In conventional PET systems, the parallax error degrades image resolution and causes image distortion. To remedy this, a PET ring diameter has to be much larger than the required size of field of view (FOV), and therefore the cost goes up. Measurement of depth-of-interaction (DOI) information is effective to reduce the parallax error and improve the image quality. This study is aimed at developing a practical method to incorporate DOI information in PET sinogram generation and image reconstruction processes and evaluate its efficacy through Monte Carlo simulation. An animal PET system with 30-mm long LSO crystals and 2-mm DOI measurement accuracy was simulated and list-mode PET data were collected. A sinogram generation method was proposed to bin each coincidence event to the correct LOR location according to both incident crystal indices and DOI positions of the two annihilation photons. The sinograms were reconstructed with an iterative OSMAPEM (ordered subset maximum a posteriori expectation maximization) algorithm. Two phantoms (a rod source phantom and a Derenzo phantom) were simulated, and the benefits of DOI were investigated in terms of reconstructed source diameter (FWHM) and source positioning accuracy. The results demonstrate that the proposed method works well to incorporate DOI information in data processing, which not only overcomes the image distortion problem but also significantly improves image resolution and resolution uniformity and results in satisfactory image quality.