On November 20, 2001, Parallel Petroleum Corporation, or “Parallel,” issued to Stonington Corporation, a financial consulting firm, stock purchase warrants to purchase an aggregate of 275,000 shares of Parallel’s common stock, or approximately 1.34% of 20,461,361 shares of Parallel’s common stock then outstanding. The warrants were issued without registration under the Securities Act of 1933, as amended, in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The warrants were issued, without stockholder approval, in exchange for Stonington’s agreement to provide financial advisory services to Parallel. The exercise price of the warrants was $2.95 per share, the fair market value of Parallel’s common stock on the date of issuance of the warrants, and are exercisable during the four-year period commencing one year after the initial issuance of the warrants. The warrants expire November 20, 2006. The warrants contain customary anti-dilution and price protection provisions. After giving effect to these provisions, the warrants are presently exercisable for an aggregate of 285,651 shares of common stock at an exercise price of $2.84 per share.

On September 19, 2005, Parallel submitted to the Listing Qualifications Department of The Nasdaq Stock Market, or “Nasdaq”, a Listing of Additional Shares Notification Form covering the shares of common stock issuable upon exercise of the warrants. Parallel was verbally advised on that same date that the Staff of Nasdaq had determined that Parallel was in violation of Marketplace Rule 4350(i)(l)(D) because the anti-dilution and price protection provisions contained in the warrants could have potentially resulted in the issuance, without shareholder approval, of twenty percent or more of the pre-transaction total shares of common stock then outstanding at a price less than the greater of book or market value.

On September 20, 2005, and in response to comments of the Nasdaq Staff, the warrants were amended to cure the deficiency by capping the conversion of the warrants at 4,000,000 shares of common stock, or approximately 19.9% of the pre-transaction total shares of common stock then outstanding.

On September 21, 2005, Parallel received written notice from Nasdaq confirming the discussions and circumstances described in this Current Report on Form 8-K and further stating that the Staff had determined that Parallel had regained compliance with the Rule and that the matter was closed.

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