PARALLEL PETROLEUM CORPORATION INCENTIVE AND RETENTION PLAN

Exhibit 10.1

PARALLEL PETROLEUM CORPORATION

INCENTIVE AND RETENTION PLAN

(as amended August 23, 2005)

Purpose

The purpose of the Parallel Petroleum Corporation Incentive and Retention Plan (the “Plan”) is to advance the interests of Parallel Petroleum Corporation, a Delaware corporation, and its stockholders by providing certain officers and employees with incentive bonus compensation which is linked to the sale of the Company (as defined in Article I hereof) or all or substantially all of the assets of the Company, a merger or business combination or other transaction. In addition, recognizing the possibility of a proposed or threatened transaction, the aggregate effect of which may be a Corporate Transaction or a Change of Control (both as defined in Article I hereof), the Board of Directors of the Company and the Compensation Committee of the Board have determined that it is imperative that the Company be able to rely upon participating officers and employees to continue in their employment by the Company or its Subsidiaries (as defined in Article I hereof), and that the Company be able to receive and rely upon their advice as to the best interests of the Company and its stockholders without concern that they might be distracted by the personal uncertainties and risks created by any such transaction.

ARTICLE I

DEFINITIONS

In addition to the terms defined in the preamble and elsewhere in this Plan, the following definitions are applicable throughout this Plan:

“Additional Base Price” means $8.62 per share of common stock.

“Additional Base Shares” means 400,000 shares of common stock of the Company.

“Affiliate” means with respect to any Person, any other Person who is, or would be deemed to be, an “affiliate” or an “associate” of such Person within the respective meanings given to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “1934 Act”), as in effect on the date of this Agreement.

“Base Price” means the volume weighted average closing price of the Company’s common stock for the fiscal quarter ended December 31, 2003, or $3.73 per share.

“Base Shares” means the weighted average shares of common stock (basic) of the Company outstanding for the fiscal quarter ended December 31, 2003, or 1,080,362 shares.

A person will be deemed the “Beneficial Owner” of any securities which such Person or any of such Person’s Affiliates would be deemed to beneficially own, directly or indirectly, within the meaning given to such term in Rule 13d-3 under the 1934 Act as in effect on the date of this Agreement.

“Board” means the Board of Directors of the Company.

“Change of Control” means the occurrence of either one or both of the following events:

(a)            the acquisition of beneficial ownership (within the meaning of Rule 13d-3 under the 1934 Act) of an aggregate of 60% or more of the Voting Power of the Company’s outstanding Voting Securities by any person or group (as such term is used in Rule 13d-5 under the 1934 Act) who beneficially owned less than 50% of the Voting Power of the Company’s outstanding Voting Securities on the date of this Plan; provided, however, that notwithstanding the foregoing, an acquisition shall not constitute a Change in Control hereunder if the acquiror is (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company and acting in such capacity, or (ii) a Subsidiary of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Voting Securities of the Company; or

(b)           A change in the composition of the Board such that the individuals who, as of the effective date of this Plan, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason (other than by way of voluntary resignation) to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the effective date of this Plan, whose election, or nomination for election, by the Company’s stockholders was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board.

“Change of Control Date” means the date on which a Change of Control occurs.

“Committee” shall have the meaning given to such term in Section 2.1 of this Plan.

“Company” means Parallel Petroleum Corporation or any Successor.

“Corporate Transaction” means the occurrence of any one or more of the following events:

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(a)            an acquisition of the Company by any Person or group of Persons (other than the Participants) by way of purchase, merger, consolidation, reorganization or other business combination, whether by way of tender offer or negotiated transaction, as a result of which the outstanding securities of the Company are exchanged or converted into cash, property and/or securities not issued by the Company (other than a merger, consolidation or reorganization the sole purpose of which is to change the Company’s domicile solely within the United States, and other than a merger, consolidation or reorganization of the Company in which the holders of the securities of the Company immediately prior to such transaction have the same proportionate ownership of the securities of the surviving corporation immediately after such transaction);

(b)           a sale, lease, exchange or other disposition by the Company (excluding disposition by way of pledge, hypothecation or foreclosure) to any Person or group of Persons (other than the Participants) in one transaction or a series of related transactions, of all or substantially all of the assets of the Company;

(c)            the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or

“Executive Group” means all executive officers of the Company and any other officer employee of the Company or its Subsidiaries selected by the Compensation Committee in its sole discretion for participation in the Plan.

“Market Value” means, as of any specified date, an amount equal to the per share closing price of the Company’s common stock on the Nasdaq Stock Market at the close of business on the day immediately preceding the Change of Control Date. If the common stock is not publicly traded on the Nasdaq Stock Market at the time a determination of its value is required to be made, the market value of the common stock shall be the per share closing price reported on the stock exchange composite tape of the exchange on which the common stock is then publicly traded, or if the common stock is not publicly traded on any such other exchange, the determination of fair market value of the common stock shall be made by the Committee in such manner as it deems appropriate.

“Participant” means a member of the Executive Group and any other employee of the Company selected by the Compensation Committee in its sole discretion for participation in the Plan.

“Performance Bonus” means a positive amount determined in accordance with the following formula:

[(Transaction Proceeds - Base Price)          xBase Shares], plus

[(Transaction Proceeds - Additional Base Price)                    xAdditional Base Shares]

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“Person” means any natural person, corporation, trust, company, organization, association, partnership or other entity of any kind, and any successors or assigns thereof, and shall also include any group of Persons acting jointly or in concert.

“Proportionate Share” means the amount of the Performance Bonus or Retention Payment allocated to each Participant upon the occurrence of a Corporate Transaction or Change of Control, as the case may be, as provided for in Section 4.1 and Section 4.2 of this Plan.

“Retention Payment” means a positive amount determined in accordance with the following formula:

“Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company or another Subsidiary.

“Successor” means any Person into or with which Parallel shall be merged, consolidated or otherwise combined, or any Person which acquires all or substantially all the assets of Parallel and in connection therewith assumes all or substantially all of Parallel’s obligations and liabilities, including Parallel’s obligations under this Agreement.

“Transaction Date” means the date on which a Corporate Transaction is consummated. If a Corporate Transaction occurs in a manner providing for multiple closings or steps, the Transaction Date will be deemed to be the date on which the first closing or step is consummated and the Corporate Transaction will be deemed to have been consummated in its entirety on such Transaction Date.

“Transaction Proceeds” means the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the price per share of common stock offered to stockholders of the Company in any merger, consolidation, share exchange, reorganization, combination, sale of assets, liquidation or dissolution transaction, (ii) the price per share of common stock offered to stockholders of the Company in any tender offer or exchange offer, or (iii) if a transaction occurs other than as described in clause (i) or (ii), the per share price determined in good faith by the Committee. If the consideration offered to holders of common stock of the Company in any transaction consists of anything other than cash, the Committee shall determine in good faith the fair cash equivalent of the portion of the consideration offered which is other than cash.

“Voting Securities” means all securities of a company entitling the holders thereof to vote in an annual election of directors (without consideration of the rights of any class of stock other than the common stock to elect directors by a separate class vote); and a specified percentage of the “Voting Power” of a company means such

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