Obligor against any of and all the obligations of the Obligor owed to such Lender now or hereafter existing under this Agreement or any other Loan Document, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 9.09 are in addition to other rights and remedies (including other rights of setoff) which such Lender or its Affiliates may have.

     Section 9.10 Governing Law; Submission to Jurisdiction.

          (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

          (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE A PARTY FROM OBTAINING JURISDICTION OVER ANOTHER PARTY IN ANY COURT OTHERWISE HAVING JURISDICTION.

          (c) EACH PARTY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT THE ADDRESS SPECIFIED IN SECTION 12.01 OF THE CREDIT AGREEMENT (OR SUCH OTHER ADDRESS AS IS SPECIFIED PURSUANT TO SECTION 12.01 OF THE CREDIT AGREEMENT) OR SCHEDULE 1 HERETO, AS APPLICABLE, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF A PARTY OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANOTHER PARTY IN ANY OTHER JURISDICTION.

          EACH PARTY HEREBY (1) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN; (2) IRREVOCABLY

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WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (3) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (4) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 9.10.

     Section 9.11 Headings . Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

     Section 9.12 Acknowledgments. Each Obligor hereby acknowledges that:

          (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

          (b) neither the Administrative Agent nor any Guaranteed Creditor has any fiduciary relationship with or duty to any Obligor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Obligors, on the one hand, and the Administrative Agent and Guaranteed Creditors, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

          (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Guaranteed Creditors or among the Obligors and the Guaranteed Creditors.

          (d) Each of the parties hereto specifically agrees that it has a duty to read this Agreement, the Security Instruments and the other Loan Documents and agrees that it is charged with notice and knowledge of the terms of this Agreement, the Security Instruments and the other Loan Documents; that it has in fact read this Agreement, the Security Instruments and the other Loan Documents and is fully informed and has full notice and knowledge of the terms, conditions and effects thereof; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement and the Security Instruments; and has received the advice of its attorney in entering into this Agreement and the Security Instruments; and that it recognizes that certain of the terms of this Agreement and the Security Instruments result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE

- 25 -

PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

     Section 9.13 Additional Obligors and Pledgors. Each Subsidiary of the Borrowers that is required to become a party to this Agreement pursuant to Section 8.14 of the Credit Agreement shall become an Obligor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex I hereto and shall thereafter have the same rights, benefits and obligations as an Obligor party hereto on the date hereof. Each Obligor that is required to pledge Equity Interests of its Subsidiaries shall execute and deliver a Supplement in the form of Annex II hereto, if such Equity Interests were not previously pledged.

     Section 9.14 Releases.

          (a) Release Upon Payment in Full. The grant of a security interest hereunder and all of rights, powers and remedies in connection herewith shall remain in full force and effect until the Administrative Agent has (i) retransferred and delivered all Collateral in its possession to the Pledgors, and (ii) executed a written release or termination statement and reassigned to the Pledgors without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Borrower Obligations and the compliance by the Obligors with all covenants and agreements hereof, the Administrative Agent, at the written request and expense of the Borrowers, will promptly release, reassign and transfer the Collateral to the Pledgors and declare this Agreement to be of no further force or effect.

          (b) Partial Releases. If any of the Collateral shall be sold, transferred or otherwise disposed of by any Pledgor in a transaction permitted by the Credit Agreement, then the Administrative Agent, at the request and sole expense of such Pledgor, shall promptly execute and deliver to such Pledgor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral and the Equity Interests of the Issuer thereof. At the request and sole expense of the Borrowers, a Guarantor shall be released from its obligations hereunder in the event that all the Equity Interests of such Guarantor shall be sold, transferred or otherwise disposed of in a transaction permitted by the Credit Agreement; provided that the Borrowers shall have delivered to the Administrative Agent, at least ten Business Days prior to the date of the proposed release, a written request of a Responsible Officer of PPC for release identifying the relevant Guarantor and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a certification by the Borrowers stating that such transaction is in compliance with the Credit Agreement and the other Loan Documents.

          (c) Retention in Satisfaction. Except as may be expressly applicable pursuant to Section 9-620 of the UCC, no action taken or omission to act by the Administrative Agent or the Guaranteed Creditors hereunder, including, without limitation, any exercise of voting or consensual rights or any other action taken or inaction, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until the Administrative Agent and the Guaranteed Creditors shall have applied payments (including, without limitation,

- 26 -

collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is provided in Section 9.14(a).

     Section 9.15 Acceptance. Each Obligor hereby expressly waives notice of acceptance of this Agreement, acceptance on the part of the Administrative Agent and the Guaranteed Creditors being conclusively presumed by their request for this Agreement and delivery of the same to the Administrative Agent.

     Section 9.16 Intercreditor Agreement. This Agreement is executed subject to that certain Intercreditor and Subordination Agreement dated November 15, 2005, by and among the Borrowers, Parallel, L.L.C., BNP Paribas, as the subordinated administrative agent and Citibank Texas, N.A., as the senior administrative agent, the terms and provisions of such Intercreditor and Subordination Agreement being incorporated herein by this reference.

- 27 -

     IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee and Collateral Agreement to be duly executed and delivered as of the date first above written.

BORROWERS:	PARALLEL PETROLEUM CORPORATION
	By:	/s/ Steven D. Foster Steven D. Foster, Chief Financial Officer
	PARALLEL, L.P.
	by: Parallel Petroleum Corporation, its
	General Partner
	By:	/s/ Steven D. Foster Steven D. Foster, Chief Financial Officer
GUARANTORS:	PARALLEL, L.L.C.
	By:	/s/ Steven D. Foster
		Steven D. Foster, Chief Financial Officer

Signature Page — Second Lien Guarantee and Collateral Agreement

Acknowledged and Agreed to as
of the date hereof by:

ADMINISTRATIVE AGENT:	BNP PARIBAS
	By: Name:	/s/ Brian M. Malone Brian M. Malone
	Title:	Managing Director
	By: Name:	/s/ Gabe Ellisor Gabe Ellisor
	Title:	Vice President

Signature Page — Second Lien Guarantee and Collateral Agreement

Annex I

Assumption Agreement

     ASSUMPTION AGREEMENT, dated as of [___] 2005, made by [] (the “Additional Obligor”), in favor of BNP Paribas, as administrative agent (in such capacity, the “Administrative Agent”) for the financial institutions (the “Lenders”) parties to the Credit Agreement referred to below. All capitalized terms not defined herein shall have the meaning ascribed to them in such Credit Agreement.

W I T N E S S E T H:

     WHEREAS, Parallel Petroleum Corporation, a Delaware corporation (“PPC”) and Parallel, L.P., a Texas limited partnership (“PLP” and with PPC, the “Borrowers”), BNP Paribas, the Administrative Agent and the Lenders have entered into the Second Lien Term Loan Agreement, dated as of November 15, 2005 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”);

     WHEREAS, in connection with the Credit Agreement, the Borrowers and certain of its Affiliates (other than the Additional Obligor) have entered into the Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005 (as amended, supplemented or otherwise modified from time to time, the “Guarantee and Collateral Agreement”) in favor of the Administrative Agent for the benefit of the Guaranteed Creditors;

     WHEREAS, the Credit Agreement requires the Additional Obligor to become a party to the Guarantee and Collateral Agreement; and

     WHEREAS, the Additional Obligor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Guarantee and Collateral Agreement;

     NOW, THEREFORE, IT IS AGREED:

     1. Guarantee and Collateral Agreement. By executing and delivering this Assumption Agreement, the Additional Obligor, as provided in Section 9.13 of the Guarantee and Collateral Agreement, hereby becomes a party to the Guarantee and Collateral Agreement as an Obligor thereunder with the same force and effect as if originally named therein as an Obligor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of an Obligor thereunder and expressly grants to the Administrative Agent, for the benefit of the Guaranteed Creditors, a security interest in all Collateral owned by such Additional Obligor to secure all of such Additional Obligor’s obligations and liabilities thereunder. The information set forth in Annex 1-A hereto is hereby added to the information set forth in Schedules 1 through 4 to the Guarantee and Collateral Agreement. The Additional Obligor hereby represents and warrants that each of the representations and warranties contained in Article IV of the Guarantee and Collateral Agreement is true and correct on and as the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date.

Annex I — 1

     2. Governing Law. This Assumption Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.

     IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written.

[ADDITIONAL OBLIGOR]

By:

Name:

Title:

Annex I — 2

Annex II

Supplement

     SUPPLEMENT, dated as of [___], 2005, made by , a [ ] (the “Additional Pledgor”), in favor of BNP Paribas, as administrative agent (in such capacity, the “Administrative Agent”) for the financial institutions (the “Lenders”) parties to the Credit Agreement referred to below. All capitalized terms not defined herein shall have the meaning ascribed to them in such Credit Agreement.

W I T N E S S E T H:

     WHEREAS, Parallel Petroleum Corporation, a Delaware corporation (“PPC”) and Parallel, L.P., a Texas limited partnership (“PLP” and with PPC, the “Borrowers”), BNP Paribas, the Administrative Agent and the Lenders have entered into an Second Lien Term Loan Agreement, dated as of November 15, 2005 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”);

     WHEREAS, in connection with the Credit Agreement, the Borrowers and certain of its Affiliates (other than the Additional Pledgor) have entered into the Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005 (as amended, supplemented or otherwise modified from time to time, the “Guarantee and Collateral Agreement”) in favor of the Administrative Agent for the benefit of the Guaranteed Creditors;

     WHEREAS, the Credit Agreement requires the Additional Pledgor to pledge the Equity Interests described hereto on Schedule 2-S; and

     WHEREAS, the Additional Pledgor has agreed to execute and deliver this Supplement in order to pledge such Equity Interests;

     NOW, THEREFORE, IT IS AGREED:

     1. Guarantee and Collateral Agreement. By executing and delivering this Supplement, the Additional Pledgor, as provided in Section 9.13 of the Guarantee and Collateral Agreement, hereby becomes a party to the Guarantee and Collateral Agreement as an Obligor thereunder (if not already a party thereto as an Obligor thereunder) with the same force and effect as if originally named as an Obligor therein, and without limiting the generality of the foregoing, hereby pledges and grants a security interest in (a) the Equity Interests described or referred to in Schedule 2-S and (b) (i) the certificates or instruments, if any, representing such Equity Interests, (ii) all dividends (cash, Equity Interests or otherwise), cash, instruments, rights to subscribe, purchase or sell and all other rights and Property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities, (iii) all replacements, additions to and substitutions for any of the Property referred to in this definition, including, without limitation, claims against third parties, (iv) the proceeds, interest, profits and other income of or on any of the Property referred to in this definition, (v) all security entitlements in respect of any of the foregoing, if any, (vi) all books and records relating to any

Annex II — 1

of the Property referred to in this definition and (vii) all proceeds of any of the foregoing (collectively, the “Collateral”). Upon execution of this Supplement, such securities will constitute “Pledged Securities” for purposes of the Guarantee and Collateral Agreement with the same force and effect as if originally listed on Schedule 2 thereto and, without limiting the generality of the foregoing, the Additional Pledgor hereby expressly assumes all obligations and liabilities of a Pledgor thereunder and expressly grants to the Administrative Agent, for the benefit of the Guaranteed Creditors, a security interest in all Collateral owned by such Additional Pledgor to secure all of such its obligations and liabilities thereunder. The information set forth in Schedule 2-S hereto is hereby added to the information set forth in Schedule 2 to the Guarantee and Collateral Agreement. The Additional Pledgor hereby represents and warrants that each of the representations and warranties contained in Article IV of the Guarantee and Collateral Agreement is true and correct on and as the date hereof (after giving effect to this Supplement) as if made on and as of such date.

     2. Governing Law. This Supplement shall be governed by, and construed in accordance with, the laws of the State of Texas.

     IN WITNESS WHEREOF, the undersigned has caused this Supplement to be duly executed and delivered as of the date first above written.

[ADDITIONAL PLEDGOR]

By:

Name:

Title:

Annex II — 2

Exhibit A

Acknowledgment and Consent

     The undersigned hereby acknowledges receipt of a copy of the Guarantee and Collateral Agreement dated as of November 15, 2005 (the “Guarantee Agreement”), made by the Obligors parties thereto for the benefit of BNP Paribas, as Administrative Agent and others. The undersigned agrees for the benefit of the Administrative Agent and the Guaranteed Creditors as follows:

     1. The undersigned will be bound by the terms of the Guarantee Agreement and will comply with such terms insofar as such terms are applicable to the undersigned.

     2. The terms of Sections 6.01(a) and 6.03 of the Guarantee Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.02(a) or Section 6.04 of the Guarantee Agreement.

[NAME OF ISSUER]

By:

Title:

Address for Notices:

Fax:

Exhibit A-1

* This consent is necessary only with respect to any Issuer which is not also a Obligor. This consent may be modified or eliminated with respect to any Issuer that is not controlled by a Obligor.

Exhibit A-2

Schedule 1

NOTICE ADDRESSES OF OBLIGORS

Parallel Petroleum Corporation
1004 North Big Spring, Suite 400
Midland, Texas 79701
Facsimile (432) 684-3905
Attention: Larry C. Oldham, President

Parallel, L.L.C.
2215-B Renaissance Drive, Suite 5
Las Vegas, Nevada 89119
Attention: Andrew T. Panaccione, President
Facsimile (702) 966-4247

Parallel, L.P.
1004 North Big Spring, Suite 400
Midland, Texas 79701
Facsimile (432) 684-3905
Attention: Larry C. Oldham, President

Exhibit A-1

Schedule 2

DESCRIPTION OF PLEDGED SECURITIES

Pledged Securities:

		Percentage			Percentage			Type of	No. of	Certificate
Owner	Issuer	Owned			Pledged			Security	Shares	No.
Parallel Petroleum Corporation	Parallel, L.L.C.		100	%		100	%	Limited Liability Company Membership Interest	n/a	No. 1
Parallel Petroleum Corporation	Parallel, L.P.		1	%		1	%	Limited Partnership Interest	n/a	GP — 1
Parallel, L.L.C.	Parallel, L.P.		99	%		99	%	Limited Partnership Interest	n/a	LP — 1

Schedule 3

FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS

1.	Filing of UCC-1 Financing Statement with respect to the Collateral with the Secretary of State of the State of Texas for Parallel, L.P.
2.	Filing of UCC-1 Financing Statement with respect to the Collateral with the Secretary of State of the State of Delaware for Parallel Petroleum Corporation and Parallel, L.L.C.

Schedule 4

LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE

(1) Legal name of Borrower:      Parallel Petroleum Corporation

Address:           1004 North Big Spring, Suite 400
                          Midland, Texas 79701

     All other names and trade names that such Borrower has used in the last five years: None.

     Jurisdiction of organization:          Delaware

     Organizational number:                  2037319

     Taxpayer identification number:   75-1971716

Location of chief executive office/sole place of business for last five years: See address above.

(2) Legal name of Borrower:      Parallel, L.P.

Address:          1004 North Big Spring, Suite 400
                          Midland, Texas 79701

All other names and trade names that such Borrower has used in the last five years: None.

     Jurisdiction of organization:          Texas

     Organizational number:                  800065637

     Taxpayer identification number:   43-1954502

Location of chief executive office/sole place of business for last five years: See address above.

(3) Legal name of Obligor: Parallel, L.L.C.

Address:          2215-B Renaissance Drive, Suite 5
                          Las Vegas, Nevada 89119

All other names and trade names that such Obligor has used in the last five years:
None.

     Jurisdiction of organization:           Delaware

     Organizational number:                  3502688

     Taxpayer identification number:   73-1632757

Location of chief executive office/sole place of business for last five years:
Midland, Texas

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Parallel Petroleum Corporation
Midland, Texas

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-57348, No. 333-34617, No. 333-669380 and No. 333-117533) of Parallel Petroleum Corporation of our reports dated February 27, 2007, relating to the consolidated financial statements and the effectiveness of Parallel Petroleum Corporation’s internal control over financial reporting, which appear in this Annual Report on Form 10-K.

/s/ BDO Seidman, LLP

Houston, Texas

February 27, 2007

EX-23.2

Exhibit 23.2

Consent of Cawley, Gillespie & Associates, Inc.

     As independent petroleum engineers, we hereby consent to the incorporation by reference in the registration statements (No. 33-57348, No. 333-34617, No. 333-66938 and No. 333-117533) on Forms S-8 of Parallel Petroleum Corporation of information from our reserves report dated January 29, 2007 and all references to our firm included in or made a part of the annual report on Form 10-K of Parallel Petroleum Corporation for the fiscal year ended December 31, 2006.

/s/ Cawley, Gillespie & Associates, Inc.

Ft. Worth, Texas
February 23, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Larry C. Oldham, certify that:

1. I have reviewed this annual report on Form 10-K of Parallel Petroleum Corporation.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated February 28, 2007	/s/ Larry C. Oldham
	Larry C. Oldham, President and
	Chief Executive Officer
	(principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Steven D. Foster, certify that:

1. I have reviewed this annual report on Form 10-K of Parallel Petroleum Corporation.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated February 28, 2007	/s/ Steven D. Foster
	Steven D. Foster
	Chief Financial Officer
	(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION

(Not filed pursuant to the Securities Exchange Act of 1934)

     Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Larry C. Oldham, the President and Chief Executive Officer of Parallel Petroleum Corporation (“Parallel”), hereby certifies that the Annual Report on Form 10-K of Parallel for the year ended December 31, 2006 fully complies with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and the information contained in that Form 10-K Report fairly presents, in all material respects, the financial condition and results of operations of Parallel.

Dated: February 28, 2007

/s/ Larry C. Oldham  

Larry C. Oldham, 

President and Chief Executive Officer 

     A signed original of this written statement required by Section 906 has been provided to Parallel Petroleum Corporation and will be retained by Parallel Petroleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION

(Not filed pursuant to the Securities Exchange Act of 1934)

     Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Steven D. Foster, the Chief Financial Officer of Parallel Petroleum Corporation (“Parallel”), hereby certifies that the Annual Report on Form 10-K of Parallel for the year ended December 31, 2006 fully complies with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and the information contained in that Form 10-K Report fairly presents, in all material respects, the financial condition and results of operations of Parallel.

Dated: February 28, 2007

/s/ Steven D. Foster  

Steven D. Foster, 

Chief Financial Officer 

     A signed original of this written statement required by Section 906 has been provided to Parallel Petroleum Corporation and will be retained by Parallel Petroleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request.