PARALLEL PETROLEUM CORP /DE/, 424B1, 1996-12-16

PARALLEL PETROLEUM CORP /DE/
424B1, 1996-12-16
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 33-15695

2,500,000 SHARES

[PARALLEL PETROLEUM LOGO]

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by Parallel
Petroleum Corporation (the "Company"). The Company's Common Stock is traded on
the Nasdaq National Market under the symbol "PLLL." On December 12, 1996, the
last reported sale price of the Common Stock as reported by the Nasdaq National
Market was $4.53 per share. See "Price Range of Common Stock."

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $4.25 $.293 $3.957
- ----------------------------------------------------------------------------------------------
Total(3)...................................... $10,625,000 $733,125 $9,891,875
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>

(1) Does not include a non-accountable expense allowance payable to the
Representative of the Underwriters or the value of a warrant to be issued to
the Representative to purchase up to 125,000 shares of Common Stock. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting estimated expenses of $450,000, including the
Representative's non-accountable expense allowance, payable by the Company.

(3) The Company has granted to the Underwriters an option, exercisable within 45
days after the date hereof, to purchase up to 375,000 additional shares of
Common Stock at the Price to Public, less the Underwriting Discount, solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $12,218,750, $843,000 and $11,375,750 respectively. See
"Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of Van Kasper & Company, San Francisco, California on or about
December 18, 1996.

VAN KASPER & COMPANY

DECEMBER 12, 1996
<PAGE> 2

A, B, C and D represent wells drilled in the Horseshoe Atoll Reef Trend of
West Texas. Other companies drilled wells A and B in 1953 and 1964, prior to the
development of 3-D seismic technology. Both were dry holes. The Company drilled
and completed wells C and D in 1993 based on a 3-D seismic survey. Wells C and D
have been producing since completion and, at September 30, 1996, had cumulative
production of approximately 136,000 barrels of oil and 907,000 Mcf of gas and
aggregate daily production rate of approximately 128 barrels of oil and 550 Mcf
of gas.

The image below, which was actually used by the Company in making its
decision to drill wells C and D, is from that 3-D seismic survey. The image on
the overleaf is another representation of the image below.

[Two images of a three-dimensional seismic survey and bar graphs
showing (i) for the three years ended December 31, 1995 and the
nine-month periods ended September 30, 1995 and 1996, the Company's
net income, oil and gas revenues, oil and gas production, operating
cash flow, production costs, and general and administrative expense,
and (ii) for the three years ended December 31, 1995 and the
nine-month period ended September 30, 1996, the Company's pretax
present value of proved reserves and equivalent barrels of oil and gas
reserves.]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Company's Financial Statements
and the notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. Certain capitalized terms used below
are defined under "Glossary."

THE COMPANY

Parallel Petroleum Corporation (the "Company") is an independent energy
company engaged in the exploration for and the acquisition and development of
oil and gas properties. The Company's primary operations are conducted in the
Permian Basin and onshore Gulf Coast areas of Texas. The Company's strategy is
to increase reserves and production and improve financial results through
targeted exploration, development and exploitation of its existing properties,
opportunistic property acquisitions, and utilization of three-dimensional
("3-D") seismic survey technology, while maintaining its low administrative cost
structure.

RECENT DEVELOPMENTS -- SUCCESSFUL USE OF 3-D SEISMIC SURVEYS

The Company believes that, with strict quality control, utilizing 3-D
seismic surveys in areas meeting the Company's 3-D seismic prospect criteria can
result in achieving "exploratory drilling returns with developmental drilling
risks."

The Company first used 3-D seismic surveys in late 1992, beginning with a
small area in the Horseshoe Atoll Reef Trend in the Permian Basin of West Texas.
Based on the survey, the Company drilled one well -- which was a producing
well -- in the survey area. The Company then expanded its 3-D seismic activities
in the Horseshoe Atoll Reef Trend, achieving an 80% success ratio (productive
wells to total wells drilled). This success ratio is significantly in excess of
exploratory drilling results obtained using 2-D seismic survey technology and
other conventional methods.

The Company subsequently identified another area -- the Yegua/Frio Gas
Trend in Jackson and Wharton Counties in the onshore Gulf Coast area of
Texas -- that the Company believed was an excellent prospect for the use of 3-D
seismic surveys. The Company conducted a 3-D seismic survey covering 16,000
acres in this area. Based in substantial part on successful drilling in reliance
on this survey, subsequent 3-D seismic surveys and additional successful
drilling based on these surveys, the Company has entered into a series of
exploration (area of mutual interest) agreements covering approximately 268,000
acres and obtained leases or lease options on 130,555 gross (36,828 net) acres.
Through September 30, 1996, the Company had drilled 53 wells in a 97,000-acre
portion of this area, utilizing its 3-D seismic surveys, achieving an 81%
success ratio. The Company is in the process of conducting 3-D seismic surveys
on the remaining 171,000 acres. See "Use of Proceeds."

The Company evaluates substantially all of its exploratory prospects using
3-D seismic surveys. The following table reflects certain information with
respect to the wells drilled by the Company through September 30, 1996, using
3-D seismic surveys. Of the 51 productive wells reflected below, all but four
continue to be producing wells at September 30, 1996.

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
WELLS ----------------------------------------------------
ACREAGE ----------------------------------- REALIZED FUTURE
3-D SEISMIC PROJECT -------------- PRO- SUCCESS TOTAL NET NET PRESENT
(YEAR SURVEY BEGAN) GROSS NET DRILLED DUCTIVE DRY RATIO INVESTMENT REVENUE* REVENUE* VALUE*
- --------------------- ------ ----- ------- -------- --- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Horseshoe Atoll Reef
Trend (1992)....... 960 720 10 8* 2 80% $ 3,305,000 $3,457,000 $ 5,990,000 $ 3,945,000
Yegua/Frio Gas Trend:
Phase I & II
(1993)........... 9,043 1,796 30 22* 8 73% 6,051,000 5,009,000 35,489,000 26,076,000
Phase III (1994)... 5,151 1,794 23 21 2 91% 1,056,000 485,000 5,607,000 3,635,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Total........ 14,194 3,590 53 43 10 81% 7,107,000 5,494,000 41,096,000 29,711,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Total................ 15,154 4,310 63 51 12 81% $10,412,000 $8,951,000 $47,086,000 $33,656,000
====== ===== === === === =========== ========== =========== ===========
</TABLE>

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

* See footnotes on page 21.

3
<PAGE> 4

RECENT FINANCIAL RESULTS AND OIL AND GAS DATA

As a result of its successful drilling efforts, the Company's reserves and
production have grown significantly and its financial results have improved
substantially. These increases are due in significant part to the substantial
number of productive wells completed during the first nine months of 1996 as a
result of drilling in the Yegua/Frio Gas Trend.

In the nine months ended September 30, 1996, compared to the comparable
period of 1995, the Company's revenues increased by 183% to $9.7 million, while
its general and administrative expenses and total costs and expenses increased
by only 23% to $400,000 and 98% to $4.9 million, respectively, and its pretax
income, net income and net income per share all increased over 1,700% to $3.9
million, $2.6 million, and $.17 per share, respectively.

At September 30, 1996, compared to December 31, 1995, the Company's future
net revenues (before income taxes) increased 75% to $82.0 million and the
present value of its future net revenues (before income taxes) increased 102% to
$52.3 million.

FUTURE PLANS AND STRATEGIES; USE OF PROCEEDS

Based on the favorable drilling results achieved using its 3-D seismic
surveys to date, the Company is currently conducting 3-D seismic surveys on
171,000 acres in the Yegua/Frio Gas Trend, as well as on certain of its Permian
Basin properties. The Company intends to continue to drill wells on formations
identified in the 3-D seismic surveys that meet the Company's drilling criteria.

The Company intends to use the net proceeds of this offering to repay most
of the indebtedness outstanding under its $30 million revolving loan agreement
with Bank One, Texas, N.A. (the "Bank"). At September 30, 1996, $16.2 million,
bearing interest at 8.25%, was outstanding under the revolving loan agreement.
The Company intends to reborrow under the revolving loan agreement from
time-to-time as necessary, subject to borrowing base limitations, to fund 3-D
seismic surveys, lease option exercises and drilling activities on its
properties and optioned properties in the Yegua/Frio Gas Trend, developmental
drilling on the Company's Permian Basin properties, other drilling expenditures
and acquisition opportunities and for general corporate purposes.

On October 31, 1996, the Company received notice from the Bank that the
borrowing base under the revolving loan agreement had been increased, effective
November 1, 1996, from $19.5 million to $22.0 million, subject to formal credit
approval, and that, upon successful completion of the offering made by this
Prospectus, the Bank intends to review and anticipates increasing further the
borrowing base, subject to formal credit approval.

4
<PAGE> 5

SUMMARY FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND UNIT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas revenues.............................. $ 3,446 $ 4,693 $ 4,714 $ 3,420 $ 9,693
Costs and expenses:
Production costs................................ 1,305 1,427 1,468 1,066 1,902
General and administrative expense.............. 298 340 433 315 386
Depreciation, depletion and amortization........ 918 1,572 1,618 1,095 2,619
------- ---------- ---------- ---------- ----------
Total costs and expenses...................... 2,521 3,339 3,519 2,476 4,907
------- ---------- ---------- ---------- ----------
Operating income.................................. 925 1,354 1,195 944 4,786
------- ---------- ---------- ---------- ----------
Interest expense, net............................. 427 711 1,035 772 931
------- ---------- ---------- ---------- ----------
Pretax income..................................... 572 708 204 207 3,912
Income tax expense................................ 196 263 67 70 1,330
------- ---------- ---------- ---------- ----------
Income from continuing operations................. $ 376 $ 445 $ 137 $ 137 $ 2,582
------- ---------- ---------- ---------- ----------
Net income........................................ $ 328 $ 445 $ 137 $ 137 $ 2,582
Net income per share.............................. $ .02 $ .03 $ .01 $ .01 $ .17
Weighted average shares outstanding............... 13,467 14,815 15,557 15,308 15,579
OTHER DATA:
EBITDA(1)......................................... $ 1,917 $ 2,991 $ 2,857 $ 2,074 $ 7,462
Operating cash flow(2)............................ $ 1,490 $ 2,280 $ 1,822 $ 1,302 $ 6,531
OPERATING DATA:
Production:
Oil (Bbls)...................................... 106,000 149,000 133,000 102,000 163,000
Gas (Mcf)....................................... 889,000 1,391,000 1,616,000 1,138,000 2,673,000
EBO............................................. 254,000 381,000 402,000 292,000 609,000
Average sales price per unit:
Oil (per Bbl)................................... $ 16.86 $ 15.81 $ 17.26 $ 17.17 $ 21.00
Gas (per Mcf)................................... $ 1.86 $ 1.68 $ 1.50 $ 1.46 $ 2.34
EBO............................................. $ 13.54 $ 12.31 $ 11.72 $ 11.72 $ 15.93
Average costs per EBO:
Production costs................................ $ 5.14 $ 3.75 $ 3.65 $ 3.65 $ 3.12
General and administrative expense.............. $ 1.17 $ .89 $ 1.08 $ 1.08 $ .63
Depreciation, depletion and amortization........ $ 3.61 $ 4.13 $ 4.02 $ 3.75 $ 4.30
</TABLE>

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 2,238 $ 2,238
Total assets................................................. $32,875 $ 32,875
Long-term debt............................................... $16,213 $ 6,771
Stockholders' equity......................................... $13,439 $ 22,881
</TABLE>

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

(1) EBITDA, or "earnings before interest, income taxes, depreciation, depletion,
and amortization," is included because it is used by some investors in
analyzing companies. EBITDA is not required by generally accepted accounting
principles and should not be construed as an alternative to operating
income, net income, net cash provided by operating activities or any other
measure of performance required by generally accepted accounting principles
or as an indicator of the Company's operating performance.

(2) Operating cash flow is net income plus the sum of (i) depreciation,
depletion and amortization, (ii) deferred taxes, and (iii) cumulative effect
of accounting change. Operating cash flow is a supplemental measure used by
the Company in the evaluation of its business and should not be construed as
an alternative to operating income or cash flow from operations and is
presented solely as supplemental disclosure.

(3) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."

5
<PAGE> 6

SUMMARY OIL AND GAS RESERVE INFORMATION

The following table sets forth summary information with respect to the
Company's estimated proved oil and gas reserves at the end of and reserve
replacement data for the periods indicated. For additional information relating
to reserves, see "Business -- Oil and Gas Reserves."

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Oil (Bbls)............................... 1,619,000 1,572,000 1,503,000 1,855,000
Gas (Mcf)................................ 19,096,000 21,611,000 26,124,000 32,831,000
EBO...................................... 4,802,000 5,174,000 5,857,000 7,327,000
Percent of proved developed reserves..... 76% 78% 81% 85%
Future net revenues (before income
taxes)................................. $36,657,000 $37,354,000 $46,835,000 $ 82,010,000
Present value of future net revenues
(before income taxes).................. $21,137,000 $20,462,000 $25,890,000 $ 52,297,000
Average reserve life (in years)(1)....... 18.91 13.58 14.56 9.02
RESERVE REPLACEMENT DATA:
Production replacement ratio(2).......... 363% 198% 270% 341%
Finding costs per EBO(3)................. $ 5.05 $ 6.90 $ 2.75 $ 3.71
</TABLE>

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

(1) Calculated by dividing period-end proved reserves by annualized production
for the most recent period.

(2) Calculated by dividing reserve additions through acquisitions of reserves,
extensions and discoveries and revisions during the period by production for
the period.

(3) Calculated by dividing costs incurred, excluding unproved property
acquisition costs, for the period by reserve additions through acquisitions,
extensions and discoveries, and revisions for such period.

THE OFFERING

Common Stock offered................ 2,500,000 shares of Common Stock of the
Company, $.01 par value. The Company
has granted the Underwriters an option
to purchase up to 375,000 additional
shares solely to cover over-allotments.

Common Stock to be outstanding after
the Offering...................... 17,406,358 shares(1).

Use of Proceeds..................... The proceeds of the offering will be
used to repay borrowings outstanding
under the Company's revolving loan
agreement. The Company anticipates
reborrowing to fund its 3-D seismic,
drilling, and other activities.

Nasdaq National Market symbol....... PLLL.
- ------------------------------

(1) Assumes all of the shares offered hereby are sold and excludes 1,531,665
shares issuable upon exercise of outstanding stock options and warrants.

6
<PAGE> 7

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. Prior to making an investment decision, prospective purchasers of shares
of the Common Stock offered hereby should consider carefully, together with the
other information contained in this Prospectus, the matters set forth below.

DEPENDENCE ON KEY PERSONNEL; SMALL MANAGEMENT TEAM

The success of the Company's business is highly dependent upon the
services, efforts and abilities of Thomas R. Cambridge, the Chairman of the
Board of Directors and Chief Executive Officer of the Company, and Larry C.
Oldham, the President and a Director of the Company. The business of the Company
could be materially and adversely affected if Mr. Cambridge or Mr. Oldham were
to become unavailable for any reason. The Company also believes that its
operations are dependent to some degree upon the availability of outside
advisors and consultants, including geophysicists who provide 3-D seismic survey
expertise. The Company does not have employment agreements with any of its
officers or employees, nor does the Company have long term contractual
arrangements with its consultants. In periods of improving market conditions,
the Company's ability to obtain and retain qualified consultants on a timely
basis may be adversely affected. The Company intends, as soon as practicable
after the completion of this offering, to purchase life insurance on the lives
of Mr. Cambridge ($1 million) and Mr. Oldham ($5 million).

At November 1, 1996, the Company had five full-time employees. The
Company's future growth and profitability will also be dependent upon the
Company's ability to attract and retain other qualified management personnel and
to effectively manage its growth. There can be no assurance that the Company
will be successful in doing so.

VOLATILITY OF OIL AND GAS PRICES

The Company's revenues, cash flows and profitability are substantially
dependent upon prevailing prices for both oil and gas. Historically, oil and gas
prices and markets have been volatile, and they are likely to continue to be
volatile in the future. Prices for oil and gas are subject to wide fluctuations
in response to relatively minor changes in the supply of and demand for oil and
gas, market uncertainty and a variety of additional factors that are beyond the
control of the Company. These factors include, among others, political
conditions in the Middle East and other regions, the domestic and foreign supply
of oil and gas, the level of consumer demand, weather conditions, domestic and
foreign government regulations, the price and availability of alternative fuels
and overall economic conditions.

CAPITAL REQUIREMENTS AND LIQUIDITY

The oil and gas industry is capital intensive. The Company's cash flow from
operations and the continued availability of credit to it are subject to a
number of variables, including the Company's proved reserves and proved
developed reserves, the level of oil and gas the Company is able to produce from
existing wells, the prices at which oil and gas are sold and the Company's
ability to acquire, locate and produce new reserves, each of which can
materially affect the borrowing base availability under the Company's revolving
loan agreement, its only credit facility. The Company may from time to time seek
additional financing, either in the form of increased bank borrowings, sales of
the Company's securities or other forms of financing. Except for the Company's
revolving loan agreement, the Company has no agreements for any such financing
and there can be no assurance as to the availability or terms of any such
financing. To the extent the Company's resources and earnings are at any time
insufficient to fund its activities or repay its indebtedness as due, the
Company will need to raise additional funds through public or private financings
or additional borrowings. No assurance can be given as to the Company's ability
to obtain any such capital resources. If the Company is at any time not able to
obtain then necessary capital resources, its results of operations and financial
condition could be materially adversely affected. If, however, additional funds
are raised through the issuance of equity securities, the percentage ownership
of the Company's stockholders at that time could be diluted and, in addition,
such equity securities may have rights, preferences or privileges senior to
those of the Common Stock.

7
<PAGE> 8

REPLACEMENT OF RESERVES; DEPENDENCE ON EXPLORATORY DRILLING ACTIVITIES

The Company's reserves are depleted as it produces oil and gas. Therefore,
the Company's future success will depend upon its ability to find, develop or
acquire additional oil and gas reserves at prices that permit profitable
operations. Unless the Company conducts successful exploitation or exploration
activities or acquires properties containing reserves, the proved reserves of
the Company will decline. There can be no assurance that the Company's
acquisition, exploitation and exploration activities will result in additional
reserves, or that the Company will be able to drill productive wells at
acceptable costs.

The success of the Company is dependent upon the success of its exploratory
drilling activities. Exploratory drilling is subject to numerous risks,
including the risk that no commercially productive oil and gas reservoirs will
be encountered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors, including encountering unexpected formations and
drilling conditions, equipment failures or accidents, as well as weather
conditions, compliance with governmental requirements, shortages or delays in
the delivery of equipment and the unavailability of qualified personnel.
Historically, a majority of the Company's wells have been drilled to depths of
less than 10,000 feet, but the Company also participates in the drilling of
deeper wells and may in the future participate in the drilling of additional
deep wells. Deeper drilling typically involves greater expense and risk.

OPERATING RISKS; RESULTS OF OPERATIONS

The Company's operations are subject to all of the operating hazards and
risks normally incident to drilling for and producing oil and gas, such as
encountering unusual or unexpected formations and pressures, explosions,
blowouts, fire, pipe and tubular failures, casing collapses, environmental
pollution, and other disasters, any one of which could result in environmental
damage, personal injury and other harm that could result in substantial
liabilities to the Company. As is customary in the industry, the Company
maintains insurance against some, but not all, of these risks. The Company
maintains general liability insurance and obtains insurance against blowouts on
a well-by-well basis, but it has not obtained insurance against operating
hazards such as environmental risks. Should the Company sustain an uninsured
liability, its ability to operate may be materially adversely affected. Drilling
activities may also be curtailed, delayed or canceled as a result of numerous
factors outside the Company's control, including but not limited to defects in
title to properties, weather conditions, compliance with governmental
requirements, mechanical difficulties, shortages or delays in the delivery of
drilling rigs or other equipment and the unavailability of qualified personnel.

Many other companies with greater resources than the Company are also
seeking prospects to evaluate using 3-D seismic technology, and there can be no
assurance the Company will be able to acquire additional prospects suitable for
3-D seismic evaluation on economic terms. In addition, no assurance can be given
that the results of the Company's future drilling efforts based on 3-D seismic
surveys, whether in areas in which the Company has used such surveys or
elsewhere, will be as successful as its results employing such surveys to date,
or successful at all.

The Company's quarterly production and results of operations have varied
from quarter to quarter. Based on its scheduled drilling activities, the Company
does not currently anticipate that its production volumes in the fourth quarter
of 1996 will increase significantly compared to its production volumes in the
prior two quarters, and normal operating considerations and other factors could
result in decreased production volumes in the fourth or subsequent quarters.

CONCENTRATION OF PRODUCING PROPERTIES

Substantially all of the Company's producing properties are located in the
State of Texas and approximately 57% of the Company's proved reserves are
located in the Yegua/Frio Gas Trend onshore the Gulf Coast of Texas. At
September 30, 1996, the Company owned interests in 174 gross (94.36 net)
producing oil and gas wells. The Company has 25 gross producing wells that
represent approximately 63% of the present value of the Company's total proved
reserves at September 30, 1996. Any material harm to the current producing
reservoirs or any significant governmental regulation with respect to these
wells, including any curtailment of production or

8
<PAGE> 9

interruption of transportation of oil or gas produced from the wells, could have
a material adverse effect on the Company's liquidity and results of operations.

COMPETITION; PROPERTY ACQUISITIONS

The Company operates in a highly competitive environment in all facets of
its operations. In seeking to acquire desirable properties suitable for
exploration or acquisition, the Company faces intense competition from both
major and independent oil and gas companies, as well as from numerous
individuals and drilling programs. Many of these competitors have financial and
other resources substantially in excess of those available to the Company. See
"Business -- Competition."

IMPRECISION OF OIL AND GAS RESERVE ESTIMATES

The proved developed and undeveloped oil and gas reserve figures included
in this Prospectus are estimates based on reserve reports prepared by
independent petroleum engineers. The estimation of reserves requires substantial
judgment on the part of the petroleum engineers and is based upon a number of
variable factors and assumptions, all of which are to some degree speculative,
resulting in imprecise determinations, particularly with respect to new
discoveries. Estimates of reserves, future net revenues and present values of
future net revenues prepared or based on reports by petroleum engineers are
estimates only, and different petroleum engineers' estimates may vary
substantially depending, in part, on the assumptions made and may be subject to
material adjustment either up or down in the future. Accordingly, actual
quantities of oil and gas may differ materially from the amounts set forth in
the engineers' reports.

The reserve information in this Prospectus is subject to further
uncertainty because 20 of the Company's producing wells have been completed
since January 1996 and, as a result, 44% of the present value of the Company's
proved reserves of oil and gas are based on limited production and reservoir
information. Further, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. For these and other reasons,
estimates of economically recoverable oil and gas reserves, future net revenues,
and present values of future net revenues may vary materially from actual
results. See "Business -- Oil and Gas Reserves."

GOVERNMENT REGULATION; ENVIRONMENTAL RISKS

The Company's business is subject to substantial regulation under local,
state and federal laws relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and gas, as
well as environmental and safety matters. In the past, prices of oil and gas
have been controlled by and subject to governmental regulation and there can be
no assurance that such price controls will not again be implemented in the
future. There can be no assurance that present or future regulation will not
adversely affect the operations of the Company. See "Business -- Regulation."

The oil and gas industry is also subject to substantial environmental
risks, such as oil spills, oil and gas leaks, ruptures, and discharges of oil
and toxic gases, which could expose the Company to substantial liability. The
Company believes that the oil and gas industry may experience increasing
liabilities and risks under the Comprehensive Environmental Response,
Compensation and Liability Act, as well as other federal, state and local
environmental laws, as a result of increased enforcement of environmental laws
by various regulatory agencies. Any such liabilities could be materially adverse
to the Company. New or different environmental standards imposed in the future
may also adversely affect the Company.

As an "owner" or "operator" of property where hazardous materials may exist
or be present, the Company, like others engaged in the petroleum industry, could
be liable for fines and "clean-up" or remediation costs, regardless of whether
the Company was responsible for the release of any hazardous substances.
Management of the Company does not believe that its environmental risks are
materially different from those of comparable companies engaged in similar
businesses. However, the Company has not obtained environmental compliance
surveys, including so-called "phase one" reports, which would disclose matters
of public record and could disclose evidence of environmental contamination
requiring remediation on any of its properties.

TITLE TO PROPERTIES

As is customary in the oil and gas industry, the Company conducts only a
preliminary title examination at the time properties believed to be suitable for
drilling operations are acquired. Prior to the commencement of

9
<PAGE> 10

drilling operations, a more extensive title examination of the properties in the
drill site tract believed to have higher values is generally conducted and title
documents for some other properties are examined to a lesser extent. However,
even the more extensive review would not necessarily reveal existing or
potential title defects. Accordingly, no assurance can be given that the Company
could successfully or economically defend title to its properties. See
"Business -- Title to Properties."

WELLS OPERATED UNDER JOINT OPERATING AGREEMENTS

Substantially all of the Company's business activities are conducted
through joint operating agreements in which the Company owns a partial interest
in oil and gas wells and the wells are operated by the Company or other joint
owners. At September 30, 1996, the Company owned interests in 85 gross (64.53
net) oil and gas wells where it is the operator (68% of its net wells) and 89
gross (29.83 net) oil and gas wells where it is not the operator (32% of its net
wells). To the extent the Company is not the operator, it has risks because it
must reimburse its share of costs, but does not have control over normal
operating procedures and expenditures. To the extent the Company is the
operator, it is at risk if one of the joint owners does not reimburse its share
of costs. Since the Company does not have a majority position with respect to
most wells in which it has an interest but is not the operator, the Company may
not be in a position to remove the operator in the event of poor performance.

BLANK CHECK PREFERRED STOCK

The Company is authorized to issue 40,000,000 shares of Preferred Stock,
none of which are outstanding. The 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. Also, the issuance of
Preferred Stock in the future could discourage or impede a tender offer, proxy
contest or other similar transaction involving a potential change in control of
the Company that might be viewed favorably by stockholders.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Common Stock of the Company in the
public market following the offering made hereby could adversely affect the
market price for the Common Stock. After this offering, if all of the shares
offered hereby are sold, the Company will have outstanding 17,406,358 shares of
Common Stock (assuming no exercise of the Underwriters' over-allotment option).
Of the 14,906,358 shares of Common Stock outstanding at the date of this
Prospectus, 2,908,565 shares, which may not otherwise be publicly saleable, are
covered by effective registration statements permitting public resale. The
Company believes that approximately 1,600,000 of these shares have been sold in
the public market. The Company believes that no single person, except persons
who have agreed not to sell for 180 days, owns more than 100,000 of the shares
covered by these registration statements. The officers and directors of the
Company and certain of their affiliates, who in the aggregate beneficially own
3,084,715 shares of Common Stock (230,000 of which are covered by the
registration statements), have agreed that they will not sell any Common Stock
without the prior written consent of Van Kasper & Company for a period of 180
days from the date of this Prospectus. Upon expiration of these restrictions,
the officers and directors of the Company and their affiliates will be free to
sell the shares beneficially owned by them, subject to compliance with Rule 144
under the Securities Act of 1933, as amended. See "Shares Eligible For Future
Sale."

FORWARD LOOKING INFORMATION; CERTAIN CAUTIONARY STATEMENTS

Certain statements contained in this Prospectus are forward looking
statements. Included in these are statements with respect to the Company's oil
and gas reserves, future net revenues, present values of future net revenues,
and budgeted or anticipated expenses. All of these statements involve
assumptions of future events which may not prove to be accurate and risks and
uncertainties. These risks and uncertainties include risks associated with the
drilling of wells, competition, financing availability, fluctuations in prices
of oil and gas, governmental regulation, geological concentration of the
Company's reserves and the matters set forth under "Imprecision of Oil and Gas
Reserve Estimates" above, elsewhere in the "Risk Factors" section and elsewhere
in this Prospectus. For these and other reasons, actual results may differ
materially from those projected or implied.

10
<PAGE> 11

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $9.4 million ($10.9 million, if
the Underwriters' over-allotment option is exercised in full). The Company
intends to use these net proceeds to reduce the indebtedness outstanding under
the Company's $30 million revolving loan agreement with Bank One, Texas, N.A.
(the "Bank"). At September 30, 1996, $16.2 million, bearing interest at 8.25%,
was outstanding under the revolving loan agreement. The revolving loan
agreement, which matures in July, 2001, is secured by substantially all of the
Company's oil and gas properties. These borrowings under the revolving loan
agreement were incurred to finance the Company's property acquisition, 3-D
seismic surveys, and enhancement and drilling activities.

The Company intends to reborrow under the revolving loan agreement from
time-to-time as necessary, subject to borrowing base limitations, to fund 3-D
seismic surveys, lease option exercises and drilling activities on its
properties and optioned properties in the Yegua/Frio Gas Trend, enhancement
drilling on the Company's Permian Basin properties, other drilling expenditures
and acquisition opportunities and for general corporate purposes.

11
<PAGE> 12

CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted to give effect to the sale of the shares of
Common Stock offered hereby and the anticipated use of the estimated net
proceeds therefrom, assuming no exercise of the Underwriters' over-allotment
option.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
ACTUAL AS ADJUSTED
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long term debt............................... $ -- $ --
=========== ===========
Long-term liabilities:
Revolving loan agreement(1)...................................... $ 16,213 $ 6,771
----------- -----------
Total long-term liabilities................................... 16,213 6,771
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized;
14,866,358 shares issued and outstanding and 17,366,358 shares
as adjusted................................................... 149 174
Additional paid-in surplus....................................... 11,684 21,101
Retained earnings................................................ 1,606 1,606
----------- -----------
Total stockholders' equity.................................... 13,439 22,881
----------- -----------
Total capitalization........................................ $ 29,652 $29,652
=========== ===========
</TABLE>

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

(1) For information regarding terms and interest rates, see note 3 of notes to
the Financial Statements of the Company.

12
<PAGE> 13

PRICE RANGE OF COMMON STOCK

The Company's Common Stock commenced trading on the Nasdaq National Market
on June 1, 1994 and, prior to that time, was traded on the Nasdaq Small Cap
Market. The Common Stock trades under the symbol "PLLL." The following table
sets forth, on a per share basis for the periods indicated, the high and low bid
quotations for the Common Stock as reported by Nasdaq. The bid quotations
represent inter-dealer prices, without retail mark-up, mark-down or commission,
and do not necessarily represent actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
First quarter...................................................... $ 4.69 $ 2.75
Second quarter..................................................... 4.75 3.38
Third quarter...................................................... 3.75 3.44
Fourth quarter..................................................... 3.50 2.88
1995
First quarter...................................................... 3.06 2.00
Second quarter..................................................... 2.06 1.38
Third quarter...................................................... 2.44 1.63
Fourth quarter..................................................... 1.97 1.38
1996
First quarter...................................................... 2.75 1.75
Second quarter..................................................... 4.00 2.50
Third quarter...................................................... 5.56 3.56
Fourth quarter (through December 12)............................... 5.44 4.44
</TABLE>

The last reported sale price of the Company's Common Stock on December 12,
1996, as reported by the Nasdaq National Market was $4.53 per share.

As of October 22, 1996, there were approximately 2,412 shareholders of
record of the Company's Common Stock. During the year ended December 31, 1995
and for the nine months ended September 30, 1996, the average daily trading
volume of the Common Stock was approximately 37,000 shares and 64,000 shares,
respectively.

DIVIDENDS

The Company has never paid any cash dividends on shares of its Common Stock
and does not anticipate paying any cash dividends on the Common Stock in the
future. The Company's revolving loan agreement prohibits the payment of cash
dividends.

13
<PAGE> 14

SELECTED FINANCIAL AND OIL AND GAS DATA

The following tables set forth selected financial and oil and gas data for
the Company as of the dates and for the periods indicated.

The financial data for the three years ended December 31, 1995 were derived
from the Financial Statements of the Company, which have been audited by KPMG
Peat Marwick LLP, independent auditors. The data for the nine months ended
September 30, 1995 and 1996 have been derived from unaudited financial
statements of the Company. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) have been made that are necessary
for a fair presentation of the unaudited information presented. Results for the
nine-months ended September 30, 1996 are not necessarily indicative of results
to be expected for the full year because of, among other reasons, seasonal
fluctuations in demand, variations in production and possible changes in prices
for oil and gas. The data set forth in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and related notes thereto,
appearing elsewhere in this Prospectus.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas revenues..................... $ 3,446 $ 4,693 $ 4,714 $ 3,420 $ 9,693
Costs and expenses:
Production costs....................... 1,305 1,427 1,468 1,066 1,902
General and administrative expense..... 298 340 433 315 386
Depreciation, depletion and
amortization........................ 918 1,572 1,618 1,095 2,619
------ ------ ------ ------ ------
Total costs and expenses....... 2,521 3,339 3,519 2,476 4,907
------ ------ ------ ------ ------
Operating income......................... 925 1,354 1,195 944 4,786
Interest expense, net.................... 427 711 1,035 772 931
Other expense (income)................... (74) (65) (44) (35) (57)
------ ------ ------ ------ ------
Pretax income............................ 572 708 204 207 3,912
Income tax expense....................... 196 263 67 70 1,330
------ ------ ------ ------ ------
Income before cumulative effect of
accounting change...................... 376 445 137 137 2,582
Cumulative effect of accounting
change(1).............................. (48) -- -- -- --
------ ------ ------ ------ ------
Net income............................... $ 328 $ 445 $ 137 $ 137 $ 2,582
====== ====== ====== ====== ======
Net income per share..................... $ .02 $ .03 $ .01 $ .01 $ .17
Weighted average shares outstanding...... 13,467 14,815 15,557 15,308 15,579
OTHER DATA:
EBITDA(2)................................ $ 1,917 $ 2,991 $ 2,857 $ 2,074 $ 7,462
Operating cash flow(3)................... $ 1,490 $ 2,280 $ 1,822 $ 1,302 $ 6,531
</TABLE>

<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 243 $ 2,238
Total assets............................................. $22,493 $32,875
Long-term debt........................................... $10,439 $16,213
Stockholders' equity..................................... $10,824 $13,439
</TABLE>

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

See footnotes on page 15.

14
<PAGE> 15

SELECTED OIL AND GAS DATA

The following table contains certain selected information regarding oil and
gas production and, based upon independent engineers' reports, estimated proved
reserves of the Company.

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Bbls)................ 106,000 149,000 133,000 102,000 163,000
Gas (Mcf)................. 889,000 1,391,000 1,616,000 1,138,000... 2,673,000
EBO....................... 254,000 381,000 402,000 292,000..... 609,000
Average sales price per
unit:
Oil (Bbls)................ $ 16.86 $ 15.81 $ 17.26 $ 17.17 $ 21.00
Gas (Mcf)................. $ 1.86 $ 1.68 $ 1.50 $ 1.46 $ 2.34
EBO....................... $ 13.54 $ 12.31 $ 11.72 $ 11.72 $ 15.93
Average costs per EBO:
Production costs.......... $ 5.14 $ 3.75 $ 3.65 $ 3.65 $ 3.12
General and administrative
expense................ $ 1.17 $ .89 $ 1.08 $ 1.08 $ .63
Depreciation, depletion
and amortization....... $ 3.61 $ 4.13 $ 4.02 $ 3.75 $ 4.30
RESERVE INFORMATION (AT END
OF PERIOD):
Proved reserves(4)
Oil (Bbls)................ 1,619,000 1,572,000 1,503,000 * 1,855,000
Gas (Mcf)................. 19,096,000 21,611,000 26,124,000 * 32,831,000
EBO....................... 4,802,000 5,174,000 5,857,000 * 7,327,000
Future net revenues (before
income taxes)(5)(6)....... $ 36,657,000 $ 37,354,000 $ 46,835,000 * $ 82,010,000
Future net revenues (net of
income taxes)(5)(7)....... $ 31,110,000 $ 33,032,000 $ 39,593,000 * $ 65,554,000
Present value of future net
revenues (before income
taxes)(5)(6).............. $ 21,137,000 $ 20,462,000 $ 25,890,000 * $ 52,297,000
Present value of future net
revenues (after income
taxes)(5)(7).............. $ 20,073,000 $ 20,462,000 $ 25,165,000 * $ 45,304,000
</TABLE>

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

Footnotes to table above and "Selected Financial Data" on page 14.

* The Company generally commissions reserve reports on an annual basis and did
not commission a reserve report at September 30, 1995.

(1) In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes (FAS
109)." The Company adopted FAS 109 in the first quarter of 1993. Upon
adoption of FAS 109, a net deferred tax liability of $48,052 was recognized
at January 1, 1993, reflecting the effects of a net book over tax basis and
limited utilization of the net operating loss carryforward.

(2) EBITDA, or "earnings before interest, income taxes, and depreciation,
depletion, and amortization," is included because it is used by some
investors in analyzing companies. EBITDA is not required by generally
accepted accounting principles and should not be construed as an alternative
to operating income, net income, net cash provided by operating activities
or any other measure of performance required by generally accepted
accounting principles or as an indicator of the Company's operating
performance.

(3) Operating cash flow is net income plus the sum of (i) depreciation,
depletion and amortization, (ii) deferred taxes, and (iii) cumulative effect
of accounting change. Operating cash flow is a supplemental measure used by
the Company in the evaluation of its business and should not be construed as
an alternative to operating income or cash flow from operations and is
presented solely as supplemental disclosure.

(4) The components of the Company's reserves (different grades of oil and gas)
and period-end oil and gas prices can materially impact the information
shown.

(5) See "Supplemental Oil and Gas Reserve Data (Unaudited)," note 13 of the
notes to the financial statements of the Company.

(6) Future net revenues (before income taxes) and the present value of future
net revenues (before income taxes) are based on reserve reports prepared by
independent petroleum engineers on a pre-tax basis using sales prices and
costs in effect as of the respective dates of the reports and a 10% discount
rate. See footnotes (5) and (7).

(7) Future net revenues (net of income taxes) and the present value of future
net revenues (net of income taxes) represent the estimated after-tax amounts
of the future net revenues (before income taxes) and the present value of
future net revenues (before income taxes) set forth above, applying the
statutory income tax rates in effect as of the dates for which the
information is presented, in accordance with Statement of Financial
Accounting Standards No. 69. See footnotes (5) and (6). Neither this
information, nor such information on a pre-tax basis (footnote (6)), should
be viewed as the current value of the Company.

15
<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the related notes thereto.

OVERVIEW

The Company's long-term business strategy is to increase the Company's
reserve base by utilizing 3-D seismic technology to endeavor to obtain
exploratory drilling returns on capital invested with developmental drilling
risks.

The Company intends to exploit its existing properties and acquire those
properties which it believes can be exploited by developing reserves not
previously produced. The Company undertakes projects only when it believes the
project has the potential for initial cash flow adequate to return the project's
capital expenditures within a short period of time, generally less than 36
months. The Company also endeavors to maximize the present value of its projects
by accelerating production of its reserves consistent with prudent reservoir
management.

As part of this business strategy, the Company has made significant
acquisitions of oil and gas producing properties in the Permian Basin of West
Texas and has discovered oil and gas reserves through the use of 3-D seismic
technology in the Horseshoe Atoll Reef Trend of West Texas and the Yegua/Frio
Gas Trend onshore the Gulf Coast of Texas. Capital utilized to acquire such
reserves has been provided primarily by secured bank financing, sales of the
Company's equity securities and cash flow from operations. The Company currently
anticipates that its total capital expenditures over the next 12 months in
connection with the implementation of its business strategy will be
approximately $8.0 million. See "-- Liquidity and Capital Resources."

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

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

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

16
<PAGE> 17

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Oil and gas revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production costs................................. 37.9 30.4 31.1 31.2 19.6
General and administrative expense............... 8.6 7.2 9.2 9.2 4.0
Depreciation, depletion and amortization......... 26.7 33.5 34.3 32.0 27.0
----- ----- ----- ----- -----
Total costs and expenses................. 73.2 71.1 74.6 72.4 50.6
----- ----- ----- ----- -----
Operating income................................... 26.8 28.9 25.4 27.6 49.4
----- ----- ----- ----- -----
Interest expense, net.............................. 12.4 15.2 22.0 22.6 9.6
Other expense (income)............................. (2.2) (1.4) (.9) (1.0) (.6)
----- ----- ----- ----- -----
Pretax income...................................... 16.6 15.1 4.3 6.0 40.4
Income tax expense................................. 5.7 5.6 1.4 2.0 13.7
----- ----- ----- ----- -----
Income before cumulative effect of accounting
change........................................... 10.9 9.5 2.9 4.0 26.7
Cumulative effect of accounting change............. (1.4) -- -- -- --
----- ----- ----- ----- -----
Net income......................................... 9.5% 9.5% 2.9% 4.0% 26.7%
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995

Oil and Gas Revenues. Oil and gas revenues increased $6.3 million, or 183%,
to $9.7 million for the nine months ended September 30, 1996, from $3.4 million
for the same period of 1995. The increase was primarily the result of a 317,000
EBO, or 109%, increase to 609,000 EBO in the Company's oil and gas production,
and an increase of 36% in the average sales price per EBO from $11.72 in the
nine months ended September 30, 1995 to $15.93 for the same period of 1996. Of
the $6.3 million increase in revenues, $3.7 million was attributable to
increased oil and gas production volume and $2.6 million was attributable to the
increase in average sales prices, primarily gas prices. Of the increase in
revenues, $4.4 million, or 70%, was due to production from the Yegua/Frio Gas
Trend properties which were drilled, completed and began production during 1996.

Production Costs. Production costs increased $836,000, or 78%, to $1.9
million for the nine months ended September 30, 1996, from $1.1 million for the
same period of 1995. The increase in production of 317,000 EBO was responsible
for the increase in production costs. Production costs as a percentage of
revenues declined primarily because of the 36% increase in the average sales
price per EBO. Additionally, average production costs per EBO declined 15% to
$3.12 in the first nine months of 1996 compared to $3.65 in the same period of
1995 as a result of new production from the Company's Yegua/Frio wells. At
September 30, 1996, substantially all of the Company's oil wells employed
artificial lift (pumping) and have higher associated production costs than its
gas wells, which flow. As a result of its successful drilling efforts in the
Yegua/Frio Gas Trend during the first nine months of 1996, the Company's
production became more weighted toward gas production.

General and Administrative Expenses. General and administrative expenses
increased $71,000, or 23%, to $386,000 for the first nine months of 1996, from
$315,000 for the same period of 1995. As a result of the Company's low
administrative cost structure and the increase in revenues, the Company's
general and administrative expenses as a percentage of revenues decreased from
9.2% for the nine months ended September 30, 1995 to 4.0% for the same period in
1996.

Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense increased $1.5 million, or 136%, to $2.6 million in the
nine months ended September 30, 1996, from $1.1 million for the same period of
1995. The decrease in depletion, depreciation and amortization as a percentage
of revenues is primarily a result of the increase in prices realized per EBO,
partially offset by an increase in the DD&A Rate to $4.30 in the nine months
ended September 30, 1996 from $3.75 in 1995. The increase in the DD&A Rate is
attributable to increased exploration and drilling activities. During the first
nine months of 1996, the Company added 1.5 million EBO to its reserve base, net
of 609,000 EBO of production, an increase of 31% to its net

17
<PAGE> 18

reserves. Depreciation, depletion and amortization expenses increased only 15%
per EBO, reflecting the Company's success in its drilling activities.

Net Interest Expense. Interest expense increased $159,000, or 21%, to
$931,000 for the nine months ended September 30, 1996, from $772,000 for the
same period of 1995, due principally to increased borrowings under the Company's
revolving loan agreement, offset partially by a decrease in interest rates.

Income Tax Expense. The Company had an effective tax rate that approximates
the statutory rate for the nine month periods ended September 30, 1996 and 1995.

Net Income and Operating Cash Flow. Net income increased $2.4 million, or
1,785%, to $2.6 million for the nine months ended September 30, 1996, compared
to $137,000 for the nine months ended September 30, 1995. Operating cash flow
increased approximately $5.2 million, or 402%, to $6.5 million for the nine
months ended September 30, 1996 compared to $1.3 million for the nine months
ended September 30, 1995. The net income and operating cash flow increases are
primarily due to the 183% increase in oil and gas revenues and, due to the
Company's low administrative cost structure, costs not increasing in proportion
to the increase in revenues.

YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994

Oil and Gas Revenues. Oil and gas revenues increased $21,000 in 1995,
compared to 1994. The increase was the result of a 5% increase in oil and gas
production from 381,000 EBO to 402,000 EBO, offset by a decrease of 5% in the
average sales price per EBO from $12.31 in 1994 to $11.72 in 1995.

Production Costs. Production costs increased $41,000, or 3%, to $1.5
million in 1995 compared to $1.4 million in 1994. While the average sales price
per EBO, which was slightly lower in 1995, accounted for the small increase in
production costs as a percentage of revenues, average production costs per EBO
were slightly lower at $3.65 in 1995 compared to $3.75 in 1994.

General and Administrative Expenses. General and administrative expenses
increased $93,000, or 27%, to $433,000 in 1995 from $340,000 in 1994.
Substantially all of this increase was attributable to the increase in staff of
one employee and overall increases in general corporate expenses.

Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense increased approximately $46,000, or 3%. The increase
was due to a 5% increase in production volumes sold in 1995 and the decline in
the DD&A Rate per EBO to $4.02 in 1995 from $4.13 in 1994.

Net Interest Expense. Interest expense increased $324,000, or 46%, to $1.0
million in 1995, compared to $711,000 in 1994, due primarily to increased
borrowings under the Company's revolving loan agreement.

Income Tax Expense. The Company had an effective tax rate that approximates
the statutory rate for both 1995 and 1994.

Net Income and Operating Cash Flow. Net income decreased $308,000 to
$137,000 in 1995 compared to $445,000 in 1994 and operating cash flow from
operations, before working capital adjustments, decreased $458,000, or 20%, to
$1.8 million in 1995 compared to $2.3 million in 1994.

YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993

Oil and Gas Revenues. Oil and gas revenues increased $1.3 million, or 37%,
to $4.7 million in 1994 compared to $3.4 million in 1993. The increase was
primarily the result of a 50% increase in oil and gas production from 254,000
EBO to 381,000 EBO, offset by a decrease of 9% in the average price per EBO from
$13.54 in 1993 to $12.31 in 1994. Production increased because of the Company's
new discoveries in the Horseshoe Atoll Reef Trend of West Texas that were
located using 3-D seismic technology.

Production Costs. Production costs increased $122,000, or 9%, to $1.4
million in 1994 compared to $1.3 million in 1993. The increase in production of
127,000 EBO was responsible for the increase in production costs, partially
offsetting the decrease in the average price per EBO from oil and gas sales,
average production costs per EBO declined 27% to $3.75 in 1994 compared to $5.14
in 1993 as a result of new production from the Company's Horseshoe Atoll Reef
Trend flowing oil wells. At December 31, 1995, substantially all of the
Company's oil wells employed artificial lift (pumping) and have higher
production costs than its gas wells.

18
<PAGE> 19

General and Administrative Expenses. General and administrative expense
increased $42,000, or 14%, to $340,000 in 1994 from $298,000 in 1993 due to the
increase in staff by one employee and overall increases in general corporate
expenses.

Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense increased $652,000, or 71%, to $1.57 million in 1994
from $918,000 in 1993. Depreciation, depletion and amortization expense
increased 14% per EBO, reflecting the Company's success in drilling activities.

Interest Expense. Interest expense increased $284,000, or 67%, to $711,000
in 1994 from $427,000 in 1993, due principally to increased borrowings under the
Company's revolving loan agreement.

Income Tax Expense. The Company had an effective tax rate that approximates
the statutory rate for 1994 and 1993.

Net Income and Operating Cash Flow. Net income increased $117,000 to
$445,000 in 1994 compared to $328,000 in 1993. Operating cash flow increased
$790,000, or 53%, to $2.3 million in 1994 compared to $1.49 million for 1993.

LIQUIDITY AND CAPITAL RESOURCES

As of November 1, 1996, the Company had budgeted expenditures of
approximately $8.0 million for 3-D seismic surveys, drilling and enhancement
activities in the ensuing 12 months, on the assumption that the 3-D seismic
surveys and results of drilling done from time to time will justify such
expenditures. Depending on the results of its 3-D seismic activities, the
Company may expend additional material amounts for drilling and completion
activities.

Upon completion of this Offering, after giving effect to the application of
the estimated net proceeds to repay most of the borrowings outstanding under its
revolving loan agreement, the Company believes that its borrowing capacity under
its revolving loan agreement, when combined with its currently budgeted cash
flows from operations, will be sufficient to fund its presently anticipated
working capital requirements and such capital expenditures through the next 12
months.

On July 1, 1996, the Company entered into its revolving loan agreement,
maturing in July 2001, with Bank One, Texas, N.A., to refinance the outstanding
indebtedness under its loan agreement with its former bank lender and to provide
funds for working capital. The Company may borrow up to the lesser of $30
million or the "borrowing base" in effect from time to time. The borrowing base
is redetermined by the bank semi-annually on or about April 1 and October 1 of
each year, or at such other times as the bank elects. At September 30, 1996, the
borrowing base and outstanding debt were $19.5 million and $16.2 million,
respectively.

The Company's operating activities during the nine month period ended
September 30, 1996, provided operating cash flow of $6.5 million. Net income of
$2.6 million, adjusted for non-cash charges (primarily depreciation, depletion
and amortization and deferred income taxes) of $3.9 million was the primary
source of this cash flow. Operating cash flow was $1.3 million for the nine
months ended September 30, 1995. Net income of $137,000, adjusted for non-cash
charges (primarily depreciation, depletion and amortization and deferred taxes)
of $1.2 million, was the principal source of operating cash flow for the nine
month period ended September 30, 1995.

Investing activities during the nine month period ended September 30, 1996
resulted in a net cash outflow of $9.2 million, all of which is attributable to
oil and gas property acquisition, development and exploration expenditures.
Investing activities during the nine month period ended September 30, 1995
resulted in a utilization of net cash of $1.3 million. Expenditures for oil and
gas property acquisitions and exploration and development activities were $2.5
million and sales of undeveloped oil and gas properties provided cash of $1.3
million in the nine months ended September 30, 1995.

Financing activities during the nine month period ended September 30, 1996,
which provided net cash flow of $4.6 million, consisted principally of
borrowings under the Company's revolving loan agreement. Financing activities
during the nine month period ended September 30, 1995, which provided net cash
flow of $797,000, consisted principally of activity on the Company's revolving
loan agreement and net proceeds of $1.3 million realized from the sale of shares
of the Company's Common Stock in a private placement.

19
<PAGE> 20

BUSINESS

The Company is primarily engaged in the exploration for and development of
oil and gas properties. The Company's primary focus of activities is in the
Permian Basin of West Texas and the onshore Gulf Coast area of Texas,
particularly the Yegua/Frio Gas Trend and the Horseshoe Atoll Reef Trend. At
September 30, 1996, the Company had total estimated net proved reserves of
approximately 7.3 million EBO, consisting of 32.8 Bcf of gas and 1,855,000 Bbls
of oil having future net revenue (before income taxes) of $82.0 million and a
present value (before income taxes) of $52.3 million. Approximately 75% of the
Company's proved reserves are gas and approximately 84% are proved developed.
The reserve life of the Company's proved reserves, at current production levels,
is approximately nine years.

The Company was incorporated in Texas in 1979 and reincorporated in
Delaware in 1984. The Company's offices are located at One Marienfeld Place,
Suite 465, Midland, Texas 79701 and its telephone number is (915) 684-3727.

RECENT DEVELOPMENTS

In 1989, the Company began acquiring producing properties in the Permian
Basin of West Texas. From 1989 through 1994, five major acquisitions were made.

In 1992, the Company first used 3-D seismic technology by applying it to a
small area in the Horseshoe Atoll Reef Trend, in which the Company had drilled a
discovery well in 1986. After commissioning a 3-D seismic survey of a small area
of this trend at minimal cost, the Company identified an undrilled feature.
Subsequently, the feature was drilled, resulted in a discovery and production
began from this well. Based upon this success, the Company then performed a
comprehensive geological review of the area and obtained seismic permits and
lease options on approximately 5,000 acres in the immediate area of the
discovery. The Company conducted a 3-D seismic survey on the area and, based on
the results of the survey, drilled nine additional wells. The Company achieved
an 80% success ratio in drilling these properties. While three of these wells
were subsequently plugged and abandoned due to marginal economics, the Company
was encouraged by this success in using 3-D seismic technology.

The Company believes 3-D seismic technology is not necessarily useful in
all areas. See "-- Use of 3-D Seismic Technology; Methodology." The Company
investigated several areas in which it believed the use of 3-D seismic
technology could provide the Company with a significant competitive advantage
and, in the Company's view, create the opportunity for "exploratory returns with
development risk."

Commencing in mid-1993, the Company investigated the Yegua/Frio Gas Trend
in Jackson and Wharton Counties, which are onshore in the Gulf Coast area of
Texas. The Company concluded that this area fit its 3-D seismic methodology
criteria because of the geology and production history of the area and because
portions of the area had been extensively drilled utilizing conventional 2-D
seismic surveys, providing reliable existing data for control and modeling
purposes. Once the Company determined that the area met its 3-D seismic prospect
criteria, the Company then conducted a 3-D seismic survey covering a 16,000-acre
area, investing approximately $500,000. Based on the favorable results of this
survey, the Company has entered into exploration (area of mutual interest)
agreements covering approximately 268,000 acres and, within these areas, has
obtained leases covering 35,353 gross (13,121 net) acres and lease options on
95,202 gross (23,707 net) acres in the Yegua/Frio Gas Trend. Through September
30, 1996, based on the results of its 3-D seismic surveys, the Company has
drilled 53 wells in the Yegua/Frio Gas Trend, achieving an 81% success rate.

20
<PAGE> 21

The following table reflects certain information with respect to the wells
drilled by the Company through September 30, 1996 based on 3-D seismic surveys.

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
WELLS ----------------------------------------------------
ACREAGE ---------------------------------- REALIZED FUTURE
3-D SEISMIC PROJECT -------------- PRO- SUCCESS TOTAL NET NET PRESENT
(YEAR SURVEY BEGAN) GROSS NET DRILLED DUCTIVE DRY RATIO INVESTMENT REVENUE(1) REVENUE(2) VALUE(3)
- ---------------------- ------ ----- ------- ------- --- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Horseshoe Atoll Reef
Trend (1992)........ 960 720 10 8(4) 2 80% $ 3,305,000 $3,457,000 $ 5,990,000 $ 3,945,000
Yegua/Frio Gas Trend:
Phase I & II
(1993)............ 9,043 1,796 30 22(5) 8 73% 6,051,000 5,009,000 35,489,000 26,076,000
Phase III (1994).... 5,151 1,794 23 21 2 91% 1,056,000 485,000 5,607,000 3,635,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Total......... 14,194 3,590 53 43 10 81% 7,107,000 5,494,000 41,096,000 29,701,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Totals................ 15,154 4,310 63 51 12 81% $10,412,000 $8,951,000 $47,086,000 $33,656,000
====== ===== === === === =========== ========== =========== ===========
</TABLE>

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

(1) Net of production costs, including severance taxes.

(2) Before income taxes.

(3) Present value of estimated future net revenue (before income taxes)
discounted at 10%.

(4) Three of these productive wells have been plugged and abandoned due to
marginal reserves and economics.

(5) One of these productive wells has been plugged and abandoned because it
became depleted and, therefore, uneconomic.

Based on the favorable results achieved in its 3-D seismic surveys to date,
the Company is in the process of conducting 3-D seismic surveys on the remaining
171,000 acres in the Yegua/Frio Gas Trend, as well as on certain of its Permian
Basin producing properties. The Company intends to continue to drill wells on
formations identified in the 3-D seismic surveys that meet the Company's
drilling criteria. See "Use of Proceeds."

USE OF 3-D SEISMIC TECHNOLOGY; METHODOLOGY

Before the use of 3-D seismic technology, it was difficult to locate
complex structural and stratigraphic traps. However, with 3-D seismic
technology, it has become possible to identify these geological features that
were previously undetected using conventional 2-D seismic technology. Use of 3-D
seismic technology has also enhanced the ability to fully develop acquired
producing properties. The use of 3-D seismic technology to select well locations
can also result in the Company drilling only one well to drain an entire
reservoir, rather than drilling two or more wells while attempting to delineate
the reservoir. However, quality control is essential at each step of the process
in order for the 3-D seismic data set to be economically useful.

The Company's 3-D seismic prospect criteria include identifying properties
which have the following characteristics:

- Attractive geological features and reservoir characteristics;

- Good seismic environment based on the analysis of conventional 2-D
seismic data;

- Production history in an area of interest that can be incorporated
into a 3-D seismic survey for control and modeling purposes; and

- Potential for economic impact based on the Company's investment.

After an area is selected utilizing these criteria, the Company will
determine ownership of the mineral rights to lands located within an area of
mutual interest. Once an oil and gas lease or seismic option is negotiated with
the mineral owners and a seismic permit is obtained from the surface owner, the
land is ready to be topographically surveyed in order to plan the actual 3-D
seismic surveying.

The Company's consulting geophysicists design a 3-D seismic survey based in
large part on the following parameters: depth of target zone, well control in
the area that has acoustic log control, existing conventionally-

21
<PAGE> 22

obtained 2-D seismic data, subsurface geology and existing reservoir information
from producing wells within the proposed survey area. Extensive quality control
is exercised in the design of the 3-D data set in order to ensure that it
acquires the information necessary to properly image the zone or zones of
interest. After the 3-D seismic survey has been designed, a land surveyor will
survey on the surface each source line and each receiver line on an exact "x/y"
coordinate, often times utilizing global positioning satellites. After the
surface survey is complete, the 3-D seismic survey is ready to be conducted or
"shot." Receiver lines are laid out with instrumentation that will record sound
waves once they have entered the ground from the source and returned to the
surface receiver and the 3-D survey is shot using dynamite or mechanical
vibration as the source of energy. As the 3-D survey is shot, the information is
recorded on field tapes and is sent to the seismic processor, who takes the
field data and organizes the information into a computerized data set. This data
is then analyzed and interpreted by the Company's consulting geophysicist using
sophisticated computer software and techniques. Once the data set is interpreted
and drillable features are identified, the Company, with the assistance of the
consulting geophysicist, will make an economic decision on whether or not to
drill.

STRATEGY

The Company's strategy is to continue to increase its reserves and
production and improve its financial results by emphasizing the strategies set
forth below.

Continue Focused Exploration Activities. The Company seeks to increase its
reserves and production through exploration. The Company primarily seeks
exploration prospects which (i) have known geological and reservoir
characteristics, (ii) are located near existing well bores that can be
correlated with seismic data for the prospect and (iii) could have a meaningful
impact on the Company's reserves. The Company intends to participate in several
moderate and high-potential exploration projects over the next 12 months which,
the Company believes, may significantly increase the Company's proved reserves
if successful. See "-- Use of 3-D Seismic Technology; Methodology."

Producing properties owned and operated by the Company are continually
subjected to rigorous production monitoring and evaluated for possible
enhancement opportunities. Enhancement activities include recompleting existing
well bores, identifying potential infill locations, and reviewing the
practicality of applying new drilling and production technologies that could
either improve recovery potential or result in the discovery of a new reservoir.
In connection with its enhancement operations, the Company routinely reviews the
economics of its oil and gas properties and, when it deems necessary, takes
corrective action, such as the shutting-in of temporarily uneconomic properties,
the plugging of wells deemed permanently impaired or depleted, the termination
of oil and gas leases deemed uneconomic under existing operating conditions and
the sale of properties to third parties.

Utilize Advanced Technology. The Company uses economically available
advanced technology in its exploration and development activities in order to
reduce risks, lower costs and more efficiently produce oil and gas from its
properties. The Company believes the availability of cost-effective 3-D seismic
surveys makes its use in exploration and development activities attractive from
a risk management perspective in certain areas and that the Company believes the
use of 3-D seismic surveys provides the Company with substantially more accurate
and comprehensive information for the evaluation of drilling prospects than does
conventional 2-D seismic and traditional evaluation methods. The Company
evaluates substantially all of its exploratory prospects using 3-D seismic
surveys.

In evaluating certain of its exploratory prospects, the Company also uses
amplitude versus offset ("AVO") analysis. AVO analysis can show the high
contrast between the sand and shales and provides for better interpretation of
the reservoir sands to determine if the sands contain gas.

The Company believes that its use of 3-D seismic and AVO analysis provides
it with a competitive advantage over other companies that do not regularly use
such technology by increasing the Company's likelihood of exploration success.
Nevertheless, in evaluating exploratory prospects in areas in which the Company
believes that using 3-D seismic is not advantageous, the Company uses
conventional evaluation methods.

22
<PAGE> 23

Pursue Opportunistic Acquisitions. The Company supplements its exploration
efforts with opportunistic acquisitions of producing properties. The Company
believes that, in certain circumstances, its small staff gives it a competitive
advantage in swiftly responding to acquisition opportunities.

The Company seeks to acquire producing properties that either are
underperforming relative to their potential or are suitable for analysis
utilizing 3-D seismic survey. The Company then seeks to reduce operating costs
and increase reserves and production on these properties. Enhancement activities
include 3-D seismic surveys, recompletions of existing wellbores, restimulations
of producing reservoirs, identification of potential infill drilling locations
and mechanical improvements to surface facilities and downhole equipment. When
appropriate, the Company may also renegotiate gas purchase contracts or
reconfigure gathering lines. See "-- 3-D Seismic Exploration Activities."

The Company continually screens, reviews and evaluates potential producing
property acquisitions presented by independent landmen, geologists and engineers
as well as properties available for purchase from major oil companies and other
independent oil and gas operators.

The operator of a well has significant control over its location and the
timing of its drilling. As operator, the Company, through consultants and
contractors, supervises the drilling and completion of wells and production
therefrom and the further development of surrounding properties. In addition,
the operator of a well receives fees from other working interest owners as
reimbursement for the general and administrative expenses attendant to the
operation of the wells. At September 30, 1996, the Company was serving as
operator of 85 gross (64.53 net) wells in which it owned interests.
Approximately 22% of the present value of the Company's oil and gas reserves at
September 30, 1996 is attributable to wells operated by the Company.

Continue Emphasis on Cost Controls. Throughout its operations, the Company
strives to maintain low general and administrative expenses. The geographic
focus of the Company's operations allows it to manage a relatively large asset
base with a small number of employees. The Company believes this base of
operations enables the Company to add exploratory prospects and acquire
producing properties at relatively low incremental overhead costs.

The Company also pursues cost savings through the use of outside
consultants and contractors. The Company uses geological and geophysical
consultants for its exploration and development efforts and uses contractors for
much of its field operations.

3-D SEISMIC EXPLORATION ACTIVITIES

Of the Company's current 3-D seismic exploratory projects, the Company
believes its Yegua/Frio Gas Trend projects currently appear to have the greatest
potential for increasing the Company's reserve base. The Company plans to
aggressively develop its interests in this trend during the next two years. Gas
reserves in the trend are relatively long-lived and generally have high levels
of BTU content and associated condensate. When successful wells are drilled,
production sales generally commence within 60 days from the date drilling is
commenced.

Yegua/Frio Gas Trend

The Yegua/Frio Gas Trend runs through Lavaca, Jackson, Wharton and Victoria
Counties, Texas. Total production since the early 1980s in the Yegua/Frio Gas
Trend in Jackson, Wharton and Victoria Counties, Texas, has exceeded 500 Bcf.
Most of this production has been discovered based on conventional 2-D seismic
data. The trend is named after the Yegua formation, which is composed of
multiple layers of sand embedded in thick shales. Gas reserves are generally
found in sands that have been formed into a trap that can be either structural
or stratigraphic, or a combination of both. The traps are generally 40 to 400
acres in size but some are larger, such as the El Campo Field located in eastern
Wharton County and the Toro Grande Field located in western Jackson County,
which are several thousand acres in size.

Since October 1993, the Company has participated in the drilling of 53
wells in the Yegua/Frio Gas Trend. Of the 53 wells drilled, 43 were completed as
producers and ten were dry holes, for a success ratio of 81%. One of the
producers was plugged and abandoned due to depletion and marginal economics. See
table under "-- Recent Developments" above. The Company has invested
approximately $7.1 million for seismic, leasehold,

23
<PAGE> 24

drilling and completion costs in areas of mutual interest totaling 97,000 acres
in the Yegua/Frio Gas Trend. As of September 30, 1996, the Company had received
approximately $5.5 million of net revenues from the project and had net reserves
of approximately 13.9 Bcf and 465 MBbls of oil, with future net revenue (before
income taxes) of approximately $41.1 million and a present value (before income
taxes) of approximately $29.7 million.

Since October 1993, the Company has entered into 11 exploration (area of
mutual interest) agreements with other participants to explore for gas in the
Yegua/Frio Gas Trend. These 11 agreements enable the Company to participate in
the acquisition and ownership of (i) 3-D seismic surveys, (ii) options to
acquire oil and gas leasehold interests and (iii) working interests in oil and
gas leases determined to have drillable features. While these agreements provide
for seismic operations on large blocks of acreage, the Company has an actual
working interest in only a portion of the total area surveyed. These agreements
and the Company's participation under such agreements are referred to as Phase
I, II, III and IV.

Phase I -- Jackson County, Texas. Subsequent to the Company's successful
use of 3-D seismic technology in the Horseshoe Atoll Reef of West Texas, the
Company identified the Yegua/Frio Gas Trend as an area which, it believed, would
be conducive to the use of 3-D seismic technology. The Company's initial area of
activity in the Yegua/Frio Gas Trend, referred to as Phase I, consists of an
area of mutual interest covering approximately 25 square miles (16,000 gross
acres). Of the 16,000 acre area of mutual interest, the Company owned, at
September 30, 1996, working interests ranging from 12.5% to 17.5% in 519 gross
(91 net) acres. More than 40 wells had been drilled in this area by other
operators before a 3-D seismic survey had been performed. A 3-D seismic survey
was performed, processed and interpreted in late 1993 and early 1994. Since
early 1994, the Company has participated in the drilling of seven wells in Phase
I. Five were completed as producers and two were dry holes, for a 71% success
ratio. One of the producers was plugged and abandoned due to depletion and
marginal economics. The Company intends to attempt to acquire additional
leasehold interests within the 16,000 acre area of mutual interest for future
drilling activities.

Phase II -- Jackson and Wharton Counties, Texas. The experience and
knowledge gained by the Company from its use of 3-D seismic in Phase I provided
the basis for the Company's decision to expand its exploration activities into
Phase II and Phase III of the Yegua/Frio Gas Trend. In April 1994, the Company
committed to participate in Phase II, which is an area of mutual interest
covering approximately 86 square miles (55,000 gross acres) in which the Company
owns a 20% interest and on which five 3-D seismic surveys have been conducted.
Four surveys were completed in mid-1994 and one survey was completed in
mid-1995. Since September 1994, the Company has participated in the drilling of
23 wells in Phase II, of which 17 are producers and six were dry holes, for a
74% success ratio. In this 55,000 acre area of mutual interest, the Company
owned, at September 30, 1996, a 20% working interest in 8,524 gross (1,705 net)
acres. The Company intends to attempt to acquire additional leasehold interests
within this area of mutual interest for drilling in 1997.

Phase III -- Jackson County, Texas. Phase III of the Yegua/Frio Gas Trend
is an area of mutual interest covering approximately 40 square miles (26,000
gross acres) in Jackson County, Texas in which the Company owns a 33.825%
interest. A 3-D seismic survey of Phase III was conducted by the end of 1994
and, since September 1995, the Company has participated in the drilling of 23
wells in Phase III, of which 21 are producers and two were dry holes, for a
success ratio of 91%. Of the 26,000 acre area of mutual interest on which the
Company has performed 3-D seismic surveys, the Company owned, at September 30,
1996, a 33.825% working interest in 5,151 gross (1,794 net) acres.

Phase IV -- Lavaca, Jackson, Wharton and Victoria Counties, Texas. In early
1996, based on its successful drilling activities in Phase I, II and III and on
3-D seismic surveys, the Company extended its activities in the Yegua/Frio Gas
Trend by assembling eight additional separate projects comprised of
approximately 171,000 gross acres in eight areas of mutual interest known as
Phase IV. The Company has completed two 3-D seismic surveys that are currently
being interpreted and anticipates conducting the remaining six 3-D seismic
surveys in 1997. The Company owns interests ranging from 15% to 60% in each
project. The Company's currently estimated share of the 3-D seismic and
leaseholds costs is approximately $6.0 million, of which approximately 50% has
been funded to date. The Company's share of estimated drilling and completion
costs will be dependent on the number of drillable features identified, if any,
by the 3-D seismic survey. As of November 1, 1996, the Company owned 21,159
gross (9,531 net) leasehold acres and 95,202 gross (23,707 net) option acres in
this Phase IV project.

24
<PAGE> 25

Horseshoe Atoll Reef Trend

The Horseshoe Atoll Reef Trend extends for approximately 175 miles into the
interior portion of the Midland Basin. Exploration of the trend began in 1948
with the discovery of the Kelly-Snyder Field. Since 1992, the Company has
drilled ten wells in the Horseshoe Atoll Reef Trend based on 3-D seismic
surveys, eight of which were completed as producers. Three of the producers have
been plugged and abandoned due to marginal reserves and economics. See table
under "-- Recent Developments." The Company has invested approximately $3.3
million for seismic, leasehold, drilling and completion costs in this project.
As of September 30, 1996 the Company had received approximately $3.46 million of
net revenues from the project and had estimated proved reserves of 738 MMcf of
gas and 242 MBbls of oil with future net revenue (before income taxes) of
approximately $6.0 million and a present value (before income taxes) of
approximately $3.9 million.

The Company owns working interests ranging from 70% to 80% in 960 gross
(720 net) acres in Howard County, Texas. The Company conducted two 3-D seismic
surveys on approximately 5,000 acres in 1992 and identified several reefs which
the Company believes may contain gas.

ACQUISITION AND EXPLOITATION ACTIVITIES

Since 1989, the Company has acquired interests in five significant
producing properties in the Permian Basin of West Texas.

The following table sets forth a summary of certain information regarding
the Company's acquisition and enhancement activities in the Permian Basin of
West Texas.

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
---------------------------------------------------
ACREAGE WELLS REALIZED FUTURE
--------------- ------------- TOTAL NET NET PRESENT
FIELD (YEAR ACQUIRED) GROSS NET GROSS NET INVESTMENT REVENUE(1) REVENUE(2) VALUE(3)
- --------------------------------------- ------ ------ ----- ----- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Page Field
Schleicher County (1989)............. 4,500 4,005 11 9.63 $1,671,000 $3,337,000 $ 5,909,000 $ 2,758,000
West World Strawn Field
Crockett County (1990)............... 5,538 4,846 13 11.38 1,296,000 2,000,000 13,511,000 6,230,000
Hulldale Penn Reef Field
Schleicher County (1991-92).......... 7,493 5,919 29 22.91 1,433,000 369,000 2,106,000 1,223,000
Chenot Gas Field
Pecos County (1993).................. 1,040 901 4 3.72 1,076,000 281,000 1,565,000 1,116,000
North Nena Lucia Unit
Nolan County (1992-96)............... 6,640 3,785 26 14.85 2,711,000 1,347,000 5,258,000 3,373,000
------ ------ --- ----- ---------- ----------- ----------- -----------
Total.......................... 25,211 19,456 83 62.49 $8,187,000 $7,334,000 $28,349,000 $14,700,000
====== ====== === ===== ========== =========== =========== ===========
</TABLE>

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

(1) At September 30, 1996, net of production costs, including severance taxes.

(2) Before income taxes.

(3) Present value of estimated future net revenues (before income taxes)
discounted at 10%.

Page Field. In March 1989, the Company purchased an 89.0% working interest
in approximately 4,500 gross (4,005 net) acres in the Page Field of Schleicher
County, Texas, for $450,000. As part of the transaction, the Company also became
the operator of the Page Field. At the time of acquisition, the Page Field was
producing an aggregate of approximately 300 Mcf of gas and 30 Bbls of oil per
day. In order to exploit the potential of the Page Field, the Company
refurbished the gathering system and installed new compression equipment in the
field. At September 30, 1996 production in the Page Field was approximately 700
MMcf of gas and 26 Bbls of oil per day.

25
<PAGE> 26

Based upon an internal geological and engineering evaluation, the Company
drilled an infill well in October 1996. The well is in the process of being
completed and future development of the Page Field will be dependent on the
completion results of this initial well.

West World Strawn Field. In December 1990, the Company purchased a 78%
working interest in approximately 5,538 gross (4,846 net) acres in the West
World Strawn Field of Crockett County, Texas, for $435,000. The Company
subsequently acquired an additional 9.5% working interest for $20,000,
increasing its total working interest in the West World Strawn Field to 87.5%
and related net revenue interest to 76.5%. The West World Strawn Field was
producing approximately 160 Mcf of gas and 20 Bbls of oil per day when the
Company purchased its initial interest. Immediately after the acquisition, the
Company renegotiated its gas sales contract and commenced remedial and
production enhancement work, including the installation of additional
compression equipment. At December 30, 1996, gross production in the West World
Strawn Field was approximately 575 Mcf of gas and 47 Bbls of oil per day.

Currently, the Company is performing an extensive geological and
engineering evaluation of this property, and the Company has identified behind
pipe zones that it intends to rework with the objective of further improving the
daily production and extending the economic life of the field.

Hulldale Penn Reef Field. The Company owns a 79.08% working interest in
approximately 7,493 gross (5,919 net) acres in the Hulldale Penn Reef Field of
Schleicher County, Texas. The Company's interests in the field were acquired in
late 1991 and early 1992 for approximately $500,000. The Company has focused on
reducing costs and has not engaged in significant enhancement activities in this
field since acquisition. The current gross production in the field is
approximately 100 Mcf of gas and 26 Bbls of oil per day, compared to 100 Mcf of
gas and 50 Bbls of oil per day at the time of the Company's acquisition. The
Company has identified multiple shut-in wellbores that it intends to rework with
the objective of improving the daily production and extending the economic life
of the field.

Chenot Gas Field. In September 1993, the Company acquired working interests
totalling 97.5% in approximately 1,040 gross (901 net) acres in the Chenot Gas
Field in Pecos County, Texas, for approximately $475,000. The Company initiated
enhancement operations to improve compression and renegotiated a new gas sales
contract. When the Company acquired its interests, aggregate production from the
field was approximately 450 Mcf of gas per day. At September 30, 1996, aggregate
production was 1,175 Mcf of gas per day. During 1995, a 3-D seismic survey was
completed, and the Company drilled and completed one well in September 1996. The
well is currently producing at the rate of approximately 900 Mcf of gas per day.
The Company presently anticipates drilling two additional wells in early 1997.

North Nena Lucia Unit. Beginning in 1992, the Company has purchased working
interests in the aggregate amount of 56% in approximately 6,640 gross (3,785
net) acres in the North Nena Lucia Unit located in Nolan County, Texas, for the
aggregate amount of approximately $1.9 million. At September 30, 1996, gross
production in the field was approximately 1,170 Mcf of gas and 198 Bbls of oil
per day.

In December 1995, an infill well was drilled and completed and is currently
producing at a rate of approximately 50 Bbls of oil per day. Based upon the
results of this well, the Company is in the process of conducting a 3-D seismic
survey on the unit and expects the survey to be interpreted in 1997. The Company
presently anticipates that, if justified by the survey, drilling infill
locations may commence in 1997.

26
<PAGE> 27

OIL AND GAS RESERVES

The oil and gas reserves of the Company have been estimated as of September
30, 1996 by Joe C. Neal and Associates, Midland, Texas. At September 30, 1996,
the Company had proved reserves of 32.8 Bcf of gas and 1,855,000 Bbls of oil for
a total of 7.3 million EBO. The following table sets forth certain information
regarding the Company's proved reserves:

<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Gas (Mcf).................................. 27,559,000 5,272,000 32,831,000
Oil (Bbls)................................. 1,603,000 252,000 1,855,000
Future Net Revenue (before income taxes)... $74,747,000 $7,263,000 $82,010,000
Present Value (before income taxes)........ $48,748,000 $3,549,000 $52,297,000
</TABLE>

Additional information concerning the Company's estimated proved oil and
gas reserves is included in note 13 of the notes to Financial Statements. See
"Risk Factors -- Imprecision of Oil and Gas Reserve Estimates" and "Risk
Factors -- Forward Looking Information; Certain Cautionary Statements."

WELLS DRILLED

The following table sets forth certain information concerning the number of
gross and net wells drilled by the Company during the three years ended December
31, 1993, 1994 and 1995 and the nine months ended September 30, 1996.

<TABLE>
<CAPTION>
EXPLORATORY WELLS(1) DEVELOPMENT WELLS(2)
------------------------------ -----------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
------------- ------------- ------------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Years Ended December 31:
1993.................................. 5.0 3.05 3.0 .65 -- -- -- --
1994.................................. 6.0 1.74 6.0 1.99 1.0 .81 -- --
1995.................................. 19.0 2.71 7.0 1.19 2.0 .40 -- --
Nine Months Ended September 30, 1996.... 18.0 4.95 5.0 .88 2.0 1.19 1.0 .42
</TABLE>

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

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

All of the Company's drilling is performed on a contract basis by
independent drilling contractors. The Company owns no drilling equipment.

PRODUCING WELLS AND ACREAGE

The following table summarizes the gross and net producing oil and gas
wells and the gross and net developed and undeveloped acreage in which the
Company owned an interest at September 30, 1996. Acreage in which the Company's
interest is limited to royalty or similar interests is not included in the
following table.

<TABLE>
<CAPTION>
PRODUCING WELLS ACREAGE
-------------------------------- ------------------------------------
OIL GAS DEVELOPED UNDEVELOPED
-------------- -------------- ---------------- ----------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Mexico.................... -- -- -- -- -- -- 11,357 354
Texas......................... 92 64.46 81 29.65 44,526 26,098 41,091 10,979
Oklahoma...................... -- -- 1 .25 320 80 -- --
Louisiana..................... -- -- -- -- -- -- 646 84
-- --
----- ----- ------ ------ ------ -----
Total............... 92 64.46 82 29.90 44,846 26,178 53,094 11,417
== ===== == ===== ====== ====== ====== =====
</TABLE>

27
<PAGE> 28

At September 30, 1996, in addition to the Company's interests in developed
and undeveloped acreage, the Company also owned options to acquire interests in
an additional 98,971 gross (25,310 net) acres in Texas.

Generally, developed oil and gas leases remain in force by virtue of, and
so long as, production from lands under lease is maintained. Undeveloped oil and
gas leaseholds are generally for a specified term, such as five or ten years,
with the payment of specified minimum delay rentals or extension by production.

VOLUMES, PRICES AND LIFTING COSTS

The following table sets forth, for the three years ended December 31, 1995
and the nine month periods ended September 30, 1995 and 1996, certain
information regarding volumes of the Company's net production of oil and gas,
the average sales prices per Bbl of oil and Mcf of gas produced, and the average
production (lifting) cost per unit of production.

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls).......... 106,000 149,000 133,000 102,000 163,000
Gas (Mcf)........... 889,000 1,391,000 1,616,000 1,138,000 2,673,000
EBO................. 254,000 381,000 402,000 292,000 609,000
Average sales price
per unit:
Oil (per Bbl)....... $ 16.86 $ 15.81 $ 17.26 $ 17.17 $ 21.00
Gas (per Mcf)....... $ 1.86 $ 1.68 $ 1.50 $ 1.46 $ 2.34
EBO................. $ 13.54 $ 12.31 $ 11.72 $ 11.72 $ 15.93
Average costs per EBO:
Production costs.... $ 5.14 $ 3.75 $ 3.65 $ 3.65 $ 3.12
General and admin-
istrative
expense.......... $ 1.17 $ .89 $ 1.08 $ 1.08 $ .63
Depreciation,
depletion and
amortization..... $ 3.61 $ 4.13 $ 4.02 $ 3.75 $ 4.30
</TABLE>

The Company's gas sales for the year ended December 31, 1995 represented
approximately 52% of the Company's combined oil and gas sales for such period.
The Company's gas sales for the nine-month period ended September 30, 1996
represented approximately 65% of the Company's combined oil and gas sales for
such period.

MARKETS AND CUSTOMERS

Substantially all of the Company's oil and gas production is sold at the
well site on an "as produced" basis. During the year ended December 31, 1995,
purchases of the Company's oil and gas by Enron Oil Transportation & Trading
Company, Cox & Perkins Exploration, Inc., Texaco, Inc. and Patterson Petroleum
Corporation accounted for 28%, 16%, 10% and 10%, respectively, of the Company's
operating revenues for such period. The Company believes the loss of any one of
these purchasers would not materially affect its ability to sell oil or gas, due
to the availability of other purchasers in the Company's areas of operations.

The Company's gas and oil reserves and production are not subject to any
long-term supply or similar agreements with foreign governments or authorities.

TITLE TO PROPERTIES

As is customary in the oil and gas industry, the Company makes only a
cursory review of title to undeveloped oil and gas leases at the time they are
acquired by the Company. Such reviews, while consistent with industry practices,
are incomplete. The Company believes that it generally is not economically
feasible to review in depth every individual property that the Company acquires,
especially in the case of producing property acquisitions covering a large
number of leases. Ordinarily, when the Company acquires producing properties, it
will focus its 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

28
<PAGE> 29

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. However, in the case of undeveloped leases or
prospects acquired by the Company before drilling is commenced, the Company will
generally cause a more thorough title search to be conducted, and any material
defects in title disclosed as a result of the search are generally remedied
prior to the time actual drilling of a well on the lease is commenced. The
Company believes that it has good title to its oil and gas properties, some of
which are subject to immaterial encumbrances, easements and restrictions. The
oil and gas properties owned by the Company are also typically subject to
royalty and other similar non-cost bearing interests customary in the industry.
The Company does not believe that any of these encumbrances or burdens will
materially affect the Company's ownership or use of its properties.

OFFICE FACILITIES

The Company leases its corporate offices in Midland, Texas, which consist
of approximately 4,675 square feet of office space, at a rental rate of $2,725
per month. The lease agreement expires by its own terms in June 1999.

COMPETITION

The oil and gas industry is highly competitive, particularly with respect
to the acquisition of development prospects and producing properties.
Competition for the acquisition of oil and gas properties is principally based
upon the amount and terms of the consideration offered. Competitors include the
major oil companies, independent oil and gas concerns and individual producers
and operators, many of which have financial resources, staffs and facilities
substantially greater than those of the Company.

The principal raw materials and resources necessary for the exploration
for, and the acquisition, development, production and sale of, oil and gas are
leasehold prospects under which oil and gas reserves may be discovered, drilling
rigs and related equipment to explore for such reserves, and knowledgeable
personnel to conduct all phases of oil and gas operations. The Company must
compete for such raw materials and resources with both major companies and
independent oil and gas operators.

EMPLOYEES

At November 1, 1996, the Company had five full-time employees. The Company
also retains, from time to time, independent land, geological, geophysical and
engineering consultants and expects to continue to do so in the future.
Additionally, the Company retains seven contract pumpers on a month-to-month
basis. The Company considers its employee relations to be excellent. See
"Management and Principal Stockholders."

REGULATION

Regulation of Oil and Gas Production. Oil and gas production operations are
subject to various types of regulation by state and federal agencies.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Also, numerous governmental departments and agencies,
both federal and state, are authorized by statute to issue rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for failure to comply. The regulatory burden on the
oil and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability.

Gas Price Controls. Prior to January 1993, certain gas sold by the Company
was subject to regulation by the Federal Energy Regulatory Commission ("FERC")
under the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978
("NGPA"). The NGPA prescribed maximum lawful prices for gas sales effective
December 1, 1978. None of the maximum lawful prices for gas set forth in the
NGPA could have been collected absent contractual authority to do so and only
after necessary approvals from the appropriate governmental agencies were
obtained. The NGPA also established phased-in deregulation of gas prices, which
have been further affected by the Natural Gas Wellhead Decontrol Act of 1989
(the "Decontrol Act"). Effective January 1, 1993, gas prices were completely
deregulated pursuant to the Decontrol Act, and sales of the Company's gas are no
longer subject to federal government price controls. As a result of the
enactment of the Decontrol Act, the remaining restrictions imposed by the NGA
and the NGPA with respect to "first sales" terminated on the earlier of January
1, 1993 or the expiration of the applicable contract. Any gas not otherwise
deregulated prior to

29
<PAGE> 30

January 1, 1993 was deregulated as of that date. The effect of the Decontrol Act
is to remove all remaining price controls under the NGPA and to remove all
remaining FERC certificate and abandonment jurisdiction otherwise applicable to
producers under the NGA.

Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of gas production, transportation
and sales. In addition, the FERC continues to promulgate revisions to various
aspects of the rules and regulations affecting those segments of the gas
industry which remain subject to the FERC's jurisdiction. The stated purpose of
many of these regulatory changes is to promote competition among the various
sectors of the gas industry. The ultimate impact of the complex and overlapping
rules and regulations issued by the FERC since 1985 cannot be predicted. In
addition, many aspects of these regulatory developments have not become final
but are still pending final judicial and FERC decisions.

In April 1992, the FERC issued Order 636, a rule designed to restructure
the interstate gas transportation and marketing system to remove various
barriers and practices that have historically limited non-pipeline gas sellers,
including producers, from effectively competing with pipelines. Since the
issuance of Order 636, the FERC has issued several orders making minor
modifications to Order 636. The restructuring process will be implemented on a
pipeline-by-pipeline basis through negotiations in individual pipeline
proceedings. When the FERC issued Order 636, it recognized that in an effort to
enable non-pipeline gas sellers to compete more effectively with pipelines, it
should not allow pipelines to be penalized by their existing contracts which
require the pipelines to pay above-market prices for gas. The FERC recognized
that it did not have authority to nullify these contracts, and instead
encouraged pipeline companies and producers to negotiate in good faith to
terminate or amend these contracts to conform with market conditions. Under
Order 636, a pipeline company is permitted to pass through to certain of its
customers the costs incurred by the pipeline in terminating or amending these
agreements as "transition costs." Order 636 allows customers to challenge these
costs, in which case the pipeline company will be permitted to pass through
costs only to the extent the pipeline company establishes at a FERC hearing,
among other things, that the contract was prudent at the time it was entered
into, that the costs incurred in the settlement were prudent and that the costs
were incurred solely in response to Order 636. Several parties have already
filed for judicial review of Order 636. Because the restructuring requirements
that emerge from the lengthy administrative and judicial review process may be
significantly different from those currently in effect, and because
implementation of the restructuring may vary by pipeline, it is not possible to
predict what effect, if any, the restructuring resulting from compliance with
Order 636 will have on the Company.

Oil Price Controls. Sales of oil, condensate and gas liquids by the Company
are not currently regulated and are made at market prices.

State Regulation. Oil and gas operations are subject to a wide variety of
state regulations relating to virtually all aspects of the oil and gas business.

The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. The statutes and
regulations of the State of Texas and certain other states limit the rate at
which oil and gas can be produced from the Company's properties.

Environmental Regulation. Various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, affect the Company's
operations and costs as a result of their effect on oil and gas exploration,
development and production operations. See "Risk Factors -- Government
Regulation; Environmental Risks."

30
<PAGE> 31

MANAGEMENT AND PRINCIPAL STOCKHOLDERS

Set forth below are the name and the office held by each director, officer
and key employee of the Company as of November 1, 1996, the Common Stock
ownership of each of them at that date and the aggregate compensation paid to
the Company's executive officers during the fiscal year ended December 31, 1995.
No other person owns of record or, to the knowledge of the Company, beneficially
5% or more of the Common Stock of the Company.

<TABLE>
<CAPTION>
COMMON STOCK
OWNERSHIP(3) 1995
----------------------- AGGREGATE
NAME POSITION SHARES % COMPENSATION
- ------------------------------- ----------------------- --------- ------- ------------
<S> <C> <C> <C> <C>
Thomas R. Cambridge............ Chairman of the Board 842,045(4) 5.6% $ 66,935(13)
of Directors and Chief
Executive Officer
Larry C. Oldham................ President and Director 806,090(5) 5.2% $111,482(14)
Danny H. Conklin(1)............ Director 120,624(6) *
Ernest R. Duke(1).............. Director 199,973(7) 1.3%
Myrle Greathouse(2)............ Director 1,020,488(8) 6.8%
Charles R. Pannill(2).......... Director 95,495(9) *
John S. Rutherford............. Manager of Land 5,250(10) *
Eric A. Bayley................. Manager of Engineering 73,990(11) *
Rebecca A. Burrell............. Manager of Accounting -- --
Diane Hurst.................... Accountant -- --
Thomas W. Ortloff.............. Secretary -- --
All Executive Officers and
Directors
as a Group (7 persons)....... 3,084,715(12) 19.75%
</TABLE>

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

* Less than one percent.

See footnotes on page 32.

Mr. Cambridge, age 61, has been a director of the Company since 1985. He is
an independent petroleum geologist engaged in the exploration for, development
and production of oil and gas. From 1970 until 1990, such activities were
carried out primarily through Cambridge & Nail Partnership, a Texas general
partnership. Since 1990, such oil and gas activities have been carried out
through Cambridge Production, Inc., a Texas corporation. Mr. Cambridge serves
the Company in the capacity of a consultant, not as a full-time employee. Mr.
Cambridge received a Bachelor of Science degree and a Master of Science degree
in Geology from the University of Nebraska in 1958 and 1960, respectively.

Mr. Oldham, age 43, a founder of the Company, has served as an officer and
director of the Company since its formation in 1979. Prior to the Company's
formation, Mr. Oldham was employed by Dorchester Gas Corporation during the
period from 1976 to 1979 and by KPMG Peat Marwick LLP during 1975 and 1976. Mr.
Oldham is a member of the American Institute of Certified Public Accountants and
a member of the Permian Basin Landman's Association. He received a Bachelor of
Business Administration degree from West Texas State University in 1975.

Mr. Conklin, age 61, has been a director of the Company since 1985. He is
an independent petroleum geologist and a principal partner in Philcon
Development Co., a privately held oil and gas exploration partnership. Mr.
Conklin is a director of Boatmens' First National Bank of Amarillo, Amarillo,
Texas, a director of Southwestern Public Service Company, Amarillo, Texas, and
former Chairman of the Independent Petroleum Association of America. Mr. Conklin
received a Bachelor of Science degree in Geology from Oklahoma State University
in 1957.

31
<PAGE> 32

Mr. Duke, age 69, has been a director of the Company since 1980. He is the
president and sole shareholder of Mustang Mud, Inc., a privately held oil field
service company. He received a Bachelor of Science degree in Geology from
Southern Methodist University in 1950.

Mr. Greathouse, age 74, has been a director of the Company since 1993. He
is the sole shareholder and chairman of the board of directors of Wes-Tex
Drilling Company ("Wes-Tex"), a corporation engaged in contract drilling of oil
and gas wells and, to a lesser extent, oil and gas exploration and production.
Mr. Greathouse graduated from the University of Oklahoma with a Bachelor's
degree in Business Administration in 1949.

Mr. Pannill, age 71, has been a director of the Company since 1982. Until
he retired in 1982, Mr. Pannill was employed by The Western Company of North
America for over thirty years where he served in various capacities, including
as an executive officer and director. Mr. Pannill received a Bachelor of Science
degree in Geology from Texas A&M University in 1950.

Mr. Rutherford, age 36, has been a full-time employee of the Company since
October 1993. From May 1991 to October 1993, Mr. Rutherford served as a
consultant to the Company, devoting substantially all of his consulting time to
the Company's business. From April 1988 to April 1991, Mr. Rutherford was a Vice
President in the energy lending division of Texas Commerce Bank, National
Association, Midland, Texas. Mr. Rutherford is a certified professional landman
and is a member of the Permian Basin Landman's Association and the American
Association of Professional Landmen. Mr. Rutherford graduated from Oral Roberts
University in 1982 with a degree in Education and he graduated from Baylor
University with a Master's of Business Administration degree in 1986.

Mr. Bayley, age 48, has been a full-time employee of the Company since
October, 1993. From December 1990 to October 1993, Mr. Bayley was an independent
consulting engineer and devoted substantially all of his consulting time to the
Company. Mr. Bayley graduated from Colorado School of Mines with a Bachelor of
Science degree in Mineral Engineering -- Chemistry in 1970, from Texas A&M
University with a Bachelor of Science degree in Petroleum Engineering in 1978,
and from the University of Texas of the Permian Basin with a Master of Business
Administration degree in 1984. Mr. Bayley is a member of the Society of
Petroleum Engineers and is a registered Professional Engineer.

Ms. Burrell, age 42, has been a full-time employee of the Company since
January, 1985. Ms. Burrell has worked in oil and gas accounting since 1978. Ms.
Burrell graduated from Jacksonville College with a degree in accounting in 1974.

Ms. Hurst, age 43, has been a full time employee of the Company since
August, 1994. Ms. Hurst attended West Texas State University and Midland
College. She has held various positions in oil and gas accounting since 1975.

Mr. Ortloff, age 48, has been the Secretary of the Company since October,
1994 and has been a partner and shareholder in the law firm of Lynch, Chappell &
Alsup, a professional corporation, in Midland, Texas, since 1981.
- ------------------------------

Footnotes to table on page 31.

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

(3) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and investment powers. Securities not outstanding, but
included in the beneficial ownership of each such person are deemed to be
outstanding for the purpose of computing the percentage of outstanding
securities of the class owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of the class owned
by any other person.

(4) Includes 225,000 shares of Common Stock underlying presently exercisable
stock options.

(5) Includes 612,000 shares of Common Stock underlying presently exercisable
stock options.

(6) Includes 25,000 shares of Common Stock underlying a presently exercisable
stock option.

(7) Includes 74,395 shares held by Duke and Cain Partnership, a general
partnership in which Mr. Duke is a partner, and 10,000 shares held in the
name of Mr. Duke's wife. Mr. Duke has shared voting and investment powers
with respect to such shares. Also included are 12,500 shares of Common
Stock underlying a presently exercisable stock option.

32
<PAGE> 33

(8) Includes 972,488 shares of Common Stock held directly by Wes-Tex. Mr.
Greathouse is the chairman of the board of directors and sole shareholder
of Wes-Tex and, accordingly, has shared voting and investment powers with
respect to such shares. Also included are 25,000 shares of Common Stock
underlying a presently exercisable stock option, and 1,000 shares held by a
22 member investment club of which Mr. Greathouse is a member, and as to
which Mr. Greathouse has shared voting and investment powers. See note 10
below.

(9) Includes 25,000 shares of Common Stock underlying a presently exercisable
stock option. Also included are 1,300 shares held by Mr. Pannill as
custodian for the benefit of two minor grandchildren, and as to which Mr.
Pannill disclaims beneficial ownership.

(10) All of these shares may be acquired upon exercise of presently exercisable
stock options.

(11) Includes 57,500 shares underlying presently exercisable stock options.

(12) Includes 924,500 shares of Common Stock underlying presently exercisable
stock options.

(13) Includes consulting fees of $62,475; a cash bonus of $3,560; and a
non-accountable expense reimbursement of $900.

(14) Includes salary of $92,181; a cash bonus of $5,015; insurance premiums for
nondiscriminatory group life, medical, disability and dental insurance in
the amount of $9,171; $2,350 for medical reimbursement; and $2,765
contributed by the Company to Mr. Oldham's individual retirement account
maintained under the Company's 408(k) simplified employee pension plan.

CONSULTING ARRANGEMENTS

In addition to the services provided by Messrs. Cambridge and Oldham, the
Company also relies extensively on its employees and outside advisors and
consultants to provide technical and administrative services and support in the
operation of the Company's business.

Geological

Eugene R. Erwin, an independent consulting geologist, has provided
consulting services to the Company for approximately eight years and has devoted
substantially all of his consulting time to the business of the Company. As
partial payment for consulting services provided to the Company, Mr. Erwin has
been granted working interests and overriding royalty interests in certain of
the Company's prospects. Mr. Erwin graduated from the University of Nebraska in
1954 with a Bachelor of Science degree in Geology and a Master of Science degree
in Geology in 1958.

Geophysical

Gregory G. Chapel, President of Digital Prospectors, LLC, has provided
consulting services to the Company since 1994 in connection with the Company's
activities in the Permian Basin of West Texas and the onshore Gulf Coast area of
Texas. Mr. Chapel gained experience with 3-D seismic interpretation and computer
aided exploration through working on international and domestic projects with
UNOCAL from 1980 to 1991. Mr. Chapel has worked with computer workstations since
1985 and has worked 3-D seismic projects since 1980. In 1991, Mr. Chapel joined
Interactive Exploration Solutions, where he used his expertise in workstation
technology and 3-D seismic interpretation to develop and teach advanced 3-D
workstation interpretation techniques. He has provided interpretation consulting
services on numerous 3-D seismic projects in West Texas, onshore the Gulf Coast
of Texas, Venezuela, Nigeria, and Norway. Mr. Chapel graduated from the Colorado
School of Mines with a degree in Geophysical Engineering in 1980.

Bryan Charles "Chuck" Keller, President of Interactive Seismic Imaging, LLC
("ISI"), has 16 years of experience in design, acquisition and processing of
geophysical surveys. Mr. Keller has been providing such services to the Company
since 1994 in connection with the Company's activities in the Permian Basin and
onshore Gulf Coast of Texas. Prior to co-founding ISI in 1994, Mr. Keller worked
for Halliburton Geophysical Services and its predecessor Geophysical Service,
Inc. from 1980 to 1992. His assignments at Halliburton Geophysical Services
included Area Geophysicist for Mid-Continent and Western U.S. Land Districts and
Operations Manager for data processing and data acquisition of the U.S. Land
Division. Mr. Keller graduated from Pittsburg State University with a Bachelor's
degree in Mathematics in 1980.

Steven J. Pawalek, the founder of SJP Exploration, Inc. ("SJP"), has 16
years of experience in the design and interpretation of geophysical surveys. Mr.
Pawalek has been providing such services to the Company since 1994 in connection
with the Company's activities in the Yegua/Frio Gas Trend in connection with
Phase III and Phase IV activities. Prior to founding SJP in 1991, Mr. Pawalek
gained his experience with Clayton W. Williams, Jr. from 1980 to 1989 as an
exploration geophysicist on the Texas Gulf Coast and Christico Petroleum

33
<PAGE> 34

Company from 1989 to 1991 as a senior geophysicist responsible for prospect
generation. Mr. Pawalek graduated from Texas A & M University with a Bachelor of
Science degree in Geophysics in 1980.

Engineering

Tommy E. Zachry, a registered professional petroleum engineer, is relied on
extensively by the Company for the day-to-day operation, maintenance and field
supervision of the Page, West World Strawn and Hulldale Penn Reef Fields. The
Company has maintained its arrangement with Mr. Zachry since acquiring its
interest in the Page Field in 1989. Under its arrangement with Mr. Zachry, the
Company pays Mr. Zachry a fee of $4,000 per month for providing the necessary
oversite, maintenance and operation of the Company's interests in these three
fields. Mr. Zachry owns an 11% working interest in the Page Field, an 11%
working interest in the West World Strawn Field and an 11.63% working interest
in the Hulldale Penn Reef Field. The Company also reimburses Mr. Zachry for
direct expenses incurred by him in connection with services rendered on behalf
of the Company. He has been employed in the oil and gas industry in various
capacities in excess of fifteen years, including as a field engineer, production
engineer and operations engineer. Mr. Zachry is the owner of Zachry Oil and Gas
Properties, Midland, Texas, and provides consulting services to others, as well
as the Company. Mr. Zachry graduated from Texas Tech University with a Bachelor
of Science degree in Electrical Engineering in 1975.

34
<PAGE> 35

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share, of which 14,896,358 shares were
outstanding at November 1, 1996 and 40,000,000 shares of preferred stock, $.10
par value, none of which are outstanding.

COMMON STOCK

Each share of Common Stock has one vote on all matters submitted to
stockholders. Subject to the rights and preferences of any series of preferred
stock which may be designated and issued, the holders of the Company's Common
Stock are entitled to receive dividends when and if declared by the Board of
Directors and upon liquidation to share pro rata in any and all assets remaining
after the payment of corporate liabilities and after satisfaction of any
liquidation preferences on any series of the Company's preferred stock. The
Company's Common Stock has no preemptive or other subscription rights, and the
outstanding shares of Common Stock are fully paid and nonassessable. There are
no conversion rights or redemption or sinking fund provisions with respect to
the Common Stock.

Since the Common Stock does not have cumulative voting rights, the holders
of more than 50% of the shares may, if they choose to do so, elect all the
directors of the Company and, in that event, the holders of the remaining shares
will not be able to elect any directors.

PREFERRED STOCK

The Board of Directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued in one or more series, with the
number of shares of each series and the rights, preferences and limitations of
each series to be determined by it. Among the specific matters that may be
determined by the Board of Directors are the rate of dividends, redemption and
conversion prices, terms and amounts payable in the event of liquidation and
voting rights. Issuance of shares of preferred stock could involve dilution of
the equity of the holders of Common Stock and further restrict the rights of
such stockholders to receive dividends.

REGISTRAR AND TRANSFER AGENT

The registrar and transfer agent for the Common Stock is American
Securities Transfer & Trust, Inc., Lakewood, Colorado.

35
<PAGE> 36

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market, or the
availability for sale of shares of Common Stock the sale of which would
otherwise be restricted, could adversely affect prevailing market prices and the
ability of the Company to raise equity capital in the future at a time and price
which it deems appropriate.

Upon completion of the offering the Company will have outstanding
17,406,358 shares of Common Stock (17,781,358 shares, if the Underwriters'
over-allotment option is exercised in full). All these shares of Common Stock
will be freely tradeable without restriction or limitation under the Act, except
to the extent such shares are subject to the agreement with the Underwriters
described below, and except for any shares held by "affiliates," as that term is
defined under the Securities Act of 1933, as amended (the "Securities Act"). The
shares held by affiliates may only be sold if they are registered under the Act
or unless an exemption from registration, such as the exemption provided by Rule
144 under the Securities Act ("Rule 144"), is available.

In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction) for
at least two years, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of one percent of the outstanding
common stock or the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is filed
pursuant to Rule 144. Sales under Rule 144 also are subject to certain
provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. A stockholder (or
stockholders whose shares are aggregated) who is not an affiliate of the Company
for at least 90 days prior to a proposed transaction and who has beneficially
owned "restricted securities" for at least three years is entitled to sell such
shares under Rule 144(k) without regard to the limitations described above. The
Securities and Exchange Commission has proposed amendments to Rule 144 that
would shorten these two and three year periods by one year each.

In October 1993 and February 1995, the Company privately placed 2,200,000
and 644,150 shares of Common Stock, respectively. In connection with the
February 1995 private placement, the Company also issued a common stock purchase
warrant to purchase 64,415 shares of the Company's Common Stock. All of such
shares of Common Stock are presently eligible for sale in the public market
pursuant to effective registration statements or Rule 144(k) under the Act.
Although the Company is not able to accurately determine the exact number of
shares of Common Stock that have previously been sold pursuant to such
registration statements or Rule 144(k), based on information available to the
Company, the Company believes that more than 1,600,000 shares of Common Stock
have been sold in the public market pursuant to such registration statements or
Rule 144 prior to the date of this Prospectus.

In addition, 1,512,250 shares of Common Stock are reserved for issuance
pursuant to the Company's stock option plans. At November 1, 1996, options for
the purchase of 1,207,250 shares of Common Stock were outstanding. When and if
issued on exercise of the option, these shares will be available for sale in the
public market from time to time upon registration or pursuant to available
exemptions from registration. See "Risk Factors -- Shares Eligible for Future
Sale."

36
<PAGE> 37

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Van Kasper & Company is acting as
Representative, have severally agreed to purchase from the Company the number of
shares of Common Stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Van Kasper & Company...................................................... 1,780,000
BT Securities Corporation................................................. 80,000
Howard, Weil, Labouisse, Friedrichs Incorporated.......................... 80,000
Jefferies & Company, Inc. ................................................ 80,000
Morgan Keegan & Company, Inc. ............................................ 80,000
Oppenheimer & Co., Inc. .................................................. 80,000
The Chicago Corporation................................................... 40,000
Cruttenden Roth Incorporated.............................................. 40,000
Huberman Financial, Inc................................................... 40,000
Petrie Parkman & Co. ..................................................... 40,000
Raymond James & Associates, Inc. ......................................... 40,000
Rodman & Renshaw, Inc. ................................................... 40,000
Southwest Securities, Inc. ............................................... 40,000
Stephens Inc. ............................................................ 40,000
---------
Total........................................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those subject to the Underwriters' over-allotment option described
below) if any are purchased.

Van Kasper & Company, the Representative of the several Underwriters, has
advised the Company that the Underwriters propose to offer the shares of Common
Stock directly to the public at the price to public set forth on the cover page
of this Prospectus and to certain dealers at this price less a discount not in
excess of $.15 per share. The Underwriters may allow and these dealers may
reallow a discount not in excess of $.10 per share to certain other dealers.
After the public offering of the shares of Common Stock, the offering price and
other selling terms may be changed by the Representative.

The Company has granted to the Underwriters an option, exercisable no later
than 45 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the price to public set forth on the cover
page of this Prospectus, less the underwriting discount set forth on the cover
page of this Prospectus, solely to cover over-allotments. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof as the number
of shares of Common Stock to be purchased by it shown in the above table bears
to the total offering, and the Company will be obligated, pursuant to the
option, to sell such shares of Common Stock to the Underwriters.

In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, warrants to purchase 125,000
shares of Common Stock from the Company (5% of the number of shares issued in
the offering) (the "Warrants"). The Warrants are exercisable, in whole or in
part, at an exercise price of 120% of the price to public set forth on the cover
page of this Prospectus at any time during the four-year period commencing one
year after the effective date of the Registration Statement of which this
Prospectus is a part. The warrant agreement pursuant to which the Warrants will
be issued will contain provisions providing for adjustment of the exercise price
and the number and type of securities issuable upon exercise of the Warrants
should any one or more of certain specified events occur. The Warrants grant to
the holders thereof certain rights of registration for the securities issuable
upon exercise of the Warrants.

At the closing of the offering, the Company will also pay to the
Representative a non-accountable expense allowance of $150,000.

37
<PAGE> 38

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.

Pursuant to the terms of certain lock-up agreements, the Company's
directors and officers have agreed with the Underwriters that, for a period of
180 days after the date of this Prospectus, they will not offer to sell or
otherwise sell, dispose of or grant any rights with respect to any shares of
Common Stock, now owned or hereafter acquired directly by such holders or with
respect to which they have the power of disposition, without the prior written
consent of Van Kasper & Company. The Company also has agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
any options or warrants to purchase Common Stock other than shares or options
issued under the Company's stock option plans, for a period of 180 days after
the date of this Prospectus, except with the prior written consent of Van Kasper
& Company.

CERTAIN LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Lynch, Chappell & Alsup, a Professional Corporation, The Summit,
Suite 700, 300 N. Marienfeld, Midland, Texas 79701. Thomas W. Ortloff, a
shareholder of the firm of Lynch, Chappell & Alsup, is Secretary of the Company.
Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn &
Crutcher LLP, 333 South Grand Avenue, Los Angeles, California 90071. Steven
Meiers, the partner of Gibson, Dunn & Crutcher LLP primarily responsible for
that firm's work on those matters, beneficially owns 10,000 shares of the
Company's Common Stock.

EXPERTS

The financial statements of the Company as of December 31, 1994 and 1995,
and for each of the years in the three-year period ended December 31, 1995 have
been included in this Prospectus and in the Registration Statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

The estimated reserves and related calculations of Joe C. Neal & Associates
set forth in this Prospectus have been included herein in reliance upon the
authority of said firm as experts in petroleum engineering.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company with the Commission can be inspected, without charge, and copies may be
obtained at prescribed rates, at the Public Reference Section of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Regional Offices of the Commission at 500 West Madison Street, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. The
Commission maintains a Worldwide Web site on the Internet at http:// www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the shares of Common Stock offered pursuant
to this Prospectus. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement, the exhibits thereto and the documents incorporated therein by
reference. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the Registration Statement or the copy of such
contract or other documents filed as an exhibit to or incorporated by reference
in the Registration Statement, and each such statement is qualified in all
respects by such reference.

38
<PAGE> 39

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents that previously were, or are in the future, filed
with the Commission (File No. 0-13305) pursuant to the Exchange Act, are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the year ended December 31, 1995; (ii) the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1996, June 30, 1996 and September 30,
1996; (iii) the Company's Proxy Statement dated April 15, 1996; and (iv) all
documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering made hereby.

Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that such statement is modified or replaced by a statement contained
in this Prospectus or in any other subsequently filed document that also is or
is deemed to be incorporated by reference into this Prospectus. Any such
statement so modified or superseded shall not be deemed, except as so modified
or replaced, to constitute a part of this Prospectus. The Company will provide
without charge to each person to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any or
all of the documents referred to above that have been or may be incorporated in
this Prospectus by reference, other than exhibits to such documents. Written or
oral requests for such copies should be directed to Rebecca A. Burrell, Parallel
Petroleum Corporation, One Marienfeld Place, Suite 465, Midland, Texas 79701
(telephone: (915) 684-3727).

GLOSSARY

As used in this Prospectus:

"Area of mutual interest" means, generally, an agreed upon area of land,
varying in size, included and described in an oil and gas exploration agreement
which participants agree will be subject to rights of first refusal as among
themselves, such that any participant acquiring any minerals, royalty,
overriding royalty, oil and gas leasehold estates or similar interests in the
designated area, is obligated to offer the other participants the opportunity to
purchase their agreed upon percentage share of the interest so acquired on the
same basis and cost as purchased by the acquiring participant. If the other
participants, after a specific time period, elect not to acquire their pro-rata
share, the acquiring participant is typically then free to retain or sell such
interests.

"Bbl" means barrel or barrels.

"Bcf" means billion cubic feet.

"DD&A Rate" means the amount of depreciation, depletion and amortization
per EBO production.

"Drillable feature" means a geologic anomaly which may contain hydrocarbons
that has been identified through the use of 3-D seismic surveys.

"EBO" means equivalent barrels of oil, determined using the ratio of six
Mcf of gas to one barrel of oil, condensate or gas liquids.

"Future net revenues (before income taxes)" means an estimate of future net
revenues from a property at a specified date, after deducting production and ad
valorem taxes, future capital costs and operating expenses, before deducting
income taxes. Future net revenues (before income taxes) should not be construed
as being the fair market value of the property.

"Future net revenues (net of income taxes)" means an estimate of future net
revenues from a property at a specified date, after deducting production and ad
valorem taxes, future capital costs and operating expenses, net of income taxes.
Future net revenues (net of income taxes) should not be construed as being the
fair market value of the property.

"Mcf" means thousand cubic feet.

"MMcf" means million cubic feet.

39
<PAGE> 40

"MBbl" means thousand barrels.

"Gross" oil and gas wells or "gross" acres is the number of wells or acres
in which the Company has an interest.

"Net" oil and gas wells or "net" acres are determined by multiplying
"gross" wells or acres by the Company's working interest in such wells or acres.

"Present value of future net revenues (before income taxes)" means future
net revenues (before income taxes) discounted at an annual rate of 10% to
determine their "present value." The present value is shown to indicate the
effect of time on the value of the revenue stream and should not be construed as
being the fair market value of the properties.

"Present value of future net revenues (net of income taxes)" means future
net revenues (net of income taxes) discounted at an annual rate of 10% to
determine their "present value." The present value is shown to indicate the
effect of time on the value of the revenue stream and should not be construed as
being the fair market value of the properties.

"Production costs" means lease operating expenses and severance and ad
valorem taxes on oil and gas production.

"Proved reserves" or "reserves" means gas and oil, condensate and gas
liquids on a net revenue interest basis, found to be commercially recoverable.

"Proved developed reserves" includes only those proved reserves expected to
be recovered from existing completion intervals in existing wells and those
reserves that exist behind the casing of existing wells when the cost of making
such reserves available for production is relatively small compared to the cost
of a new well.

"Proved undeveloped reserves" includes those proved reserves expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.

"Trend" means a geographical area where similar geological, geophysical, or
oil and gas reservoir and production characteristics may exist.

40
<PAGE> 41

PARALLEL PETROLEUM CORPORATION

INDEX TO THE FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1994 and 1995, and September 30, 1996
(unaudited)..................................................................... F-3
Statements of Operations for the years ended December 31, 1993, 1994, and 1995,
and the nine months ended September 30, 1995 and 1996 (unaudited)............... F-4
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994,
and 1995, and the nine months and 1996 (unaudited).............................. F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995,
and the nine months ended September 30, 1995 and 1996 (unaudited)............... F-6
Notes to Financial Statements.................................................... F-7
</TABLE>

F-1
<PAGE> 42

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Parallel Petroleum Corporation:

We have audited the accompanying balance sheets of Parallel Petroleum
Corporation as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Parallel Petroleum
Corporation as of December 31, 1994 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995, in conformity with generally accepted accounting principles.

As discussed in notes 1 and 5 to the financial statements, the Company
changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".

KPMG PEAT MARWICK LLP

Midland, Texas
February 2, 1996

F-2
<PAGE> 43

PARALLEL PETROLEUM CORPORATION

BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- 1996
ASSETS 1994 1995 -------------
------- ------- (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 598 $ 559 $ 416
Accounts Receivable:
Oil and gas........................................... 470 648 2,158
Others, net of allowance for doubtful accounts of $28
in 1994, 1995 and 1996.............................. 243 115 701
Affiliate............................................. 2 3 10
------- ------- -------
715 766 2,869
Prepaid expenses and other............................... 13 16 12
Undeveloped leases held for sale......................... 464 61 --
Deferred income taxes.................................... -- 114 210
------- ------- -------
Total current assets.................................. 1,790 1,516 3,507
------- ------- -------
Property and equipment, at cost:
Oil and gas properties, full cost method................. 27,658 30,880 40,362
Other.................................................... 298 316 372
------- ------- -------
27,956 31,196 40,734
Less accumulated depreciation and depletion.............. 7,232 8,838 11,457
------- ------- -------
Net property and equipment............................ 20,724 22,358 29,277
------- ------- -------
Other assets, net of accumulated amortization of $20 in
1994, $24 in 1995 and $40 in 1996........................ 247 41 91
------- ------- -------
Total assets.......................................... $22,761 $23,915 $32,875
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade................................................. $ 1,696 856 $ 1,208
Affiliate............................................. 327 20 61
------- ------- -------
Total current liabilities........................... 2,023 876 1,269
------- ------- -------
Long-term debt............................................. 11,000 11,675 16,213
Deferred revenue........................................... 50 -- --
Deferred income taxes...................................... 359 528 1,954
Contingencies
Stockholders' equity:
Preferred stock -- par value of $.10 per share,
authorized 40,000 shares, none issued................. -- -- --
Common stock -- par value of $.01 per share, authorized
100,000 shares, issued and outstanding 14,175 in 1994,
14,854 in 1995 and 14,866 in 1996..................... 142 149 149
Additional paid-in surplus............................... 10,300 11,663 11,684
Retained earnings (deficit).............................. (1,113) (976) 1,606
------- ------- -------
Total stockholders' equity............................ 9,329 10,836 13,439
------- ------- -------
Total liabilities and stockholder's equity............ $22,761 $23,915 $32,875
======= ======= =======
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 44
PARALLEL PETROLEUM CORPORATION

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Oil and gas revenues......................... $ 3,446 $ 4,693 $ 4,714 $ 3,420 $ 9,693
------- ------- ------- ------- -------
Costs and expenses:
Production costs........................... 1,305 1,427 1,468 1,066 1,902
General and administrative expense......... 298 340 433 315 386
Depreciation, depletion and amortization... 918 1,572 1,618 1,095 2,619
------- ------- ------- ------- -------
Total costs and expenses................ 2,521 3,339 3,519 2,476 4,907
------- ------- ------- ------- -------
Operating income........................ 925 1,354 1,195 944 4,786
------- ------- ------- ------- -------
Other (income) expense, net:
Interest expense........................... 427 711 1,035 772 931
Other expense (income)..................... (74) (65) (44) (35) (57)
------- ------- ------- ------- -------
Total other expense, net................ 353 646 991 737 874
------- ------- ------- ------- -------
Pretax income before cumulative effect of
accounting change.......................... 572 708 204 207 3,912
Income tax expense........................... 196 263 67 70 1,330
------- ------- ------- ------- -------
Income before cumulative effect of
accounting change.......................... 376 445 137 137 2,582
Cumulative effect of accounting change....... (48) -- -- -- --
------- ------- ------- ------- -------
Net income.............................. $ 328 $ 445 $ 137 $ 137 $ 2,582
======= ======= ======= ======= =======
Income per common share:
Income before cumulative effect of
accounting change....................... $ 0.03 $ 0.03 $ 0.01 $ 0.01 $ 0.17
Cumulative effect of accounting change..... (0.01) -- -- -- --
------- ------- ------- ------- -------
Net income per common share............. $ 0.02 $ 0.03 $ 0.01 $ 0.01 $ .17
======= ======= ======= ======= =======
Weighted average common shares and common
stock equivalents outstanding.............. 13,467 14,815 15,557 15,308 15,579
======= ======= ======= ======= =======
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE> 45

PARALLEL PETROLEUM CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL RETAINED TOTAL
NUMBER PAID-IN EARNINGS STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993..................... 11,772 $118 $ 7,109 $ (1,886) $ 5,341
Issuance of stock............................ 2,200 22 2,918 -- 2,940
Options exercised............................ 95 1 42 -- 43
Tax benefits related to options.............. -- -- 65 -- 65
Net income................................... -- -- -- 328 328
------ ---- ------- ------- -------
Balance at December 31, 1993................... 14,067 141 10,134 (1,558) 8,717
Options exercised............................ 108 1 83 -- 84
Tax benefits related to options.............. -- -- 83 -- 83
Net income................................... -- -- -- 445 445
------ ---- ------- ------- -------
Balance at December 31, 1994................... 14,175 142 10,300 (1,113) 9,329
Issuance of stock............................ 644 6 1,315 -- 1,321
Options exercised............................ 35 1 35 -- 36
Tax benefits related to options.............. -- -- 13 -- 13
Net income................................... -- -- -- 137 137
------ ---- ------- ------- -------
Balance at December 31, 1995................... 14,854 149 11,663 (976) 10,836
Options exercised (unaudited)................ 12 -- 21 -- 21
Net income (unaudited)....................... -- -- -- 2,582 2,582
------ ---- ------- ------- -------
Balance at September 30, 1996 (unaudited)...... 14,866 $149 $11,684 $ 1,606 $13,439
====== ==== ======= ======= =======
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 46
PARALLEL PETROLEUM CORPORATION

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 328 $ 445 $ 137 $ 137 $ 2,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and
amortization............................ 918 1,572 1,618 1,095 2,619
Cumulative effect of accounting change.... 48 -- -- -- --
Income taxes.............................. 196 263 67 70 1,330
Other, net................................... (7) (78) 8 174 (50)
Changes in assets and liabilities:
Decrease (increase) in trade
receivables............................. (138) 175 (51) (45) (2,103)
Decrease (increase) in prepaid expenses
and other............................... 15 (5) (3) (30) 4
Increase (decrease) in accounts payable
and accrued liabilities................. 727 (518) (281) (1,272) 163
------- ------- ------- ------- --------
Net cash provided by operating
activities........................... 2,087 1,854 1,495 129 4,545
------- ------- ------- ------- --------
Cash flows from investing activities:
Additions to property and equipment.......... (4,700) (6,317) (4,518) (2,488) (9,855)
Proceeds from disposition of property and
equipment................................. 402 572 597 1,261 608
Acquisition of undeveloped leases held for
sale...................................... (1,004) (772) (524) (106) --
Proceeds from disposition of undeveloped
leases held for sale...................... 381 12 731 -- --
------- ------- ------- ------- --------
Net cash used in investing activities..... (4,921) (6,505) (3,714) (1,333) (9,247)
------- ------- ------- ------- --------
Cash flows from financing activities:
Proceeds from the issuance of long-term
debt...................................... 2,625 5,191 2,285 1,050 19,607
Payments of long-term debt................... (3,036) -- (1,610) (1,610) (15,069)
Proceeds from exercise of options............ 43 84 36 36 21
Stock offering costs......................... -- (149) (142) (290) --
Proceeds from common stock issuance.......... 2,940 -- 1,611 1,611 --
------- ------- ------- ------- --------
Net cash provided by financing
activities.............................. 2,572 5,126 2,180 797 4,559
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................. (262) 475 (39) (407) (143)
Cash and cash equivalents, beginning of
period....................................... 385 123 598 598 559
------- ------- ------- ------- --------
Cash and cash equivalents, end of period....... $ 123 $ 598 $ 559 $ 191 $ 416
======= ======= ======= ======= ========
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE> 47
PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Parallel Petroleum Corporation, a Delaware corporation (the Company), is
primarily engaged in, and its only industry segment is, the acquisition of, and
the exploration for, development, production and sale of, crude oil and natural
gas. The Company's business activities are carried out primarily in Texas. The
Company's activities in Texas are focused in the onshore Gulf Coast area of
Jackson and Wharton Counties, Texas, and in the Permian Basin of West Texas.

Property and Equipment

Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such costs capitalized
in 1993, 1994, 1995 and for the period ended September 30, 1996 totaled
$375,898, $527,000, $512,000 and $427,800, respectively.

Depletion of such costs is provided using the units-of-production method
based upon estimates of proved oil and gas reserves with oil and gas production
being converted to a common unit of measure based upon their relative energy
content. Depreciation, depletion and amortization per equivalent unit of
production (EBO) was $3.61, $4.13, $4.02, and $4.30 for 1993, 1994, 1995 and for
the nine months ended September 30, 1996, respectively. Costs from unproved
properties are excluded from depletion until evaluated.

In accordance with the full cost method of accounting, the net capitalized
costs of oil and gas properties (full cost ceiling limitation) are not to exceed
their related estimated future net revenues discounted at 10%, and lower of cost
or estimated fair value of unproved properties, net of tax considerations.

Upon retirement or disposition of assets other than oil and gas properties,
the cost and related accumulated depreciation are removed from the accounts with
the resulting gains or losses, if any, reflected in results of operations.
Depreciation of other property and equipment is computed using the straight-line
method based on their estimated useful lives.

Maintenance and repairs are charged to operations; renewals and betterments
are charged to the appropriate property and equipment accounts.

Undeveloped Leases Held for Sale

Undeveloped leases held for sale represent unproven oil and gas properties
which the Company expects to sell within one year. Such properties are carried
at the lower of cost or net realizable value and are excluded from amortization.
Gains or losses upon disposition or impairment of such properties are treated as
an adjustment to the full cost pool with no gain or loss recognized.

Income Taxes

The Company accounts for federal income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), which
required a change from the deferred method of

F-7
<PAGE> 48

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

accounting for income taxes under Accounting Principles Board ("APB") Opinion 11
to the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, 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
FAS 109, 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.

Pursuant to the deferred method of accounting for income taxes under APB
Opinion 11, which applied to 1992 and prior years, deferred income taxes were
recognized for income and expense items that are reported in different years for
financial and income tax reporting purposes using the tax rates applicable for
the year of the calculation. Under the deferred method, deferred taxes were not
adjusted for subsequent tax rate changes.

Environmental

The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.

Revenue Recognition

The Company uses the sales method of accounting for crude oil revenues. To
the extent that crude oil is produced but not sold, the oil in tanks is not
recorded as inventory on the financial statements. The oil in tanks at December
31, 1994 and 1995 was not material.

The Company uses the sales method of accounting for natural gas revenues.
Under this method, revenues are recognized based on actual volumes of gas sold
to purchasers.

Gas Balancing

Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under gas
balancing arrangements in excess of the Company's interest in properties covered
by such agreements. As of December 31, 1995, the Company had no significant
amounts outstanding under gas balancing arrangements.

Net Income Per Common Share

Net income per common share has been computed by dividing net earnings by
the weighted average number of shares and share equivalents, if more than 3%
dilutive, outstanding during the period. There were no significant differences
between the primary and fully dilutive earnings per share.

F-8
<PAGE> 49

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Use of Estimates in the Preparation of Financial Statements

Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

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.

Interim Financial Statements

The interim financial information as of September 30, 1996, and for the
nine months ended September 30, 1995 and 1996, is unaudited. However, in the
opinion of management, these interim financial statements include all the
necessary adjustments to fairly present the results of the interim periods, and
all such adjustments are of a normal recurring nature. The interim financial
statements should be read in conjunction with the audited financial statements
for the years ended December 31, 1993, 1994 and 1995.

Reclassifications

Certain reclassifications have been made to the 1993 and 1994 amounts to
conform to the 1995 presentation.

(2) DISCLOSURES ABOUT 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 does not differ from the existing rate on the
Company's long-term debt balance.

(3) LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, at the bank's prime rate plus
.75% (9.25% at December 31, 1995), secured by
substantially all of the Company's oil and gas
properties, due in forty-eight monthly payments
commencing June 1997.............................. $11,000 $11,675 $ --
Note payable to bank, at bank's base lending rate
(8.25% at September 30, 1996)(a).................. -- -- 16,213
Less: current maturities............................ -- -- --
------- ------- -------
$11,000 $11,675 $16,213
======= ======= =======
</TABLE>

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

(a) The note payable is classified as long-term due to a maturity date of July
1, 2001.

F-9
<PAGE> 50

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(3) LONG-TERM DEBT -- (CONTINUED)

On July 31, 1995 the Company amended and renewed its loan agreement. The
note provides for a two-year revolving line of credit of $25,000,000 with a
borrowing base of $12,000,000, followed by a four-year term loan requiring
forty-eight monthly principal payments beginning June 1997. The borrowing base
was subject to redetermination every six months with the latest redetermination
date on November 30, 1995. The note was secured by substantially all of the
Company's oil and gas properties. Commitment fees of .5% per annum on the
difference between the commitment and the average daily amount outstanding were
due quarterly.

The amended and renewed loan agreement contains various restrictive
covenants and compliance requirements, which include (1) maintenance of certain
financial ratios, (2) limiting the incurrence of additional indebtedness, and
(3) no payment of dividends.

On July 1, 1996, the Company entered into a new loan agreement to refinance
the outstanding indebtedness with its former lender and to provide funds for
working capital. The note provides for a revolving credit facility of
$30,000,000 with a borrowing base of $19,500,000. The note matures July 1, 2001.
The borrowing base is subject to redetermination every six months on October 1,
and April 1, with the latest redetermination date on August 12, 1996. The note
is secured by substantially all of the Company's oil and gas properties.
Commitment fees of .25% per annum on the difference between the commitment and
the average daily amount outstanding are due quarterly.

The unpaid principal balance on the note bears interest at the election of
the Company at a rate equal to (i) the bank's base lending rate or (ii) the
bank's eurodollar rate plus a margin of 2.5%. On September 30, 1996, the
interest rate in effect was the bank's base lending rate of 8.25%.

The new loan agreement contains various restrictive covenants and
compliance requirements, which include (1) maintenance of certain financial
ratios, (2) limiting the incurrence of additional indebtedness, and (3) no
payment of dividends.

(4) STOCK OPTIONS AND WARRANTS

As of September 30, 1996, the Company granted incentive stock options
covering a total of 85,000 shares of common stock to certain key employees of
the Company. The exercise price of $5.40 per share was not less than the
estimated fair market value of the shares at the date of the grant. The options
are exercisable at various times over periods commencing August 14, 1997 and
extending through August 14, 2006. Also as of September 30, 1996, certain
executive officers exercised options to purchase 12,250 shares of common stock
at $1.75 per share.

During 1995, the Company granted incentive stock options covering a total
of 70,000 shares of common stock to certain key employees of the Company. The
exercise price of $1.75 per share was not less than the estimated fair market
value of the shares at the date of the grant. The options are exercisable at
various times over periods commencing May 31, 1996 and extending through May 31,
2005. The same employees canceled incentive stock options during 1995 covering
70,000 shares of common stock at an exercise price of $3.94 per share, and
70,000 shares at $3.44 per share for a total of 140,000 shares. Also during
1995, an executive officer exercised options to purchase 35,000 shares of common
stock at $1.03 per share. Exercise of the nonqualified stock options resulted in
a deferred tax effect of $12,257.

During 1994, the Company granted incentive stock options covering a total
of 115,000 shares of common stock to certain key employees of the Company. The
exercise price of $3.44 per share was not less than the estimated fair market
value of the shares at the date of the grant. The options are exercisable at
various times over periods commencing October 6, 1995 and extending through
October 6, 2004. Also during 1994, executive

F-10
<PAGE> 51

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(4) STOCK OPTIONS AND WARRANTS -- (CONTINUED)

officers exercised options to purchase 20,000 shares of common stock at $.34 per
share; 37,500 shares of common stock at $.68 per share; and 50,000 shares at
$1.03 per share for a total of 107,500 shares. Exercise of the nonqualified
stock options resulted in a deferred tax effect of $83,391.

During 1993, the Company granted nonqualified and incentive stock options
covering a total of 340,000 shares of common stock to certain executive officers
and key employees of the Company. The exercise prices of $3.19 and $3.94 per
share were not less than the estimated fair market value of the shares at the
date of the grant. The options are exercisable at various times over periods
commencing October 18, 1994 and extending through October 18, 2003. Also during
1993, an executive officer exercised the option to purchase 80,000 shares of
common stock at $.34 per share and 15,000 shares at $1.03 per share for a total
of 95,000 shares. Exercise of the nonqualified stock options resulted in a
deferred tax effect of $65,552.

<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance at January 1, 1993........................................ 987,000 $.34 to $1.03
Options granted................................................. 340,000 $3.19 to $3.94
Options exercised............................................... (95,000) $.34 to $1.03
---------
Balance at December 31, 1993...................................... 1,232,000 $.34 to $3.94
Options granted................................................. 115,000 $3.44
Options exercised............................................... (107,500) $.34 to $1.03
---------
Balance at December 31, 1994...................................... 1,239,500 $.34 to $3.94
Options granted................................................. 70,000 $1.75
Options exercised............................................... (35,000) $1.03
Options canceled................................................ (140,000) $3.44 to $3.94
---------
Balance at December 31, 1995...................................... 1,134,500 $.34 to $3.94
Options granted (unaudited)..................................... 85,000 $5.40
Options exercised (unaudited)................................... (12,250) $1.75
---------
Balance at September 30, 1996 (unaudited)......................... 1,207,250 $.34 to $5.40
=========
Options exercisable at September 30, 1996 (unaudited)............. 1,124,750 $.34 to $5.40
=========
</TABLE>

In connection with the private placement offering (See Note 9), a
broker-dealer responsible for introducing the Company to the Company's principal
placement agent received a five-year warrant to purchase 64,415 shares of common
stock at a price of $2.75 per share.

The Company had outstanding at December 31, 1994, 1995, and as of September
30, 1996, 300,000 warrants. Each warrant allows the holder to buy one share of
common stock for $6.00. The warrants were issued as part of the Company's
initial public offering in 1980 and are exercisable for a 30 day period
commencing on the date a registration statement covering exercise is declared
effective. The warrants contain antidilution provisions and in the event of
liquidation, dissolution, or winding up of the Company, the holders are not
entitled to participate in the assets of the Company.

(5) INCOME TAXES

As discussed in Note 1, effective January 1, 1993, the Company adopted FAS
109. The cumulative effective of this accounting change was a charge of $48,052
as of January 1, 1993 and is reported separately in the

F-11
<PAGE> 52

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(5) INCOME TAXES -- (CONTINUED)

accompanying statement of operations for the year ended December 31, 1993. Prior
years financial statements have not been restated to apply the provisions of FAS
109.

Federal income tax expense differs from the amount computed at the Federal
statutory rate as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1993 1994 1995
---- ---- ---
<S> <C> <C> <C>
Income tax expense at statutory rate........................... $195 $240 $69
Nondeductible expenses and other............................... 1 23 (2)
---- ---- ---
Income tax expense............................................. $196 $263 $67
==== ==== ===
</TABLE>

The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
are as follows (in thousands):

<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
CURRENT
-------
Deferred income tax assets:
Net operating loss carryforwards expected to be utilized in
1996.......................................................... $ -- $ 114
------ ------
Total current deferred tax assets................................ $ -- $ 114
====== ======
NONCURRENT
----------
Deferred income tax assets:
Net operating loss carryforwards................................. $3,537 $3,376
Statutory depletion carryforwards................................ 178 186
------ ------
Total noncurrent deferred income tax assets...................... 3,715 3,562
------ ------
Deferred income tax liabilities:
Property and equipment, principally due to differences in basis,
expensing of intangible drilling costs for tax purposes and
depletion..................................................... 4,066 4,090
Other.............................................................. 8 --
------ ------
Total deferred income tax liabilities............................ 4,074 4,090
------ ------
Net noncurrent deferred income tax liability..................... $ 359 $ 528
====== ======
</TABLE>

A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future and the availability of certain tax planning strategies that
would generate taxable income to realize the net tax benefits, if implemented,
management has determined that taxable income of the Company will more likely
than not be sufficient to fully utilize available carryforwards prior to their
ultimate expiration.

F-12
<PAGE> 53

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(5) INCOME TAXES -- (CONTINUED)

As of December 31, 1995, the Company had investment tax credit and net
operating loss carryforwards for regular and alternative minimum tax purposes
available to reduce future taxable income and tax liability, respectively. These
carryforwards expire as follows (in thousands):

<TABLE>
<CAPTION>
ALTERNATIVE
MINIMUM
NET OPERATING INVESTMENT TAX TAX NET
LOSS CREDIT OPERATING LOSS
------------- -------------- --------------
<S> <C> <C> <C>
1996.......................................... $ 336 $14 $ --
1997.......................................... 779 37 --
1998.......................................... 598 -- --
1999.......................................... 852 -- --
2000.......................................... 562 -- --
2001.......................................... 684 -- 2,794
2002.......................................... 421 -- 291
2003.......................................... 138 -- 82
2004.......................................... 257 -- 48
2005.......................................... 69 -- --
2006.......................................... 1,011 -- --
2007.......................................... 792 -- --
2008.......................................... 1,596 -- 1,920
2009.......................................... 2,170 -- 1,974
------- --- ------
$10,265 $51 $7,109
======= === ======
</TABLE>

(6) MAJOR CUSTOMERS

The following purchasers accounted for 10% or more of the Company's oil and
gas sales for the periods ended:

<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1993 1994 1995 1996
---- ---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Purchaser A......................................... 31% 31% 28% 11%
Purchaser B......................................... 17% -- -- --
Purchaser C......................................... -- 10% 10% --
Purchaser D......................................... -- -- 10% --
Purchaser E......................................... 12% -- -- --
Purchaser F......................................... 11% -- -- --
Purchaser G......................................... -- -- 16% 57%
</TABLE>

(7) EMPLOYEE PENSION PLAN

Effective September 1, 1988, the Company established a simplified employee
pension plan covering all salaried employees of the Company. The employees
voluntarily contribute a portion of their eligible compensation, not to exceed
$7,000, adjusted for inflation beginning in 1988, to the plan. The Company's
contribution, including the employees contribution, cannot exceed the lesser of
$30,000 or 15% of compensation. During 1995 and 1994, the Company contributed an
aggregate of $6,739 and $2,626, respectively, of which $2,765 and

F-13
<PAGE> 54

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(7) EMPLOYEE PENSION PLAN -- (CONTINUED)

$1,129, respectively, was allocated to a Director of the Company. There were no
Company contributions during 1993. The Company has no obligation to make
contributions to the plan.

(8) STATEMENTS OF CASH FLOWS

During 1995, the Company transferred $148,115 of deferred stock offering
costs related to a private placement of common stock to additional paid-in
surplus. See Note 9.

During 1993, 1994, 1995 and as of September 30, 1996, $704,785, $338,821,
$196,582 and $60,413 were transferred from leases held for resale to oil and gas
properties, respectively. These transfers are considered non-cash transactions.

No Federal taxes were paid in 1993, 1994 and 1995 and for the nine months
ended September 30, 1996, as a result of net operating losses or loss
carryforwards. Payments of interest were $427,020, $703,775 and $1,027,461 in
1993, 1994 and 1995, respectively, and $913,805 for the nine months ended
September 30, 1996.

At December 31, 1994, 1995 and as of September 30, 1996, there were
$1,123,442, $257,863 and $487,814, respectively, of property additions accrued
in accounts payable.

(9) COMMON STOCK OFFERING

On February 7, 1995, the Company closed on a private placement offering
dated November 7, 1994. The Company sold 644,150 shares of its common stock at
$2.50 per share of which 50,000 shares were beneficially purchased by certain
directors of the Company. Proceeds received, net of related expenses, were
approximately $1,321,000.

(10) RELATED PARTY TRANSACTIONS

During 1994, 1995 and as of September 30, 1996, the Company was charged
$757,000, $4,200 and $260,000, respectively, for drilling services and lease
operating expenses by entities in which certain Directors are majority owners.
These Directors and their companies own interests in certain wells operated by
the Company. During 1994, 1995 and as of September 30, 1996, with respect to
these wells the Company charged $213,000, $40,800 and $77,000, respectively, for
the lease operating expenses and drilling costs and paid $184,000, $167,000 and
$102,000, respectively, in oil and gas revenues to these related parties with
respect to these wells. As of September 30, 1996, the Company received $10,100
in oil and gas revenues related to these wells.

An entity in which the Chief Executive Officer and Chairman of the Board is
the owner acted as the Company's agent in performing the routine day to day
operations of certain wells. In 1994, 1995 and as of September 30, 1996, the
Company was billed $189,000, $348,000 and $212,000, respectively, for the
Company's pro rata share of lease operating and drilling expenses and received
$287,000, $130,000 and $152,000 in 1994, 1995 and as of September 30, 1996,
respectively, in oil and gas revenues related to these wells.

F-14
<PAGE> 55
PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(11) OIL AND GAS EXPENDITURES

The following table reflects capitalized costs related to the oil and gas
producing activities (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized costs:
Proved properties................................. $24,038 $29,172 $40,175
Unproved properties............................... 3,620 1,708 187
------- ------- -------
27,658 30,880 40,362
Accumulated depletion.......................... 6,994 8,591 11,192
------- ------- -------
$20,664 $22,289 $29,170
======= ======= =======
</TABLE>

Costs of unproved properties are not being depleted at December 31, 1995
and were incurred primarily during 1994 and are expected to be evaluated in the
next two years.

The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Transfers from undeveloped leases held for
sale...................................... $ 705 $ 339 $ 197 $ 60
Proved property acquisition costs........... 546 238 372 3,607
Unproved property acquisition costs......... 721 2,542 841 2,385
Exploration................................. 2,225 3,400 1,519 3,313
Development................................. 1,173 1,225 889 724
------ ------ ------ ----------
$5,370 $7,744 $3,818 $10,089
====== ====== ====== ==========
</TABLE>

(12) FOURTH QUARTER ADJUSTMENT

During the fourth quarter of 1994 and 1995, $155,000 and $157,000,
respectively, of depreciation, depletion, and amortization related to prior
quarters was recorded based on the December 31, 1994 and 1995 reserve study.

(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)

The estimates of the Company's proved oil and gas reserves, which are all
located in the United States, are prepared by independent petroleum engineers.
Reserves were estimated in accordance with guidelines established by the U.S.
Securities and Exchange Commission and the Financial Accounting Standards Board,
which require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalations except by
contractual arrangements. Information for oil is presented in barrels (BBL) and
for gas in thousands of cubic feet (MCF).

F-15
<PAGE> 56

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) -- (CONTINUED)

A summary of changes in reserve balances is presented below (in thousands):

<TABLE>
<CAPTION>
TOTAL PROVED PROVED DEVELOPED
---------------- ----------------
BBL MCF BBL MCF
----- ------ ----- ------
<S> <C> <C> <C> <C>
Reserves as of January 1, 1993............................ 1,297 17,120 1,063 11,666
Purchase of reserves in place........................... -- 1,418 -- 1,418
Extensions and discoveries.............................. 637 2,434 637 2,434
Revisions of previous estimates......................... (197) (961) (203) (918)
Sales of reserves in place.............................. (12) (26) (12) (26)
Production.............................................. (106) (889) (106) (889)
----- ------ ----- ------
Reserves as of December 31, 1993.......................... 1,619 19,096 1,379 13,685
Extensions and discoveries.............................. 134 2,920 134 2,920
Revisions of previous estimates......................... (32) 986 (34) 1,173
Production.............................................. (149) (1,391) (149) (1,391)
----- ------ ----- ------
Reserves as of December 31, 1994.......................... 1,572 21,611 1,330 16,387
Purchase of reserves in place........................... 5 147 5 147
Extensions and discoveries.............................. 147 7,097 147 7,097
Revisions of previous estimates......................... (88) (1,115) (94) (1,161)
Production.............................................. (133) (1,616) (133) (1,616)
----- ------ ----- ------
Reserves as of December 31, 1995.......................... 1,503 26,124 1,255 20,854
Purchase of reserves in place........................... 228 3,836 228 3,836
Extensions and discoveries.............................. 436 9,746 436 9,746
Revisions of previous estimates......................... (149) (4,202) (152) (4,204)
Production.............................................. (163) (2,673) (164) (2,673)
----- ------ ----- ------
Reserves as of September 30, 1996......................... 1,855 32,831 1,603 27,559
===== ====== ===== ======
</TABLE>

The following is a standardized measure of the discounted net future cash
flows and changes applicable to proved oil and gas reserves required by SFAS No.
69. The future cash flows are based on estimated oil and gas reserves utilizing
prices and costs in effect as of period 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
are the reserve studies prepared by independent petroleum engineers, 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

F-16
<PAGE> 57

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) -- (CONTINUED)

and their valuation. Therefore, the standardized measure of discounted future
net cash flow is not necessarily a "best estimate" of the fair value of the
Company's proved oil and gas properties.

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Future cash flows............................ $ 56,693 $ 63,288 $ 75,044 $ 117,796
Future costs:
Production................................. (17,943) (23,559) (25,356) (32,929)
Development................................ (2,093) (2,375) (2,853) (2,857)
-------- -------- -------- --------
Future net cash flows before income taxes.... 36,657 37,354 46,835 82,010
Future income taxes.......................... (5,547) (4,322) (7,242) (16,456)
-------- -------- -------- --------
Future net cash flows........................ 31,110 33,032 39,593 65,554
10% annual discount for estimated timing of
cash flows................................. (11,037) (12,570) (14,428) (20,250)
-------- -------- -------- --------
Standardized measure of discounted net cash
flows...................................... $ 20,073 $ 20,462 $ 25,165 $ 45,304
======== ======== ======== ========
</TABLE>

F-17
<PAGE> 58

PARALLEL PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996

(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)

(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) -- (CONTINUED)

CHANGES IN STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Increase (decrease):
Purchase of minerals in place.................... $ 876 $ -- $ 182 $ 4,167
Extensions and discoveries and improved recovery,
net of future production and development
costs......................................... 7,586 3,514 9,222 23,176
Accretion of discount............................ 2,077 2,114 2,050 2,589
Net change in sales prices net of production
costs......................................... (3,884) (1,418) 35 7,285
Changes in estimated future development costs.... 224 (137) (323) --
Revisions of quantity estimates.................. (1,568) 574 (1,151) (4,905)
Net change in income taxes....................... 714 1,063 725 (6,267)
Sales, net of production costs................... (2,093) (3,202) (3,246) (7,791)
Sales of minerals-in-place....................... (227) -- -- --
Changes of production rates (timing) and other... (2,619) (2,119) (2,791) 1,885
------- ------- ------- -------
Net increase.................................. 1,086 389 4,703 20,139
Standardized measure of discounted future net cash
flows:
Beginning of year................................ 18,987 20,073 20,462 25,165
------- ------- ------- -------
End of year...................................... $20,073 $20,462 $25,165 $45,304
======= ======= ======= =======
</TABLE>

F-18
<PAGE> 59

[Map of Texas showing location of corporate headquarters and principal areas of
activity.]

<PAGE> 60
================================================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 11
Capitalization......................... 12
Price Range of Common Stock............ 13
Dividends.............................. 13
Selected Financial and Oil and Gas
Data................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 20
Management and Principal
Stockholders......................... 31
Description of Capital Stock........... 35
Shares Eligible for Future Sale........ 36
Underwriting........................... 37
Certain Legal Matters.................. 38
Experts................................ 38
Available Information.................. 38
Incorporation of Certain Documents by
Reference............................ 39
Glossary............................... 39
Index to Financial Statements.......... F-1
</TABLE>

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2,500,000 SHARES

[PARALLEL LOGO]

COMMON STOCK

------------------------------
PROSPECTUS
------------------------------

VAN KASPER & COMPANY

DECEMBER 12, 1996

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