form10qa.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-Q/A

T           Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2008

Or

£           Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From __________ to ___________
______________________________

Commission File Number 0-7406
______________________________

PrimeEnergy Corporation
(Exact name of registrant as specified in its charter)

Delaware
84-0637348
(State or other jurisdiction of incorporation or organization)
(IRS employer identification number)

One Landmark Square, Stamford, Connecticut  06901
(Address of principal executive offices)

(203) 358-5700
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings required for the past 90 days.
Yes T           No £

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer” and “smaller reporting company” in Rule 12-B of the Exchange Act.

 
Large Accelerated Filer £
Accelerated Filer £
 
Non-Accelerated Filer £
Smaller Reporting Company T
 
(Do not check if smaller reporting company)

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £           No T

The number of shares outstanding of each class of the Registrant's Common Stock as of May 12, 2008 was: Common Stock, $0.10 par value, 3,058,979 shares.
 
 
 
 
 
PrimeEnergy Corporation
Index to Form 10-Q
March 31, 2008


Part I - Financial Information
  
     
Item 1. Financial Statements (restated)
  
     
 
3-4
     
 
5
     
 
6
     
 
7
     
 
8
     
31-33
     
34
     
34
     
Part II -  Other Information
  
     
35
35
35
35
35
35
     
36

2

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (the “Form 10-Q/A”) amends the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 filed by PrimeEnergy Corporation (the “Company”), originally filed with the Securities and Exchange Commission on May 15, 2008. The Form 10-Q/A includes amended and restated consolidated financial statements and related financial information for the year ended December 31, 2007 and the quarters ended March 31, 2008 and 2007. This information is disclosed in Note 2 to the consolidated financial statements.

The restatement provides detail of the change in accounting method from proportionate consolidation of partnerships that the Company controls to the full consolidation method and the change in the basis of a partnership in which the Company acquired a twenty percent non-controlling interest in 2005.

The following items are included in this amendment:

PART I -
ITEM 1. Financial Statements
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

All other information contained in the original Form 10-Q remains unchanged. However, the entire report with all Items is included in this Form 10-Q/A-1 for the convenience of the reader. This Amendment No.1 on Form 10-Q/A does not reflect events occurring after the filing of our Report on Form 10-Q on May 15, 2008 or include, or otherwise modify or update, the disclosure contained therein in any way except as expressly indicated above.

 

PrimeEnergy Corporation
Consolidated Balance Sheets
March 31, 2008 and December 31, 2007

   
March 31, 2008 (Unaudited and Restated)
    
December 31 2007 (Audited and Restated)
  
ASSETS
            
Current assets:
            
Cash and cash equivalents
   $ 22,424,000     $ 25,373,000  
Restricted cash and cash equivalents
     3,678,000       3,633,000  
Accounts receivable (net)
     21,755,000       21,311,000  
Due from related parties
     131,000       32,000  
Prepaid expenses
     956,000       1,391,000  
Derivative contracts
     --       1,332,000  
Inventory at cost
     3,682,000       3,705,000  
Deferred income tax
     5,048,000       1,582,000  
Total current assets
     57,674,000       58,359,000  
                 
Property and equipment, at cost
                
Oil and gas properties (successful efforts method), net
     227,902,000       237,852,000  
Field service equipment and other,  net
     9,327,000       8,209,000  
Net property and equipment
     237,229,000       246,061,000  
                 
Other assets
     519,000       1,245,000  
                 
Total assets
   $ 295,422,000     $ 305,665,000  

See accompanying notes to the consolidated financial statements.

3

PrimeEnergy Corporation
Consolidated Balance Sheets
March 31, 2008 and December 31, 2007

   
March 31, 2008 (Unaudited and Restated)
    
December 31, 2007 (Audited and Restated)
  
LIABILITIES and STOCKHOLDERS' EQUITY
            
Current liabilities:
            
Current bank debt
   $ 26,350,000     $ 34,950,000  
Accounts payable
     24,828,000       26,780,000  
Current portion of asset retirement and other long term obligation
     527,000       1,065,000  
Derivative liability short term
     12,635,000       4,340,000  
Accrued liabilities
     10,418,000       10,032,000  
Due to related parties
     446,000       520,000  
Total current liabilities
     75,204,000       77,687,000  
                 
Long-term bank debt
     119,300,000       120,050,000  
Asset retirement obligation
     17,132,000       16,936,000  
Derivative liability long term
     7,358,000       3,369,000  
Deferred income taxes
     23,834,000       26,022,000  
Total liabilities
     242,828,000       244,064,000  
Minority interest
     13,962,000       12,929,000  
Stockholders' equity:
                
Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued
     --       --  
Common stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in 2008 and 2007
     769,000       769,000  
Paid in capital
     11,024,000       11,024,000  
Retained earnings
     75,616,000       72,885,000  
Accumulated other comprehensive income(loss), net
     (12,795,000 )     (3,618,000 )
      74,614,000       81,060,000  
Treasury stock, at cost, 4,630,251 common shares at 2008 and 4,558,544 common shares at 2007
     (35,982,000 )     (32,388,000 )
Total stockholders' equity
     38,632,000       48,672,000  
Total liabilities and stockholders, equity
   $ 295,422,000     $ 305,665,000  

See accompanying notes to the consolidated financial statements.

4

PrimeEnergy Corporation
Consolidated Statements of Operations
Three Months Ended March 31, 2008 and 2007
(Unaudited)

   
2008 Restated
    
2007 Restated
  
Revenue:
            
Oil and gas sales
   $ 34,101,000     $ 22,266,000  
Field service income
     6,255,000       5,896,000  
Administrative overhead fees
     2,199,000       2,330,000  
Other income
     202,000       1,000  
Total revenue
     42,757,000       30,493,000  
Costs and expenses:
                
Lease operating expense
     9,706,000       7,539,000  
Field service expense
     4,779,000       4,551,000  
Depreciation, depletion and amortization
     16,920,000       7,694,000  
General and administrative expense
     3,225,000       3,198,000  
Exploration costs
     57,000       361,000  
Total costs and expenses
     34,687,000       23,343,000  
Add gain/(loss) on sale and exchange of assets
     (15,000 )     263,000  
Income from operations
     8,055,000       7,413,000  
                 
Other income and expenses:
                
Less: Interest expense
     2,447,000       1,683,000  
Add interest income
     157,000       227,000  
Less: Minority interest
     1,646,000       775,000  
                 
Income before provision for income taxes
     4,119,000       5,182,000  
Provision for income taxes
     1,388,000       1,865,000  
Net income
   $ 2,731,000     $ 3,317,000  
                 
Basic income per common share
   $ 0.88     $ 1.03  
                 
Diluted income per common share
   $ 0.71     $ 0.84  

See accompanying notes to the consolidated financial statements.

5

PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2008 (Restated)
(Unaudited)

Balance at December  31, 2007
     7,694,970     $ 769,000     $ 11,024,000     $ 72,885,000     $ (3,618,000 )   $ (32,388,000 )   $ 48,672,000  
Purchased 71,707 shares of common Stock
                                             (3,594,000 )     (3,594,000 )
Net income
                             2,731,000                       2,731,000  
Other comprehensive Income (Loss), net of taxes
                                     (9,177,000 )             (9,177,000 )
Balance at March 31, 2008
     7,694,970     $ 769,000     $ 11,024,000     $ 75,616,000     $ (12,795,000 )   $ (35,982,000 )   $ 38,632,000  

See accompanying notes to the consolidated financial statements.

6

PrimeEnergy Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2008 and 2007
(Unaudited)

   
2008 Restated
    
2007 Restated
  
Cash flows from operating activities:
            
Net income
   $ 2,731,000     $ 3,317,000  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation, depletion, amortization and accretion on discounted liabilities
     16,920,000       7,694,000  
Dry hole and abandonment expense
     --       305,000  
Gain on sale of properties
     15,000       (263,000 )
Provision for deferred taxes
     (493,000 )     1,694,000  
Minority interest in earnings of partnerships
     1,646,000       775,000  
Changes in assets and liabilities:
                
(Increase) decrease in accounts receivable
     16,000       3,044,000  
(Increase) decrease in due from related parties
     814,000       381,000  
(Increase) decrease in inventories
     (8,000 )     (3,000 )
(Increase) decrease in prepaid expenses and other assets
     (14,000 )     12,000  
Increase (decrease) in accounts payable
     601,000       (5,480,000 )
Increase (decrease) in accrued liabilities
     2,882,000       1,754,000  
Increase (decrease) in due to related parties
     (594,000 )     82,000  
Net cash provided by operating activities:
     24,516,000       13,312,000  
Cash flows from investing activities:
                
Capital expenditures, including exploration expense
     (13,853,000 )     (41,913,000 )
Proceeds from sale of property and equipment
     (15,000 )     263,000  
Net cash (used in) investing activities
     (13,868,000 )     (41,650,000 )
Cash flows from financing activities:
                
Purchase of treasury stock
     (3,594,000 )     (1,223,000 )
Proceeds from long-term bank debt
     29,075,000       40,160,000  
Repayment of long-term bank debt
     (38,510,000 )     (20,220,000 )
Distribution to minority interest
     (568,000 )     (738,000 )
Net cash provided by (used in) financing activities
     (13,597,000 )     17,979,000  
Net increase (decrease) in cash and cash equivalents
     (2,949,000 )     (10,359,000 )
                 
Cash and cash equivalents at the beginning of the period
     25,373,000       29,056,000  
Cash and cash equivalents at the end of the period
   $ 22,424,000     $ 18,697,000  

See accompanying notes to the consolidated financial statements.

7

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008
 
(1) Interim Financial Statements:
The accompanying consolidated financial statements of PrimeEnergy Corporation, with the exception of the consolidated balance sheet at December 31, 2007, have not been audited by independent public accountants. In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present fairly our financial position at March 31, 2008 and our income and cash flows for the three months ended March 31, 2008 and 2007.  All such adjustments are of a normal recurring nature.  Certain amounts presented in prior period financial statements have been reclassified for consistency with current period presentation. The results for interim periods are not necessarily indicative of annual results.

Effective January 1, 2008, the Company adopted those provisions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” that were required to be adopted. There was no financial statement impact upon adoption on January 1, 2008. For further information regarding the adoption of SFAS No. 157, please refer to Note 11 of the Notes to the Consolidated Financial Statements.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115,” became effective on January 1, 2008 and permits companies to choose, at specified dates, to measure certain eligible financial instruments at fair value. The provisions of SFAS No. 159 apply only to entities that elect to use the fair value option and to all entities with available-for-sale and trading securities. At the effective date, companies may elect the fair value option for eligible items that exist at that date, and the effect of the first remeasurement to fair value must be reported as a cumulative-effect adjustment to the opening balance of retained earnings. Since the Company has not elected to adopt the fair value option for eligible items, SFAS No. 159 has not had an impact on its financial position or results of operations.

Recently Issued Accounting Standards:
In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are in the process of evaluating the impact of SFAS No. 161 on our consolidated financial statements.

8

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (ARB) No. 51.” SFAS No. 160 clarifies that a noncontrolling interest (previously commonly referred to as a minority interest) in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity in the consolidated financial statements. The presentation of the consolidated income statement has been changed by SFAS No. 160, and consolidated net income attributable to both the parent and the noncontrolling interest is now required to be reported separately. Previously, net income attributable to the noncontrolling interest was typically reported as an expense or other deduction in arriving at consolidated net income and was often combined with other financial statement amounts. In addition, the ownership interests in subsidiaries held by parties other than the parent must be clearly identified, labeled, and presented in the equity in the consolidated financial statements separately from the parent’s equity. Subsequent changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently, and when a subsidiary is deconsolidated, any retained noncontrolling equity interest in the former subsidiary must be initially measured at fair value. Expanded disclosures, including a reconciliation of equity balances of the parent and noncontrolling interest are also required. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. Prospective application is required. We are in the process of evaluating the impact of SFAS No. 160 on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) was issued in an effort to continue the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. It changes how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods. Certain of these changes will introduce more volatility into earnings. The acquirer must now record all assets and liabilities of the acquired business at fair value, and related transaction and restructuring costs will be expensed rather than the previous method of being capitalized as part of the acquisition. SFAS No. 141(R) also impacts the annual goodwill impairment test associated with acquisitions, including those that close before the effective date of SFAS No. 141(R). The definitions of a “business” and a “business combination” have been expanded, resulting in more transactions qualifying as business combinations. SFAS No. 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 31, 2008 and earlier adoption is prohibited. We cannot predict the impact that the adoption of SFAS No. 141(R) will have on our financial position, results of operations or cash flows with respect to any acquisitions completed after December 31, 2008.

9

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008
 
(2) Financial Restatement:
The restatements reflect the change in accounting method from proportionate consolidation of partnerships that the Company controls to the full consolidation method. The Company had historically accounted for its interests in twenty limited partnerships and trusts, which own interests in oil and gas properties using the proportionate consolidation under the guidance of EITF 00-1 as related to the extractive industries. Under the guidance of EITF 04-05 the interests in limited partnerships and trusts that we control should have been fully consolidated when EITF 04-05 became effective.

The restatements also reflect the correction of gain recognition in 2005 related to the sale of assets to a partnership in which the company acquired a twenty percent non-controlling interest.  The Company recorded 100% of the gain however under the guidance of EITF 01-2 the Company, since it acquired a 20% interest in the partnership, should have recorded 80% of the gain.  This correction in 2005 resulted in a reduction of the Company’s basis related to the partnership interest and a decrease in the current year depreciation and depletion of that asset.

The effects of the restatement on reported amounts for the periods ended March 31, 2008, December 31, 2007, and March 31, 2007 are presented below in the following tables:

RESTATED CONSOLIDATED BALANCE SHEETS

   
As Reported March 2008
    
Cumulative Effective of Prior Year Adjustments
    
Current Year Adjustments
    
Notes
    
As Restated March 2008
  
                               
ASSETS:
                              
                               
Current assets:
                              
Cash and cash equivalents
   $ 17,136,000     $ 4,060,000     $ 1,228,000    
b
     $ 22,424,000  
Restricted cash and cash equivalents
     3,678,000       --       --    
 
       3,678,000  
Accounts receivable, net
     21,579,000       963,000       (787,000 )  
b
       21,755,000  
Due from related parties
     25,000       (180,000 )     286,000    
b
       131,000  
Prepaid expenses
     956,000       --       --             956,000  
Inventory at cost
     3,690,000       (6,000 )     (2,000 )  
b
       3,682,000  
Deferred income tax
     5,048,000       --       --             5,048,000  
Total current assets
     52,112,000       4,837,000       725,000             57,674,000  
                                       
Property and equipment, at cost:
                                      
Oil and gas properties (successful efforts method), net
     223,086,000       4,681,000       135,000    
a,b
       227,902,000  
Field service equipment
     9,327,000       --       --             9,327,000  
Total net property and equipment
     232,413,000       4,681,000       135,000             237,229,000  
                                       
Other assets
     454,000       65,000       --    
b
       519,000  
                                       
Total assets
   $ 284,979,000     $ 9,583,000     $ 860,000           $ 295,422,000  

10

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

RESTATED CONSOLIDATED BALANCE SHEETS

   
As Reported March 2008
    
Cumulative Effective of Prior Year Adjustment
    
Current Year Adjustment
    
Notes
    
As Restated March 2008
  
LIABILITIES and STOCKHOLDERS’ EQUITY:
                              
                               
Current liabilities:
                              
Current bank debt
   $ 26,350,000     $ --     $ --           $ 26,350,000  
Accounts payable
     25,698,000       54,000       (924,000 )  
b
       24,828,000  
Current portion of asset retirement and other long-term obligations
     527,000       --       --             527,000  
Derivative liability short term
     12,635,000       --       --             12,635,000  
Accrued liabilities
     10,294,000       79,000       45,000    
b
       10,418,000  
Due to related parties
     968,000       (1,043,000 )     521,000    
b
       446,000  
Total current liabilities
     76,472,000       (910,000 )     (358,000 )           75,205,000  
                                       
Long-term bank debt
     119,300,000       --       --             119,300,000  
Asset retirement obligations
     15,721,000       1,398,000       13,000    
b
       17,132,000  
Derivative liability long term
     7,358,000       --       --             7,358,000  
Deferred income taxes
     24,680,000       (908,000 )     62,000    
a
       23,834,000  
Total liabilities
     243,531,000       (420,000 )     (283,000 )           242,829,000  
                                       
Minority interest
     1,313,000       11,616,000       1,033,000    
b
       13,962,000  
                                       
Stockholders’ equity:
                                      
Preferred stock, $.10 par value, authorized 5,000,000 shares; none issued
                                      
Common stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in 2008 and 2007
     769,000       --       --             769,000  
Paid in capital
     11,024,000       --       --             11,024,000  
Retained earnings
     77,119,000       (1,613,000 )     110,000    
a
       75,616,000  
Accumulated other comprehensive income (loss), net
     (12,795,000 )     --       --             (12,795,000 )
      76,117,000       (1,613,000 )     110,000             74,614,000  
Treasury stock, at cost 4,630,251 common shares in 2008 and 4,558,544 in 2007
     (35,982,000 )     --       --             (35,982,000 )
Total stockholders’ equity
     40,135,000       (1,613,000 )     110,000             38,632,000  
                                       
Total liabilities and stockholders’ equity
   $ 284,979,000     $ 9,583,000     $ 860,000           $ 295,422,000  

11

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

RESTATED CONSOLIDATED STATEMENT of STOCKHOLDERS’ EQUITY

As Reported:

   
Common Stock
                                
   
Shares
    
Amount
    
Paid In Capital
    
Retained Earnings
    
Accumulated Other Comprehensive Income/Loss
    
Treasury Stock
    
Total
  
                                           
Balance at December  31, 2007
     7,694,970     $ 769,000     $ 11,024,000     $ 74,498,000     $ (3,618,000 )   $ (32,388,000 )   $ 50,285,000  
Purchased 71,707 shares of common Stock
                                             (3,594,000 )     (3,594,000 )
Net income
                             2,621,000                       2,621,000  
Other comprehensive Income, net of taxes
                                     (9,177,000 )             (9,177,000 )
Balance at March 31, 2008
     7,694,970     $ 769,000     $ 11,024,000     $ 77,119,000     $ (12,795,000 )   $ (35,982,000 )   $ 40,135,000  

As Restated:

   
Common Stock
                                
   
Shares
    
Amount
    
Paid In Capital
    
Retained Earnings
    
Accumulated Other Comprehensive Income/Loss
    
Treasury Stock
    
Total
  
                                           
Balance at December  31, 2007
     7,694,970     $ 769,000     $ 11,024,000     $ 72,885,000     $ (3,618,000 )   $ (32,388,000 )   $ 48,672,000  
Purchased 71,707 shares of common Stock
                                             (3,594,000 )     (3,594,000 )
Net income
                             2,731,000                       2,731,000  
Other comprehensive Income, net of taxes
                                     (9,177,000 )             (9,177,000 )
Balance at March 31, 2008
     7,694,970     $ 769,000     $ 11,024,000     $ 75,616,000     $ (12,795,000 )   $ (35,982,000 )   $ 38,632,000  

12

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

CONSOLIDATED STATEMENTS OF OPERATIONS

   
As Reported March 2008
    
Current year adjustments
    
Notes
    
As Restated March 2008
  
                         
Revenue:
                        
Oil and gas sales
   $ 31,152,000     $ 2,949,000    
b
     $ 34,101,000  
Field service income
     6,244,000       11,000    
b
       6,255,000  
Administrative overhead fees
     2,199,000       --             2,199,000  
Other income
     202,000       --             202,000  
      39,797,000       2,960,000             42,757,000  
Costs and expenses:
                              
Lease operating expense
     8,593,000       1,113,000    
b
       9,706,000  
Field service expense
     4,762,000       17,000    
b
       4,779,000  
Depreciation, depletion and amortization
     16,966,000       (46,000 )  
a,b
       16,920,000  
General and administrative expense
     3,128,000       97,000    
b
       3,225,000  
Exploration costs
     57,000       --             57,000  
      33,506,000       1,181,000             34,687,000  
                               
Add gain on sale and exchange of assets
     (15,000 )     --             (15,000 )
Income from operations
     6,276,000       1,779,000             8,055,000  
                               
Other income and expense:
                              
Less:  Interest expense
     2,447,000       --             2,447,000  
Add interest income
     119,000       38,000    
b
       157,000  
Less:  Minority interest
     --       1,646,000    
b
       1,646,000  
                               
Income before provision for income taxes
     3,948,000       171,000             4,119,000  
Provision for income taxes
     1,327,000       61,000    
a
       1,388,000  
                               
Net income
   $ 2,621,000     $ 110,000           $ 2,731,000  
                               
Basic net income per common share
   $ 0.85     $ 0.03           $ 0.88  
Diluted net income per common share
   $ 0.68     $ 0.03           $ 0.71  

13

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

CONSOLIDATED STATEMENTS of CASH FLOWS

   
As Reported March 2008
    
Current Year Adjustments
    
Notes
    
As Restated March 2008
  
                         
Cash flows from operating activities:
                        
Net income
   $ 2,621,000     $ 110,000    
a
     $ 2,731,000  
Adjustments to reconcile net income to net cash provided by operating activities:
                              
Depreciation, depletion, amortization and accretion on discounted liabilities
     16,966,000       (46,000 )  
a,b
       16,920,000  
Gain on sale of properties
     15,000       --             15,000  
Provision for deferred income taxes
     (554,000 )     61,000    
a
       (493,000 )
Minority interest in earnings of partnerships
     --       1,646,000    
b
       1,646,000  
Changes in assets and liabilities:
                              
(Increase) decrease in accounts receivable
     (1,231,000 )     1,247,000    
b
       16,000  
(Increase) decrease in due from related parties
     187,000       627,000    
b
       814,000  
(Increase) decrease in inventories
     --       (8,000 )  
b
       (8,000 )
(Increase) decrease in prepaid expenses and other assets
     (79,000 )     65,000    
b
       (14,000 )
Increase (decrease) in accounts payable
     802,000       (201,000 )  
b
       601,000  
Increase (decrease) in accrued liabilities
     3,006,000       (124,000 )  
b
       2,882,000  
Increase (decrease) in due to related parties
     (594,000 )     --             (594,000 )
Net cash provided by operating activities
     21,139,000       3,377,000             24,516,000  
                               
Cash flows from investing activities
                              
Capital expenditures, including exploration expense
     (12,272,000 )     (1,581,000 )  
b
       (13,853,000 )
Proceeds from sale of properties and equipment
     (15,000 )     --             (15,000 )
Net cash used in investing activities
     (12,287,000 )     (1,581,000 )           (13,868,000 )
                               
Cash flows from financing activities
                              
Purchase of stock for treasury
     (3,594,000 )     --             (3,594,000 )
Increase in long-term bank debt and other long-term obligations
     29,075,000       --             29,075,000  
Repayment of long-term bank debt and other long-term obligations
     (38,510,000 )     --             (38,510,000 )
Distribution to minority interest
     --       (568,000 )  
b
       (568,000 )
Net cash provided by (used in) financing activities
     (13,029,000 )     (568,000 )           (13,597,000 )
                               
Net increase(decrease) in cash and cash equivalents
     (4,177,000 )     1,228,000    
 
       (2,949,000 )
Cash and cash equivalents at the beginning of the period
     21,313,000       4,060,000    
b
 
     25,373,000  
Cash and cash equivalents at the end of the period
   $ 17,136,000     $ 5,288,000           $ 22,424,000  

14

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

RESTATED CONSOLIDATED BALANCE SHEETS

   
As Reported December 2007
    
Cumulative effect of Adjustments
    
Current Year Adjustments
    
Notes
    
As Restated December 2007
  
                               
ASSETS:
                              
                               
Current assets:
                              
Cash and cash equivalents
   $ 21,313,000     $ 4,403,000     $ (343,000 )  
b
     $ 25,373,000  
Restricted cash and cash equivalents
     3,633,000       --       --             3,633,000  
Accounts receivable, net
     20,348,000       694,000       269,000    
b
       21,311,000  
Due from related parties
     212,000       (226,000 )     46,000    
b
       32,000  
Prepaid expenses
     1,391,000       --       --             1,391,000  
Derivative contracts
     1,332,000       --       --             1,332,000  
Inventory at cost
     3,711,000       (3,000 )     (3,000 )  
b
       3,705,000  
Deferred income tax
     1,582,000       --       --             1,582,000  
Total current assets
     53,522,000       4,868,000       (31,000 )           58,359,000  
                                       
Property and equipment, at cost:
                                      
Oil and gas properties (successful efforts method), net
     233,171,000       3,581,000       1,100,000    
a,b
       237,852,000  
Field service equipment
     8,209,000       --       --             8,209,000  
Total net property and equipment
     241,380,000       3,581,000       1,100,000             246,061,000  
                                       
Other assets
     1,180,000       67,000       (2,000 )  
b
       1,245,000  
                                       
Total assets
   $ 296,082,000     $ 8,516,000     $ 1,067,000           $ 305,665,000  

15

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

RESTATED CONSOLIDATED BALANCE SHEETS

   
As Reported December 2007
    
Cumulative Effective of Prior Year Adjustment
    
Current Year Adjustment
    
Notes
    
As Restated December 2007
  
LIABILITIES and STOCKHOLDERS’ EQUITY:
                              
                               
Current liabilities:
                              
Current bank debt
   $ 34,950,000     $ --     $ --           $ 34,950,000  
Accounts payable
     26,726,000       (31,000 )     85,000    
b
       26,780,000  
Current portion of asset retirement and other long-term obligations
     1,065,000       31,000       (31,000 )  
b
       1,065,000  
Derivative liability short term
     4,340,000       --       --             4,340,000  
Accrued liabilities
     9,953,000       68,000       11,000    
b
       10,032,000  
Due to related parties
     1,563,000       (312,000 )     (731,000 )  
b
       520,000  
Total current liabilities
     78,597,000       (244,000 )     (666,000 )           77,687,000  
                                       
Long-term bank debt
     120,050,000       --       --             120,050,000  
Asset retirement obligations
     15,538,000       576,000       822,000    
b
       16,936,000  
Derivative liability long term
     3,369,000       --       --             3,369,000  
Deferred income taxes
     26,930,000       (1,093,000 )     185,000    
a,b
       26,022,000  
Total liabilities
     244,484,000       (761,000 )     341,000             244,064,000  
                                       
Minority interest
     1,313,000       11,220,000       396,000  
 
b
       12,929,000  
                                       
Stockholders’ equity:
                                      
Preferred stock, $.10 par value, authorized 5,000,000 shares; none issued
                                      
Common stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in 2007 and 2006
     769,000       --       --             769,000  
Paid in capital
     11,024,000       --       --             11,024,000  
Retained earnings
     74,498,000       (1,943,000 )     330,000    
a
       72,885,000  
Accumulated other comprehensive income (loss), net
     (3,618,000 )     -       --             (3,618,000 )
      82,673,000       (1,943,000 )     330,000             81,060,000  
Treasury stock, at cost 4,558,544 common shares in 2007 and 4,478,145 in 2006
     (32,388,000 )     -       --             (32,388,000 )
Total stockholders’ equity
     50,285,000       (1,943,000 )     330,000             48,672,000  
                                       
Total liabilities and stockholders’ equity
   $ 296,082,000     $ 8,516,000     $ 1,067,000           $ 305,665,000  

16

PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 2008

CONSOLIDATED STATEMENTS OF OPERATIONS

   
As Reported March 2007
    
Current year Adjustments
    
Notes
    
As Restated March 2007
  
                         
Revenue:
                        
Oil and gas sales
   $ 20,329,000     $ 1,937,000    
b
     $ 22,266,000  
Field service income
     5,887,000       9,000    
b
       5,896,000  
Administrative overhead fees
     2,330,000       --             2,330,000  
Other income
     1,000       --             1,000  
      28,547,000       1,946,000             30,493,000  
Costs and expenses:
                              
Lease operating expense
     6,553,000       986,000    
b
       7,539,000  
Field service expense
     4,551,000       --             4,551,000  
Depreciation, depletion and amortization
     7,690,000       4,000    
a,b
       7,694,000  
General and administrative expense
     3,110,000       88,000    
b
       3,198,000  
Exploration costs
     361,000       --             361,000  
      22,265,000       1,078,000             23,343,000  
                               
Add gain on sale and exchange of assets
     263,000       --             263,000  
Income from operations
     6,545,000       868,000             7,413,000  
                               
Other income and expense:
                              
Less: Interest expense
     1,683,000       --             1,683,000  
Add interest income
     191,000       36,000    
b
       227,000  
Less: Minority interest
     --       775,000    
b
       775,000  
                               
Income before provision for income taxes
     5,053,000       129,000             5,182,000  
Provision for income taxes
     1,819,000       46,000    
a
       1,865,000  
                               
Net income
   $ 3,234,000     $ 83,000