As filed with Securities and Exchange Commission on January 12, 2005 
Registration No. 333-120989          


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                AMENDMENT NO. 1

                                       TO

                                    FORM S-4


                             REGISTRATION STATEMENT
                        Under THE SECURITIES ACT OF 1933

                          Abraxas Petroleum Corporation
                           Eastside Coal Company, Inc.
                          Sandia Oil & Gas Corporation
                             Sandia Operating Corp.
                            Wamsutter Holdings, Inc.
                      Western Associated Energy Corporation
                                                                       

           (Exact Name of Registrants as Specified in their Charters)

     Nevada                    1331                      74-258403
     Colorado                  1331                      74-227540
     Texas                     1331                      74-236896
     Texas                     1331                      74-246870
     Wyoming                   1331                      74-289701
     Texas                     1331                      74-193787
      (State or other     (Primary Standard              (I.R.S. Employer 
      jurisdiction of     Industrial                     Identification 
      incorporation or    Classification Code            Number) 
      organization)       Number) 

  500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, (210) 490-4788
                                                                       
               (Address, including zip code, and telephone number,
        including area code, of registrants' principal executive offices)

                               Robert L. G. Watson
                      President and Chief Executive Officer
                          Abraxas Petroleum Corporation
                       500 North Loop 1604 East, Suite 100
                            San Antonio, Texas 78232
                                 (210) 490-4788
                                                                       
 (Name, address, including zip code, and telephone number, including area code,
                              of agent for service)

                                 With a copy to:

                         Cox Smith Matthews Incorporated
                           112 East Pecan, Suite 1800
                            San Antonio, Texas 78205
                             Attn: Steven R. Jacobs
                                 (210) 554-5500
                                                                       


         APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.

         If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

         If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________________

         If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] __________________________

         THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.


The information in this  prospectus is not complete and may be changed.  Abraxas
may not sell these securities  until the  registration  statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to  sell  these  securities  and it is not  soliciting  an  offer  to buy  these
securities in any state where the offer is not permitted.


                  SUBJECT TO COMPLETION, DATED JANUARY __, 2005


PROSPECTUS

                          ABRAXAS PETROLEUM CORPORATION
                             OFFER TO EXCHANGE UP TO

$125,000,000 PRINCIPAL AMOUNT FLOATING RATE SENIOR SECURED NOTES DUE 2009,
                             SERIES B AND GUARANTEES THEREOF

                           FOR ANY AND ALL OUTSTANDING

$125,000,000 PRINCIPAL AMOUNT FLOATING RATE SENIOR SECURED NOTES DUE 2009, 
                             SERIES A AND GUARANTEES THEREOF

   THE SERIES A/B EXCHANGE OFFER WILL EXPIRE AT midnight, NEW YORK CITY TIME,
                      ON __________, 2005, UNLESS EXTENDED.

The Floating Rate Senior Secured Notes due 2009, Series A

     o    were  originally  offered and sold on October 28, 2004 in an aggregate
          principal amount of $125,000,000;

     o    will mature on December 1, 2009;

     o    accrue interest from the date of issuance at a per annum floating rate
          of six-month LIBOR plus 7.50, initially being 9.72% per annum;

     o    interest  is  payable  semi-annually  on each June 1 and  December  1,
          commencing June 1, 2005;

     o    are  guaranteed by each of Abraxas'  current  subsidiaries  other than
          Grey Wolf  Exploration  Inc.,  including Sandia Oil & Gas Corporation,
          Sandia Operating Corp.,  Wamsutter Holdings,  Inc., Western Associated
          Energy  Corporation  and  Eastside  Coal  Company,  Inc.  and  will be
          guaranteed by all of Abraxas' future subsidiaries;

     o    are  secured by a shared  lien on all of  Abraxas'  current and future
          properties and assets, including, but not limited to, Abraxas' natural
          gas and crude oil properties; and

     o    are not listed on any national securities exchange.

The Floating Rate Senior Secured Notes due 2009, Series B

     o    are  offered  in  exchange  for  an  equal  principal  amount  of  the
          outstanding Series A notes;

     o    evidence the same  indebtedness as the outstanding  Series A notes and
          are entitled to the benefits of the indenture  under which those notes
          were issued; and

     o    are not listed on any national securities exchange.

The Series A/B Exchange Offer

     o    expires at midnight,  New York City time, on __________,  2005, unless
          extended;

     o    is Abraxas'  offer to exchange  Abraxas'  Series B notes,  or exchange
          notes,  and  guarantees  thereof  for an equal  amount of our  validly
          tendered  outstanding  Series  A  notes,  or  outstanding  notes,  and
          guarantees thereof;

     o    is not a taxable exchange for U.S. Federal income tax purposes; and

     o    is not  subject  to any  condition  other  than  that the  Series  A/B
          exchange   offer  not  violate   applicable   law  or  any  applicable
          interpretation of the staff of the Securities and Exchange Commission.

         You should carefully consider the risk factors beginning on page 17 of
this prospectus before participating in the Series A/B exchange offer.

                                       i

 
        Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.

     Each  broker-dealer  that  receives  exchange  notes  for its  own  account
pursuant to the Series A/B exchange offer must  acknowledge that it will deliver
a prospectus in connection with any resale of such exchange notes. The Letter of
Transmittal  states that by so acknowledging  and by delivering a prospectus,  a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning  of the  Securities  Act.  This  Prospectus,  as it may  be  amended  or
supplemented  from time to time,  may be used by a  broker-dealer  in connection
with resales of exchange notes  received in exchange for  Securities  where such
Securities  were  acquired by such  broker-dealer  as a result of  market-making
activities or other trading activities. Abraxas has agreed that, for a period of
180 days  after  the  Expiration  Date (as  defined  herein),  it will make this
Prospectus  available to any  broker-dealer  for use in connection with any such
resale. See "Plan of Distribution".


                              The date of this prospectus is January __, 2005.



                                       ii



                        NOTICE TO NEW HAMPSHIRE RESIDENTS

     NEITHER THE FACT THAT A  REGISTRATION  STATEMENT  OR AN  APPLICATION  FOR A
LICENSE HAS BEEN FILED UNDER THIS  CHAPTER WITH THE STATE OF NEW  HAMPSHIRE  NOR
THE FACT THAT A SECURITY IS  EFFECTIVELY  REGISTERED  OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE  CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION  OR  EXCEPTION  IS AVAILABLE  FOR A
SECURITY OR A  TRANSACTION  MEANS THAT THE  SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR  QUALIFICATIONS  OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON,  SECURITY,  OR  TRANSACTION.  IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE,  TO ANY  PROSPECTIVE  PURCHASER,  CUSTOMER,  OR CLIENT ANY  REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

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

                                TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS...................................................iv
SUMMARY.....................................................................  1
RISK FACTORS.................................................................17
USE OF PROCEEDS..............................................................30
CAPITALIZATION...............................................................30
RATIO OF EARNINGS TO FIXED CHARGES...........................................31
THE SERIES A/B EXCHANGE OFFER................................................32
UNAUDITED PRO FORMA FINANCIAL INFORMATION....................................39
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA..............................44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
 OF OPERATIONS...............................................................45
BUSINESS.................................................................... 73
MANAGEMENT...................................................................87
EXECUTIVE COMPENSATION.......................................................90
DESCRIPTION OF THE EXCHANGE NOTES............................................93
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT..................................156
BOOK-ENTRY; DELIVERY AND FORM...............................................159
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS..............................162
PLAN OF DISTRIBUTION........................................................167
LEGAL MATTERS...............................................................168
EXPERTS.....................................................................168
WHERE YOU CAN FIND MORE INFORMATION.........................................168
GLOSSARY OF TERMS...........................................................169
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1

     You should rely only on the information  contained in this  prospectus.  We
have not authorized anyone to provide you with different information. We are not
making an offer to sell, or a solicitation of an offer to buy, these  securities
in any  jurisdiction  where the offer or sale is not permitted.  The information
contained in this prospectus speaks only as of the date of this prospectus.

     This prospectus contains summaries of certain provisions  contained in some
of the documents described herein, but reference is made to the actual documents
for complete  information.  All of the summaries are qualified in their entirety
by the actual documents. Copies of documents referred to in this prospectus will
be made available to prospective investors by Abraxas upon written request.

                                      iii





                           FORWARD-LOOKING STATEMENTS

     We make forward-looking statements throughout this prospectus. Whenever you
read a statement  that is not simply a  statement  of  historical  fact (such as
statements  including words like "believe,"  "expect,"  "anticipate,"  "intend,"
"plan," "seek," "estimate," "could," "potentially" or similar expressions),  you
must  remember  that  these  are  forward  looking  statements,   and  that  our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this prospectus is generally located in
the material set forth under the headings "Summary," "Risk Factors," "Business,"
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operations" but may be found in other locations as well.  These  forward-looking
statements  generally  relate to our plans and objectives for future  operations
and are based upon our  management's  reasonable  estimates of future results or
trends.  The factors that may affect our  expectations  regarding our operations
include, among others, the following:

     o    our high debt level;

     o    our success in development, exploitation and exploration activities;

     o    our ability to make planned capital expenditures;

     o    declines in our production of natural gas and crude oil;

     o    prices for natural gas and crude oil;

     o    our ability to raise equity capital or incur additional indebtedness;

     o    political  and  economic   conditions  in  oil  producing   countries,
          especially those in the Middle East;

     o    price and availability of alternative fuels;

     o    our restrictive debt covenants;

     o    our acquisition and divestiture activities;

     o    results of our hedging activities; and

     o    other factors discussed elsewhere in this prospectus.






                                       iv

                                     SUMMARY

     The following summarizes the more detailed information  appearing elsewhere
in  this  prospectus.  It is  not  complete  and  may  not  contain  all  of the
information  that you should consider before engaging in the Series A/B exchange
offer. For a more complete understanding of our business and of all the terms of
the notes,  you should  carefully read this entire  prospectus.  As used in this
prospectus, unless the context otherwise requires, or as used in "Description of
the  Exchange  Notes,"  or as  otherwise  noted,  "Abraxas"  refers  to  Abraxas
Petroleum  Corporation and all of its  subsidiaries  other than Grey Wolf. "Grey
Wolf"  refers  only to  Abraxas'  wholly-owned  Canadian  subsidiary,  Grey Wolf
Exploration  Inc.,  and "we,"  "our" and "us"  refer to  Abraxas  and all of its
subsidiaries.  Except as otherwise  noted, (i) the reserve data reported in this
prospectus  is based  on the  reserve  estimates  of our  independent  petroleum
engineers  and  (ii)  all  dollar  amounts  referenced  in this  prospectus  are
references  to  U.S.  dollars.   Except  as  otherwise  noted,  or  as  used  in
"Description  of the  Exchange  Notes," the terms "on a pro forma basis" or "pro
forma" refer to our business,  financial condition and results of operations, as
applicable,  as if (i) Grey Wolf were not included as part of our  operations or
in our consolidated financial information,  as applicable,  (ii) the refinancing
described in this  prospectus had occurred at the times indicated and (iii) as a
result,  the January 2003 financial  restructuring  described in this prospectus
did not take place.  See "Glossary of Terms" for  definitions  of some technical
terms used in this prospectus.

                                   Our Company

     We are an independent  energy company  primarily engaged in the development
and production of natural gas and crude oil. Historically, we have grown through
the  acquisition  and  subsequent  development  and  exploitation  of  producing
properties,  principally  through the  redevelopment of old fields utilizing new
technologies  such as modern log analysis and reservoir  modeling  techniques as
well as 3-D  seismic  surveys  and  horizontal  drilling.  As a result  of these
activities,  we  believe  that  we  have a  substantial  inventory  of low  risk
development opportunities,  which provide a basis for significant production and
reserve  increases.  In addition,  we intend to expand upon our exploitation and
development  activities with complementary low risk exploration  projects in our
core areas of operation.

     Abraxas'  core  areas of  operation  are in south  and west  Texas and east
central   Wyoming.   Abraxas'   current   producing   properties  are  typically
characterized by long-lived  reserves,  established  production  profiles and an
emphasis on natural gas. Grey Wolf conducts  operations in western  Canada.  The
following  table sets forth  certain  information  relating to Abraxas' and Grey
Wolf's proved reserves at December 31, 2003:



                                                                           Percentage of PV-10
                                                               ----------------------------------------------
                      Reserves     Reserve Life      PV-10       Developed      Natural Gas     Operated
                    ----------------------------- ------------ -------------- ---------------- --------------
                       (Bcfe)       (in years)    (in millions)
                                                                                  
      Abraxas.......     100.1         16.2        $161.6           64%             80%             90%

      Grey Wolf.....      21.0         19.1        $  55.2          76%             77%             49%


     In January 2003, we completed a series of transactions,  which we sometimes
refer to as the January 2003 financial restructuring, including the sale of most
of our Canadian properties and the issuance of Abraxas' existing 11 1/2% secured
notes due 2007.  The terms of those notes  limited  our ability to make  capital
expenditures  exceeding $10 million per year,  which caused us to put a priority
on those  projects  which  allowed us to maintain our  leasehold  positions  and
comply with drilling  requirements  on non-operated  properties,  rather than on
those  opportunities which we believed had the greatest potential for increasing
our production and reserves. Despite this limitation on capital expenditures, we
increased  average  daily  production  from  the  producing  properties  that we
continued to own after the Canadian sale in January 2003 from  approximately  19
MMcfe in January 2003 to  approximately  24 MMcfe in June 2004, while drilling a
total of 43 wells with a 93% success rate. In addition, during 2003, we added 16
Bcfe of proved reserves at a finding cost of $1.15 per Mcfe.

     Abraxas  believes  that  its  high  quality  asset  base,  high  degree  of
operational  control and large  inventory of drilling  projects  position it for
future growth. Abraxas' properties are concentrated in locations that facilitate
substantial  economies  of scale  in  drilling  and  production  operations  and
efficient reservoir management practices. 

                                       1


Abraxas operates 94% of its  propertiesaccounting  for  approximately 90% of its
PV-10,  giving  Abraxas  substantial  control over the timing and  incurrence of
operating  and  capital  expenditures.   In  addition,  Abraxas  has  47  proved
undeveloped  locations  and has  identified  over 100 drilling and  recompletion
opportunities on its existing U.S. acreage, the successful  development of which
Abraxas  believes could  significantly  increase its daily production and proved
reserves.

                                 The Refinancing

     On October 28, 2004, in order to provide  Abraxas with greater  flexibility
in conducting its business, including increasing capital spending and exploiting
its  additional  drilling  opportunities,  Abraxas  refinanced  all of its  then
existing  indebtedness  by  redeeming  its 11 1/2%  secured  notes  due 2007 and
terminating its previous credit facility with the net proceeds from:

     o    the private issuance of $125.0 million  aggregate  principal amount of
          the Floating Rate Senior Secured Notes due 2009, Series A;

     o    the  proceeds of its new $25.0  million  second lien  increasing  rate
          bridge loan; and

     o    the payment to Abraxas by Grey Wolf of $35.0 million from the proceeds
          of Grey Wolf's new $35.0 million term loan.


As a part of the  refinancing,  Abraxas also  entered  into a new $15.0  million
revolving  credit  facility,  under which Abraxas  currently has availability of
approximately $13.6 million.

     Abraxas anticipates making capital expenditures on U.S. properties for 2005
of  approximately  $20.0  million,  which Abraxas  anticipates  will include the
development activities related to approximately 23 projects.


                            Series A/B Exchange Offer

     Simultaneously with the issuance of the outstanding notes,  Abraxas entered
into an exchange and  registration  rights  agreement  with  Guggenheim  Capital
Markets,  LLC,  the initial  purchaser  of those  notes.  Under the terms of the
exchange and registration rights agreement,  Abraxas agreed to file with the SEC
and cause to become effective,  a registration statement relating to an offer to
exchange the outstanding notes and guarantees thereof for the exchange notes and
guarantees  thereof  described in this prospectus (the outstanding notes and the
exchange  notes are  sometimes  referred to in this  prospectus as the "notes").
Under the exchange and registration rights agreement,  Abraxas must deliver this
prospectus to holders of the outstanding  notes and must complete the Series A/B
exchange  offer by June 6, 2005,  subject to any  extension  that may be legally
required. If Abraxas fails to file the required registration statement,  the SEC
does not declare the  required  registration  statement  effective or if Abraxas
does not  complete  the  Series  A/B  exchange  offer,  in each case  within the
applicable time periods required,  Abraxas has agreed to pay additional interest
to the holders of the outstanding notes. You may exchange your outstanding notes
and guarantees  thereof for exchange notes and guarantees  thereof in the Series
A/B exchange offer (discussion of the exchange of outstanding notes for exchange
notes in this prospectus also includes the exchange of the respective guarantees
of each  series of notes).  You should  read the  discussion  under the  heading
"Summary of Terms of the Exchange Notes" and "Description of the Exchange Notes"
for further information regarding the exchange notes.

     We believe that holders of the  outstanding  notes,  upon completion of the
Series A/B exchange offer, may resell the exchange notes without  complying with
the  registration and prospectus  delivery  provisions of the Securities Act, if
certain  conditions are met. You should read the  discussion  under the headings
"Summary of the Series A/B  Exchange  Offer",  "Plan of  Distribution"  and "The
Series A/B Exchange  Offer-Resales  of Exchange  Notes" for further  information
regarding the Series A/B exchange offer and resales of the exchange notes.

                                       2


     The  exchange  notes will be  recorded  at the same  carrying  value as the
outstanding notes. Accordingly,  no gain or loss for accounting purposes will be
recognized upon the closing of the Series A/B exchange offer.  Costs  associated
with the Series A/B exchange offer will be expensed as incurred.

                              Corporate Information

     Abraxas was originally incorporated in Texas in 1977 and re-incorporated in
Nevada in 1990 when it became a public company.  Abraxas' common stock is listed
on the  American  Stock  Exchange  under the symbol  "ABP."  Abraxas'  principal
offices are located at 500 North Loop 1604 East,  Suite 100, San Antonio,  Texas
78232,  and its telephone  number is (210) 490-4788.  Abraxas'  Internet website
address is www.abraxaspetroleum.com.



                                       3


                    Summary of the Series A/B Exchange Offer

     The  following  is a brief  summary  of  certain  terms of the  Series  A/B
exchange offer.

Registration Rights.................... Abraxas issued the outstanding  notes on
                                        October   28,   2004   to  the   initial
                                        purchaser  in a  private  offering.  The
                                        initial purchaser, in turn, resold those
                                        notes  to  (i)  qualified  institutional
                                        buyers in  reliance  on Rule 144A  under
                                        the Securities  Act, (ii)  institutional
                                        investors  that  qualified as accredited
                                        investors   as   defined    under   Rule
                                        501(a)(1),  (2),  (3), (7) (8) under the
                                        Securities  Act,  (iii) a limited number
                                        of   individuals    who   qualified   as
                                        accredited  investors  as defined  under
                                        Rule  501(a)(4),   (5),  (6)  under  the
                                        Securities  Act  and  (iv)  outside  the
                                        United   States   in   compliance   with
                                        Regulation S under the  Securities  Act.
                                        Simultaneously with the initial issuance
                                        of the outstanding notes, Abraxas agreed
                                        to   provide    the   holders   of   the
                                        outstanding  notes with certain exchange
                                        and  registration  rights.  The exchange
                                        and   registration    rights   agreement
                                        provides  for the  Series  A/B  exchange
                                        offer.

                                        You may exchange your outstanding  notes
                                        for exchange notes. After the Series A/B
                                        exchange   offer   is   completed,   you
                                        generally  will not be  entitled  to any
                                        further    rights   to   exchange   your
                                        outstanding  notes for  exchange  notes.
                                        
Series A/B Exchange Offer.............. Abraxas   is    offering   to   exchange
                                        $125,000,000  aggregate principal amount
                                        of  its  Floating  Rate  Senior  Secured
                                        Notes due 2009,  Series B and guarantees
                                        thereof,  the offering of which has been
                                        registered under the Securities Act, for
                                        all  outstanding  Floating  Rate  Senior
                                        Secured  Notes  due  2009,  Series A and
                                        guarantees  thereof.  To  participate in
                                        the Series A/B exchange offer,  you must
                                        have properly  tendered your outstanding
                                        notes,  and Abraxas  must have  accepted
                                        them.    Abraxas   will   exchange   all
                                        outstanding   notes  that  you   validly
                                        tender  and  do  not  validly  withdraw.
                                        Abraxas will issue  registered  exchange
                                        notes at or  promptly  after  the end of
                                        the   Series   A/B    exchange    offer.
                          
Resales..............................   Based  on the  SEC  staff's  letters  to
                                        third    parties   in   other    similar
                                        transactions,  Abraxas believes that you
                                        can   offer   for   resale,   resell  or
                                        otherwise  transfer the  exchange  notes
                                        without  complying with the registration
                                        and prospectus delivery  requirements of
                                        the Securities Act if:

                                             o  you are  acquiring  the exchange
                                                notes in the ordinary  course of
                                                your business;
        
                                             o  you  are not  participating,  do
                                                not intend to  participate,  and
                                                have    no     arrangement    or
                                                understanding with any person to
                                                participate in, the distribution
                                                of the exchange notes; and

                                             o  you  are not an  "affiliate"  of
                                                Abraxas,  as defined in Rule 405
                                                of the Securities Act.

                                        If  any  of  these   conditions  is  not
                                        satisfied  and you transfer any exchange
                                        notes   without   delivering   a  proper
                                        prospectus or without  qualifying  for a
                                        registration  exemption,  you may  incur

                                       4


                                        liability  under the Securities  Act. We
                                        will not assume or indemnify you against
                                        such liability.

                                        Abraxas    will   not   seek   its   own
                                        interpretive  letter,  and cannot assure
                                        you that  the SEC  staff  will  take the
                                        same position on the Series A/B exchange
                                        offer as it did in interpretive  letters
                                        to other parties.

                                        Each    broker-dealer    that   receives
                                        exchange  notes for its own  account  in
                                        exchange for outstanding notes that such
                                        broker-dealer      acquired      through
                                        market-making     or    other    trading
                                        activities must acknowledge that it will
                                        deliver  a  proper  prospectus  when  it
                                        transfers   any   exchange    notes.   A
                                        broker-dealer  may use  this  prospectus
                                        for a  limited  period  for an  offer to
                                        resell,  a resale or other  transfer  of
                                        the exchange notes.

ExpirationT...........................  The Series A/B exchange offer expires at
                                        midnight,   New  York  City   time,   on
                                        ____________, 2005, unless we extend the
                                        expiration                         time.
                                   
Conditions to the Series A/B Exchange
Offer...................................The   Series  A/B   exchange   offer  is
                                        subject to customary conditions, some of
                                        which Abraxas may waive. You should read
                                        the  discussion  under the heading  "The
                                        Series A/B Exchange Offer--Conditions to
                                        the Series A/B  Exchange  Offer" in this
                                        prospectus for more information. 

Accrued Interest on the Exchange Notes. The  exchange  notes will bear  interest
                                        from  October 28, 2004.  

Procedures for Tendering 
Outstanding Notes.......................Abraxas issued the outstanding  notes in
                                        global form. When the outstanding  notes
                                        were  issued in  October  2004,  Abraxas
                                        deposited  global  notes with U.S.  Bank
                                        National  Association  as custodian  for
                                        Cede  &  Co.,   the   nominee   for  The
                                        Depository  Trust  Company,  or DTC, the
                                        book-entry    depositary.     Beneficial
                                        interests  in  the  outstanding   notes,
                                        which  are held by  direct  or  indirect
                                        participants   in  DTC,   are  shown  on
                                        records maintained in book-entry form by
                                        DTC.

                                        You may tender  your  outstanding  notes
                                        held   in   book-entry    form   through
                                        book-entry  transfer in accordance  with
                                        DTC's Automated Tender Offer Program, or
                                        ATOP. 

Special Procedures for Beneficial
Owners................................. If  you  are a  beneficial  owner  whose
                                        outstanding  notes are registered in the
                                        name  of a  broker,  dealer,  commercial
                                        bank, trust company or other nominee and
                                        wish to tender your outstanding notes in
                                        the Series A/B  exchange  offer,  please
                                        contact the registered holder as soon as
                                        possible  and  instruct  it to tender on
                                        your   behalf   and   comply   with  the
                                        instructions set forth elsewhere in this
                                        prospectus.

Withdrawal Rights...................... You  may  withdraw  the  tender  of your
                                        outstanding  notes  at any  time  before
                                        midnight,  New York  City  time,  on the
                                        expiration   date   by   following   the
                                        procedures   for  withdrawal  set  forth
                                        under  the   heading   "The  Series  A/B
                                        Exchange    Offer--Withdrawal   Rights".

                                       5

                                   

Appraisal or Dissenter's Rights.........Holders  of  outstanding  notes  do  not
                                        have any appraisal or dissenters' rights
                                        in the Series A/B exchange offer. If you
                                        do not tender your outstanding  notes or
                                        Abraxas  rejects your  tender,  you will
                                        not be entitled to any further rights to
                                        exchange  your  outstanding   notes  for
                                        exchange  notes.  If you  do not  tender
                                        your outstanding notes, they will remain
                                        outstanding and entitled to the benefits
                                        of the  indenture  governing  the notes.
                                        You should read the discussion under the
                                        heading "Risk Factors--Risks  Related to
                                        the  Series  A/B  Exchange   Offer"  for
                                        further    information. 

Federal Tax Consequences............... The exchange of notes generally is not a
                                        taxable   exchange  for  United   States
                                        federal   income   tax   purposes.   You
                                        generally will not recognize any taxable
                                        gain or loss or any interest income as a
                                        result of such exchange.  For additional
                                        information  regarding  the  federal tax
                                        consequences  of  participating  in  the
                                        Series A/B  exchange  offer and  holding
                                        the   notes,   you   should   read   the
                                        discussion under the heading "Certain U.
                                        S. Federal  Income Tax  Considerations."
                                     
Exchange Agent.........................  U.S.  Bank  National   Association   is
                                        serving  as the  exchange  agent  in the
                                        Series A/B exchange offer.  The exchange
                                        agent's   address,   and  telephone  and
                                        facsimile  numbers  are  listed  in  the
                                        section of this prospectus entitled "The
                                        Series  A/B   Exchange   Offer--Exchange
                                        Agent" and in the accompanying letter of
                                        transmittal.   

Use of Proceeds.......................  We will not  receive any  proceeds  from
                                        the Series A/B  exchange  offer,  and we
                                        will pay the  expenses of the Series A/B
                                        exchange offer. 

                                  Risk Factors

     Participating in the Series A/B exchange offer involves  substantial  risk.
You should carefully  consider the information  under the caption "Risk Factors"
and all other information  included in this prospectus  before  participating in
the Series A/B exchange offer.



                                       6




                     Summary of Terms of the Exchange Notes

     The exchange notes represent the same debt as the outstanding notes, except
that the  exchange  notes will be  registered  under the  Securities  Act.  As a
result, the exchange notes will not bear legends  restricting their transfer and
will not contain the registration rights and damages provisions contained in the
outstanding  notes, with certain limited exceptions in accordance with the terms
of the exchange and registration rights agreement. The outstanding notes and the
exchange notes are governed by the same indenture,  and both series of notes are
sometimes interchangeably referred to herein as the "notes."

Issuer..................................Abraxas Petroleum Corporation.

Exchange Notes Offered..................$125 million aggregate  principal amount
                                        of Floating  Rate Senior  Secured  Notes
                                        due 2009, Series B.

Maturity Date...........................December 1, 2009.

Interest Rate..........................Interest on the exchange notes accrues at
                                        a per annum  floating  rate of six-month
                                        LIBOR plus 7.50%.  The initial  interest
                                        rate on the exchange  notes is 9.72% per
                                        annum.  The interest  rate will be reset
                                        semi-annually   on   each   June  1  and
                                        December 1, commencing on June 1, 2005.

Interest Payment Dates..................Interest  is  payable  semi-annually  in
                                        arrears on June 1 and December 1 of each
                                        year, commencing on June 1, 2005.

Regular Record Dates....................The  15th day of the  month  immediately
                                        preceding the month in which the related
                                        interest payment date occurs.

Ranking and Lien Priority
of the Exchange Notes...................The   notes    are    senior    secured
                                        obligations  of Abraxas.  The notes rank
                                        equally among themselves and with all of
                                        Abraxas'  unsubordinated  and  unsecured
                                        indebtedness,   including  Abraxas'  new
                                        revolving credit facility, and senior in
                                        right of  payment to  Abraxas'  existing
                                        and  future  subordinated  indebtedness,
                                        including the bridge loan. The notes are
                                        effectively  senior to Abraxas' existing
                                        and future unsecured indebtedness to the
                                        extent  of the  value of the  collateral
                                        securing the notes and  available to the
                                        holders   of   the   notes   under   the
                                        intercreditor agreement.

                                        The  provisions  of  the   intercreditor
                                        agreement among Abraxas,  the subsidiary
                                        guarantors,  Wells Fargo Foothill, Inc.,
                                        Guggenheim  Corporate  Funding,  LLC and
                                        U.S. Bank National  Association  provide
                                        that upon  notice of an event of default
                                        with  respect  to  the  notes,  the  new
                                        revolving  credit facility or the bridge
                                        loan and so long as an event of  default
                                        exists, payments made by Abraxas and the
                                        subsidiary  guarantors  will be applied,
                                        together  with  any  proceeds  from  any
                                        disposition of collateral:

                                             o  if a minimum collateral coverage
                                                ratio   of   three   times   the
                                                outstanding   obligations  under
                                                the   new    revolving    credit
                                                facility  is  met,  (i)  to  the
                                                payment of interest on the notes
                                                only if and when all accrued and
                                                unpaid   interest   on  the  new
                                                revolving  credit  facility  has
                                                been   paid   and  (ii)  to  the
                                                payment  of   principal  of  the
                                                notes after the entire principal
                                                amount outstanding under the new
                                                revolving  credit  facility  has
                                                been repaid; or

                                       7

                                             o  if   that   minimum   collateral
                                                coverage  ratio is not then met,
                                                to the  payment of  interest  on
                                                and  principal of the notes only
                                                if  and  when  all   outstanding
                                                interest on and principal of the
                                                new  revolving  credit  facility
                                                have been paid.

                                        See   "Description   of   the   Exchange
                                        Notes--Brief Description of the Exchange
                                        Notes  and  the  Subsidiary  Guarantees;
                                        Ranking   and   Lien    Priority"    and
                                        "Intercreditor Agreement."

Subsidiary Guarantees.................. Each of  Abraxas'  current  subsidiaries
                                        other  than  Grey  Wolf  and its  future
                                        restricted       subsidiaries       have
                                        unconditionally guaranteed,  jointly and
                                        severally,  the payment of the principal
                                        of, and premium and interest  (including
                                        any  additional  interest) on, the notes
                                        on a senior secured basis.  In addition,
                                        any other  subsidiary  or  affiliate  of
                                        Abraxas,  including  Grey Wolf,  that in
                                        the   future    guarantees   any   other
                                        indebtedness    of    Abraxas   or   its
                                        restricted  subsidiaries  will  also  be
                                        required to guarantee the notes.  Except
                                        under    the    limited    circumstances
                                        described in this prospectus,  the notes
                                        are not, and will not be,  guaranteed by
                                        Grey   Wolf,   and   are    structurally
                                        subordinated  in right of payment to all
                                        of  its   obligations,   including  Grey
                                        Wolf's term loan and trade  payables and
                                        other debt of Grey Wolf.

                                        The  subsidiary  note  guarantee of each
                                        subsidiary   guarantor   is  the  senior
                                        secured  obligation  of  the  subsidiary
                                        guarantor, ranks equally with all of its
                                        unsubordinated       and       unsecured
                                        indebtedness  and  senior  in  right  of
                                        payment  to  its   existing  and  future
                                        subordinated indebtedness, including its
                                        guarantee  of  the  bridge   loan.   The
                                        subsidiary   guarantee  is   effectively
                                        senior  to that  subsidiary  guarantor's
                                        existing     and    future     unsecured
                                        indebtedness  to the extent of the value
                                        of   the   collateral    securing   that
                                        subsidiary  note guarantee and available
                                        to the  holders  of the notes  under the
                                        intercreditor agreement.

Security............................... The  notes  and  the   subsidiary   note
                                        guarantees,   together   with   the  new
                                        revolving   credit   facility   and  the
                                        subsidiary     guarantors'    guarantees
                                        thereof,  are  secured  by shared  first
                                        priority perfected  security  interests,
                                        subject     to     certain     permitted
                                        encumbrances,  in  all of  Abraxas'  and
                                        each  of  its  restricted  subsidiaries'
                                        material property and assets,  including
                                        substantially  all of their  natural gas
                                        and crude oil  properties and all of the
                                        capital  stock  (or  in the  case  of an
                                        unrestricted   subsidiary   that   is  a
                                        controlled  foreign  corporation,  up to
                                        65% of the outstanding capital stock) in
                                        any entity,  other than Grey Wolf, owned
                                        by    Abraxas    and   its    restricted
                                        subsidiaries    (all   of    which    is
                                        collectively   referred   to   in   this
                                        prospectus as the collateral). The notes
                                        are not  secured by any of the  property
                                        or  assets  of  Grey  Wolf   (unless  it
                                        becomes a  restricted  subsidiary).  The
                                        shares  of  capital  stock of Grey  Wolf
                                        owned by  Abraxas  do not  constitute  a
                                        part of the collateral.

                                        See   "Description   of   the   Exchange
                                        Notes--Security."   

Intercreditor Agreement.................The holders of the notes,  together with
                                        the lenders under Abraxas' new revolving
                                        credit  facility  and bridge  loan,  are
                                        subject to an  intercreditor  agreement.
                                       8

                                        The intercreditor  agreement among other
                                        things,  (i) creates security  interests
                                        in  collateral  in favor of a collateral
                                        agent for the  benefit of the holders of
                                        the  notes,  the  new  revolving  credit
                                        facility  lenders  and the  bridge  loan
                                        lenders and (ii) governs the priority of
                                        payments  among such parties upon notice
                                        of  an  event  of   default   under  the
                                        indenture,   the  new  revolving  credit
                                        facility or the bridge loan.

                                        So  long  as no such  event  of  default
                                        exists,  the  collateral  agent will not
                                        collect payments under the new revolving
                                        credit facility documents, the indenture
                                        and other note  documents  or the bridge
                                        loan documents, and all payments will be
                                        made   directly   to   the    respective
                                        creditor.  Upon  notice  of an  event of
                                        default  and for so long as an  event of
                                        default  exists,  payments  to each  new
                                        revolving credit facility lender, holder
                                        of the notes and bridge loan lender from
                                        Abraxas and the  subsidiary  guarantors,
                                        and proceeds from any disposition of any
                                        collateral,  will,  subject  to  limited
                                        exceptions,    be   collected   by   the
                                        collateral  agent  for  deposit  into  a
                                        collateral  account and then distributed
                                        as   described   under    "Intercreditor
                                        Agreement--Priority of Distributions."

                                        The   collateral   agent   will  act  in
                                        accordance   with   the    intercreditor
                                        agreement and as directed by the control
                                        party.  Prior to the  occurrence  of any
                                        event of default, the control party will
                                        be the  holders of the notes and the new
                                        revolving   credit   facility   lenders,
                                        acting as a single class, by vote of the
                                        holders of a majority  of the  aggregate
                                        principal    amount    of    outstanding
                                        obligations  under the notes and the new
                                        revolving credit  facility.  Upon notice
                                        of any such event of default, the bridge
                                        loan lenders  will be the control  party
                                        for 240 days following such notice. If a
                                        stay under the  Bankruptcy  Code  occurs
                                        during such 240-day period,  that period
                                        will be  extended  by the number of days
                                        during which that stay was effective. If
                                        the  new   revolving   credit   facility
                                        lenders  and  holders  of the notes have
                                        not been paid in full by the end of such
                                        specified  period,  they will become the
                                        control party, acting as a single class,
                                        by vote of the  holders of a majority of
                                        the   aggregate   principal   amount  of
                                        outstanding  obligations under the notes
                                        and the new revolving credit facility.

                                        For  more   information   regarding  the
                                        Intercreditor Agreement, you should read
                                        "Intercreditor Agreement."

Optional Redemption.....................After April 28, 2007, Abraxas may redeem
                                        all or a  portion  of the  notes  at the
                                        redemption   prices   set  forth   under
                                        "Description     of     the     Exchange
                                        Notes--Optional     Redemption,"    plus
                                        accrued and unpaid  interest to the date
                                        of  redemption.   Prior  to  that  date,
                                        Abraxas  may  redeem  up to  35%  of the
                                        aggregate  original  principal amount of
                                        the notes using the net  proceeds of one
                                        or more equity  offerings,  in each case
                                        at the  redemption  price  calculated as
                                        set  forth  under  "Description  of  the
                                        Exchange Notes--Optional Redemption."

Repurchase at the Option of Holders
Upon the Occurrence     
of Certain Asset Sales..................If  the  bridge  loan  lenders  exercise
                                        their     right     under     certain...
                                        circumstances to require Abraxas to sell
                                        assets,  including assets comprising the
                                        collateral,  the  net  proceeds  will be
                                        applied in the following  order,  to the
                                        extent available to:

                                             o  first, pay any interest then due
                                                and   payable   under   the  new
                                       9


                                                revolving credit facility;

                                             o  second,  pay any  interest  then
                                                due and payable on the notes;

                                             o  third,   pay  any   accrued  and
                                                unpaid   interest   on  the  new
                                                revolving  credit  facility that
                                                was  not   paid   under   clause
                                                "first" of this paragraph;

                                             o  fourth,   pay  any   outstanding
                                                principal  of the new  revolving
                                                credit facility;

                                             o  fifth,    if    the    remaining
                                                aggregate  amount  of  such  net
                                                cash proceeds, together with any
                                                net cash  proceeds in the bridge
                                                loan asset sale proceeds account
                                                from  a   previous   asset  sale
                                                consummated  in accordance  with
                                                the   provisions   described  in
                                                "Description   of  the  Exchange
                                                Notes--Repurchase  at the Option
                                                of Holders  Upon the  Occurrence
                                                of Certain Asset Sales," exceeds
                                                $5.0 million,  the entire amount
                                                in the  bridge  loan  asset sale
                                                proceeds  account  is to be used
                                                to make a net proceeds  offer to
                                                purchase  notes from all holders
                                                of the notes as if such net cash
                                                proceeds   remaining  after  any
                                                payment made  pursuant to clause
                                                "first,"  "second,"  "third"  or
                                                "fourth"  above,  and any  other
                                                net cash  proceeds in the bridge
                                                loan   asset    sale    proceeds
                                                account,   are  excess  proceeds
                                                (see    "Description    of   the
                                                Exchange          Notes--Certain
                                                Covenants--Limitation  on  Asset
                                                Sales"); and

                                             o  sixth,  after the payment of all
                                                amounts   required   by  a   net
                                                proceeds     offer    made    in
                                                accordance  with clause  "fifth"
                                                above    repay    all    amounts
                                                outstanding   under  the  bridge
                                                loan.

                                        See   "Description   of   the   Exchange
                                        Notes--Repurchase   at  the   Option  of
                                        Holders Upon the  Occurrence  of Certain
                                        Asset       Sales."   

Change Of Control.......................If Abraxas experiences specific kinds of
                                        change of control events, each holder of
                                        notes may require  Abraxas to repurchase
                                        all  or any  portion  of  such  holder's
                                        notes at a purchase  price equal to 101%
                                        of the  principal  amount of the  notes,
                                        plus accrued and unpaid  interest to the
                                        date of repurchase.  See "Description of
                                        the Exchange  Notes--  Repurchase at the
                                        Option  of  Holders  Upon  a  Change  of
                                        Control."

Covenants.............................. The  indenture  governing  the  exchange
                                        notes  contains  covenants  that,  among
                                        other things, limit Abraxas' ability to:

                                             o  incur  or  guarantee  additional
                                                indebtedness  and issue  certain
                                                types  of  preferred   stock  or
                                                redeemable stock;

                                             o  transfer or sell assets;

                                             o  create liens on assets;

                                             o  pay   dividends  or  make  other
                                                distributions  on capital  stock


                                       10


                                                or   make    other    restricted
                                                payments,              including
                                                repurchasing,    redeeming    or
                                                retiring    capital   stock   or
                                                subordinated   debt  or   making
                                                certain      investments      or
                                                acquisitions;

                                             o  engage  in   transactions   with
                                                affiliates;

                                             o  guarantee other indebtedness;

                                             o  permit   restrictions   on   the
                                                ability of its  subsidiaries  to
                                                distribute   or  lend  money  to
                                                Abraxas;

                                             o  cause a restricted subsidiary to
                                                issue or sell its capital stock;
                                                and

                                             o  consolidate,  merge or  transfer
                                                all or substantially  all of the
                                                consolidated  assets of  Abraxas
                                                and its restricted subsidiaries.
                                          
                                        These covenants are subject to important
                                        exceptions and qualifications, which are
                                        described  under   "Description  of  the
                                        Exchange Notes--Certain Covenants."
                                       

Events of Default.......................The   indenture   governing   the  notes
                                        contains  customary  events of  default,
                                        including  nonpayment  of  principal  or
                                        interest, violations of covenants, cross
                                        default   and  cross   acceleration   to
                                        certain  other  indebtedness,  including
                                        the new  revolving  credit  facility and
                                        bridge  loan,  bankruptcy,  and material
                                        judgments and liabilities.

Absence of a Public Market 
for Exchange Notes......................For additional information regarding the
                                        exchange  notes,  you  should  read  the
                                        discussion     under     the     heading
                                        "Description   of  the  Exchange  Notes"
                                        below.



                                       11



          Summary Historical Consolidated and Pro Forma Financial Data

     The  information  for the years ended  December 31, 2001,  2002 and 2003 is
derived from our audited  financial  statements.  The  information  for the nine
months ended September 30, 2003 and 2004 is derived from our unaudited financial
statements.  It is  important  that you read  this  financial  data  along  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," "Selected Historical Financial Data" and our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.

     The pro forma  financial  data  presented  below is unaudited  and has been
derived from our consolidated  financial  statements included in this prospectus
and from unaudited historical and pro forma consolidated financial data. The pro
forma financial information presented below for the year ended December 31, 2003
and for the nine months ended September 30, 2004 reflects consolidated statement
of operations data relating to Abraxas and each of the subsidiary  guarantors of
the notes and gives effect to:

         o     the exclusion of Grey Wolf from Abraxas' statement of operations;

         o     the consummation of the October 2004 financial restructuring; and

         o     the  exclusion  of  the  January  2003  financial   restructuring
               described   under   "Management's   Discussion  and  Analysis  of
               Financial Condition and Results of Operations."

     The pro forma  condensed  balance sheet reflects the  consolidated  balance
sheet data  relating to Abraxas  and each of the  subsidiary  guarantors  of the
notes and gives effect to the  exclusion of balance  sheet data relating to Grey
Wolf as of September 30, 2004.

     Grey Wolf,  through which we conduct our Canadian  operations  and hold our
properties and assets located in Canada,  is excluded from the pro forma results
because:

         o     except  under  the  limited   circumstances   described  in  this
               prospectus,  the notes are not,  and will not be,  guaranteed  by
               Grey Wolf, and are structurally  subordinated in right of payment
               to all of its  obligations,  including  Grey Wolf's term loan and
               trade payables and other debt of Grey Wolf;

         o     the notes are not  secured  by any of the  property  or assets of
               Grey Wolf (unless it becomes a restricted subsidiary); and

         o     the shares of capital  stock of Grey Wolf owned by Abraxas do not
               constitute a part of the collateral.

Accordingly, the notes are effectively junior to all the liabilities, including
all trade payables and other debt, of Grey Wolf.

     The pro forma information set forth below is not necessarily  indicative of
the results that actually  would have been achieved if the Grey Wolf  operations
had not been part of Abraxas' operations or the refinancing had been consummated
as of the dates indicated.  The pro forma  information in these tables should be
read in conjunction with "Unaudited Pro Forma Financial Information" included in
this prospectus.


                                       12


      Summary Historical Consolidated and Pro Forma Statement of Operations





                                           Years Ended December 31,                              Nine Months Ended September 30,
                            --------------------------------------------------------------   --------------------------------------
                                                                               Pro Forma,                               Pro Forma,
Statement of Operations Data:           2001(1)     2002(1)       2003(1)        2003         2003(1)        2004          2004
                                      ----------  ----------- -------------  -------------  ------------- ------------ ------------
                                                                         (dollars in thousands)
 Revenue:
                                                                                                       
  Oil and gas production revenue..... $ 73,201    $  50,862    $  38,105      $ 29,710         29,277      $ 34,249     $  24,174 
  Gas processing revenue.............    2,438        2,420          133            --            132            --            --
  Rig revenue........................      756          635          663           663            495           518           518
  Other revenue......................      848          403          118             7             67           218             9
                                      ----------  -----------   ----------    -----------    -----------   ----------    ---------
Total operating revenue (2).......... $ 77,243    $  54,320    $  39,019      $ 30,380       $ 29,971      $ 34,985     $  24,701

Operating costs and expenses:
Lease and other operating expenses(3)   19,318       15,807       10,208         8,951          7,607         9,760         7,158
Depreciation, depletion and
    amortization expense.............   32,484       26,539       10,803         7,608          7,861         9,398         5,402
Proved property impairment...........    2,638      115,993           --            --             -             --            --
General and administrative expense...    6,445        6,884        5,360         3,995          3,769         4,813         3,759
Stock-based compensation.............   (2,767)          --        1,106         1,106            467         1,122         1,122
                                      ----------  -----------   ----------    -----------    -----------   ----------    ---------
Total Operating expense..............   58,118      165,223       27,477        21,660         19,704        25,093        17,441
                                      ----------  -----------   ----------    -----------    -----------   ----------    ---------
Operating income (loss)..............   19,125     (110,903)      11,542         8,720         10,267         9,892         7,260

Other (income) expense:
  Interest expense, net of interest
income (4)...........................   31,445       34,058       16,925        15,120         12,899        13,688        11,356
 Amortization of deferred financing
fee..................................    2,268        2,095        1,678         2,260          1,244         1,380         1,695
Financing cost.......................       --          967        4,406         4,406          4,182         1,641         1,641
(Gain) loss on sale of foreign
subsidiaries.........................       --           --      (68,933)      (68,933)       (67,258)           --            --
(Gain) loss on sale of equity
investment...........................      845           --           --            --             --            --            --
Other................................      207          201          774           100            774            11            11
                                      ----------  -----------   ----------    -----------    -----------   ----------    ---------

Income (loss) before income taxes,     
minority interest and cumulative
effect of accounting change..........  (15,640)    (148,224)      56,692        55,767         58,426        (6,828)       (7,443)
Income tax provision.................    2,402      (29,697)         377            --            377            --            --
Minority interest....................    1,676           --           --            --             --            --            --
Cumulative effect of accounting
change...............................       --           --          395           395            395            --            --
                                      ----------  -----------   ----------    -----------    -----------   ----------    ---------
Net earnings (loss) ................. $(19,718)   $(118,527)   $  55,920      $ 55,372       $ 57,654      $ (6,828)       (7,443) 
                                      ==========  ===========   ==========    ===========    ===========   ==========    =========

Income (loss) per common share:
   Basic............................. $  (0.76)   $  (3.95)    $    1.58      $   1.57       $    1.63     $  (0.19)    $   (0.21)
   Diluted........................... $  (0.76)   $  (3.95)    $    1.55      $   1.54       $    1.60     $  (0.19)    $   (0.21)

Other Data:
   Capital expenditures (including
     acquisitions)................... $ 57,056   $   38,912    $  18,349      $    9,194     $ 16,327      $ 10,985      $  4,789

Statement of Cash Flows Data Net cash provided by (used in):
    Operating activities............. $ 16,263   $   (8,336)   $  23,850                     $  9,587      $ 15,306
    Investing activities............. $(30,797)  $   (5,036)   $  67,461                     $ 70,524      $(10,985)
    Financing activities............. $ 20,685   $   10,836    $ (95,622)                    $(82,974)     $ (1,288)





                                       13



                                                                            As at September 30, 2004
                                                                           ---------------------------
                                                                            Historical    Pro Forma
                                                                           ------------- -------------
                                                                             (dollars in  thousands)
Balance Sheet Data:
                                                                                          
     Cash and cash equivalents............................................  $    3,601    $   2,894
     Net property and equipment...........................................     114,233       75,488
     Total assets.........................................................     129,067       94,993
     Total other liabilities..............................................      14,938        6,560
     Total debt...........................................................     190,516      150,000
     Total stockholders' deficit..........................................     (76,387)     (61,567)
--------------


(1)      Data for  2001,  2002 and the first 23 days of 2003  includes  Canadian
         subsidiaries sold in January 2003.

(2)      Consists of natural gas and crude oil  production  sales,  revenue from
         rig  operations  and  other  miscellaneous   revenue,  net  of  hedging
         activities.

(3)      Consists  of  lease  operating  expenses,   production  taxes  and  rig
         operations.

(4)      Interest expense on our indebtedness  includes cash interest expense on
         our  existing  credit  facility and  non-cash  interest  expense on the
         existing notes (through the issuance of additional notes).




                                       14


                 Summary Historical and Pro Forma Operating Data

     The historical  operating data presented  below sets forth a summary of our
production  and per unit sales price of crude oil,  NGLs and natural gas and our
per unit  expenses  for the  periods  indicated.  The pro forma  operating  data
presented  below for the year ended  December  31,  2003 and for the nine months
ended  September 30, 2004 reflects the  consolidated  operating data for Abraxas
and each of the  restricted  subsidiaries  and gives effect to the  exclusion of
operating data relating to Grey Wolf.



                                                                                                        Nine Months Ended
                                                 Years Ended December 31,                                 September 30,
                                   -----------------------------------------------------      -------------------------------------
                                                                                 Pro                                        Pro
                                                                                Forma                                      Forma
                                   2001(1)        2002(1)         2003(1)        2003           2003(1)        2004         2004
                                   ----------     ----------    ----------    ----------      ----------    ----------  -----------
                                                             (dollars in thousands, except per unit data)
Total Sales:
                                                                                                          
   Natural gas and crude oil         $73,201        $50,862      $38,105       $29,710         $29,277       $34,249       $24,174
   sales.........................
Production:
   Crude oil (MBbls).............        454            292          252           220             180           191            166
   NGLs (MBbls)..................        278            242           37             9              31            41              7
   Natural gas (MMcf)............     17,496         15,453        6,189         4,781           4,669         5,093          3,382
   Gas and Oil Sales (MMcfe).....     21,888         18,657        7,923         6,155           5,935         6,485          4,420
   Average daily sales (MMcfe)...      60.0           51.1          21.7          16.9            21.7          23.7           16.1
Average Sales Price:(2)
   Crude oil (per Bbl)...........    $ 24.63         $24.34      $  30.32       $ 30.43       $  30.55       $  37.84      $  37.91
   NGLs (per Bbl)................      21.51         17.94          24.47         20.47          24.27          32.00         24.71
   Natural gas (per Mcf).........       3.20          2.55           4.78          4.77           4.93           5.05          5.24
   Per Mcfe......................       3.34          2.73           4.81          4.82           4.93           5.28          5.47
Cost of production (per Mcfe):
   Lease operating expense.......   $   0.85        $  0.82        $ 1.21      $   1.36       $    1.21     $     1.44    $   1.52
   Depreciation, depletion and                                                                                        
    amortization.................   $   1.48        $  1.42        $ 1.36      $   1.24       $    1.32     $     1.45    $   1.22
   General and administrative....   $   0.29        $  0.37        $ 0.68      $   0.65       $    0.64     $     0.74    $   0.85
   Interest expense..............   $   1.44        $  1.83        $ 2.14      $   2.01       $    2.17     $     2.11    $   2.57
     --------------


     (1) Data for  2001,  2002 and the first 23 days of 2003  includes  Canadian
subsidiaries sold in January 2003.

     (2) Average sales prices include effects of hedging activities.



                                       15



                  Summary Historical and Pro Forma Reserve Data

     The  historical  reserve data  presented  below sets forth a summary of our
estimated  proved  crude oil,  NGLs and  natural  gas  reserves  as of the dates
indicated.  The pro  forma  reserve  data  presented  below  for the year  ended
December 31, 2003 reflects the consolidated reserve data for Abraxas and each of
the  restricted  subsidiaries  and gives effect to and reflects the exclusion of
reserve data relating to Grey Wolf.

     The  reserve   estimates  were  prepared  in  accordance   with  guidelines
established  by the SEC  regarding  the present value of reserves and future net
revenues.  The  process of  estimating  natural  gas and crude oil  reserves  is
complex and involves  decisions and  assumptions  in the evaluation of available
geological,  geophysical,   engineering  and  economic  data.  Therefore,  these
estimates are imprecise. See "Risk Factors--Estimates of our proved reserves and
future net revenue are uncertain and inherently imprecise."



                                                                                                      Pro Forma
                                                          2001            2002           2003            2003
                                                       -----------     -----------    -----------     -----------
                                                                        (dollars in thousands)
    Estimated Proved Reserves(1):
                                                                                                
       Crude oil and NGLs (MBbls)....................      6,802           4,605          4,134           3,320
       Natural gas (MMcf)............................    188,757         138,832         96,284          80,202
       Natural gas equivalents (MMcfe)...............    229,569         166,462        121,088         100,122

       % Proved developed (based on volume)..........       59%              65%            54%            51%

       Estimated future net revenue before income
       taxes.........................................   $386,762        $460,987       $416,756       $333,761

       PV-10.........................................   $209,666        $254,853       $216,823       $161,584

       % Proved developed (based on value)...........       82%              81%            67%            64%

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


     (1) The weighted average prices utilized for the purposes of estimating our
         proved  reserves and future net revenues were $2.20,  $3.79,  $5.05 and
         $5.13 per Mcf at  December  31,  2001,  2002,  2003 and pro forma 2003,
         respectively, and $18.26, $29.69, $31.03 and $31.03 per Bbl at December
         31, 2001, 2002, 2003 and pro forma 2003, respectively.

         The following  table sets forth our developed and  undeveloped  acreage
for the period indicated:



                                                                      As of December 31, 2003
                                                           ------------------------------------------------
                                                               US             Canada            Total
                                                           -------------    ------------    ---------------
                  Acreage:
           Gross acres:
                                                                                            
             Developed...................................     26,871            18,238            45,109
             Undeveloped.................................     63,375           155,246           218,621
                                                           -------------    ------------    ---------------
               Total ....................................     90,246           173,484           263,730
                                                           =============    ============    ===============
           Net acres:
             Developed...................................     22,178             9,075            31,253
             Undeveloped.................................     58,235            93,866           152,101
                                                           -------------    ------------    ---------------
               Total ....................................     80,413           102,941           183,354
                                                           =============    ============    ===============





                                       16





                                  RISK FACTORS

     You should  consider  carefully  these risks together with all of the other
information included in this prospectus before deciding whether to exchange your
outstanding notes in the Series A/B exchange offer.

     The risk factors noted in this section and other factors  contained in this
prospectus  describe examples of risks,  uncertainties and events that may cause
our  actual  results  to  differ   materially   from  those   contained  in  any
forward-looking  statement.  If one or  more of  these  risks  or  uncertainties
materialize,  or if underlying assumptions prove incorrect,  actual outcomes may
vary materially from those described in this prospectus.

Risks Related to the Series A/B Exchange Offer

     If you do not exchange  your  outstanding  notes,  they will continue to be
subject to restrictions on transfer and may be difficult to resell.

     If you do not exchange  your  outstanding  notes in the Series A/B exchange
offer, you may be unable to freely sell your outstanding notes because,  without
the benefit of an effective shelf registration statement,  any outstanding notes
not exchanged will remain subject to the  restrictions on transfer  provided for
under the Securities  Act. These  restrictions  on transfer of your  outstanding
notes  exist  because  Abraxas  issued  the  outstanding  notes  pursuant  to an
exemption  from  the  registration   requirements  of  the  Securities  Act  and
applicable state securities laws.

     Generally,  the  outstanding  notes that are not exchanged for the exchange
notes  pursuant  to  the  Series  A/B  exchange  offer  will  remain  restricted
securities. Accordingly, any such outstanding notes may be resold only:

     o   to Abraxas (upon their redemption or otherwise);

     o   pursuant to an effective  registration  statement  under the Securities
         Act;

     o   so long as the  outstanding  notes are eligible for resale  pursuant to
         Rule 144A under the Securities Act to a qualified  institutional  buyer
         within  the  meaning  of  Rule  144A  in  a  transaction   meeting  the
         requirements of Rule 144A;

     o   outside the United States to a foreign person pursuant to the exemption
         from the  registration  requirements  of the Securities Act provided by
         Regulation S under the Securities Act;

     o   pursuant to an exemption  from  registration  under the  Securities Act
         provided by Rule 144 thereunder (if available); or

     o   pursuant  to  another   available   exemption  from  the   registration
         requirements of the Securities Act, in each case in accordance with any
         applicable securities laws of any state of the United States.

     To the extent any outstanding notes are tendered and accepted in the Series
A/B exchange offer, the trading market,  if any, for the outstanding  notes that
remain  outstanding  after the Series A/B exchange  offer is completed  would be
adversely affected due to a reduction in market liquidity.

     If you do not comply with the Series A/B  exchange  offer  procedures,  you
will not receive new, freely tradable exchange notes, and your outstanding notes
will continue to be subject to restrictions on transfer.

     If you do not comply with the Series A/B  exchange  offer  procedures,  you
will not receive exchange notes and your  outstanding  notes will continue to be
subject to restrictions  on transfer.  Delivery of exchange notes in exchange of
your outstanding notes tendered and accepted for exchange pursuant to the Series
A/B exchange offer will be made only if you do one of the following prior to the
expiration or termination of the Series A/B exchange offer:

     o   tender  your  outstanding  notes by sending the  certificates  for your
         outstanding  notes, in proper form for transfer,  a properly  completed
         and duly executed letter of transmittal; or

                                       17


     o   tender your outstanding notes by using book-entry  transfer  procedures
         and  transmitting  a properly  completed  and duly  executed  letter of
         transmittal or an agent's message instead of the letter of transmittal,
         to the exchange agent.

     Therefore,   holders  of  outstanding   notes  who  would  like  to  tender
outstanding  notes in exchange for exchange notes should be sure to allow enough
time for the  outstanding  notes to be delivered on time. We are not required to
notify you of  defects or  irregularities  in tenders of  outstanding  notes for
exchange. Outstanding notes that are not tendered or that are tendered but we do
not accept for exchange will, following  consummation of the Series A/B exchange
offer,  continue to be subject to the existing transfer  restrictions  under the
Securities Act and, upon consummation of the Series A/B exchange offer,  certain
registration  and other  rights under the  registration  rights  agreement  will
terminate.

     There is currently no active  trading  market for the exchange  notes,  the
value of the exchange notes may fluctuate  significantly  and any market for the
exchange notes may be illiquid.

     Although upon the completion of the Series A/B exchange offer, the exchange
notes will generally be freely transferable, there is currently no public market
for the exchange notes.  Abraxas cannot assure you that an active market for the
exchange  notes will develop,  or, if such a market  develops,  that such market
will be  liquid  or that you  will be able to sell  your  exchange  notes in the
future at an  acceptable  price to you, if at all.  Abraxas  does not  presently
intend to apply for the exchange  notes to be listed on any national  securities
exchange or to arrange for any  quotation  system to quote  them.  The  exchange
notes  have been  declared  eligible  for  trading  in The  PORTAL  Market.  The
liquidity  of the market for the  exchange  notes  will  depend  upon the amount
outstanding,  the number of  holders  thereof  and the  interest  of  securities
dealers in maintaining a market in such exchange  notes. If a liquid market were
to exist,  the  exchange  notes could trade at prices that may be lower than the
principal  amount  or  purchase  price,  depending  on many  factors,  including
prevailing  interest  rates,  the market for similar notes,  Abraxas'  financial
performance  and other factors beyond  Abraxas'  control.  The liquidity of, and
trading market for, the exchange notes also may be adversely affected by general
declines in the market for high yield  securities.  Such  declines may adversely
affect the liquidity and trading markets for the notes.

Risks Related to Our Business

     We have a highly leveraged  capital  structure,  which limits our operating
and financial flexibility.

     We have a highly leveraged capital  structure.  Abraxas currently has total
indebtedness, including the notes, of approximately $150.0 million, all of which
is secured indebtedness.

     Our highly leveraged  capital structure will have several important effects
on our future operations, including:

     o   A substantial  amount of our cash flow from operations will be required
         to service our  indebtedness  (including cash interest  payments on the
         notes),  which will reduce the funds that would  otherwise be available
         for  operations,  capital  expenditures  and  expansion  opportunities,
         including developing our properties;

     o   The covenants  contained in Abraxas' new revolving  credit facility and
         bridge loan require Abraxas to meet certain  financial tests and comply
         with  certain  other  restrictions,  including  limitations  on capital
         expenditures. These restrictions,  together with those in the indenture
         governing  the  notes,  limit  Abraxas'  ability to  undertake  certain
         activities and respond to changes in its business and its industry;

     o   The  covenants  contained  in the new Grey Wolf term  loan  limit  Grey
         Wolf's ability to make distributions or pay dividends to Abraxas.  As a
         result, Grey Wolf's cash flow from operations is no longer available to
         Abraxas   to  meet  its  debt   service   obligations   and   operating
         requirements;

     o   Our debt  level may impair our  ability to obtain  additional  capital,
         through  equity  offerings  or debt  financings,  for working  capital,
         capital expenditures or refinancing of indebtedness;

                                       18


     o   Our debt level  makes us more  vulnerable  to  economic  downturns  and
         adverse  developments in our industry  (especially  declines in natural
         gas and crude oil prices) and the economy in general; and

     o   The notes and the new revolving credit facility are subject to variable
         interest rates which makes us vulnerable to interest rate increases.

     We may not be able to fund the substantial  capital  expenditures that will
     be required for us to increase our reserves and our production.

     We are required to make  substantial  capital  expenditures  to develop our
existing reserves and to discover new reserves.  Historically,  we have financed
our capital  expenditures  primarily with cash flow from operations,  borrowings
under credit facilities and sales of producing properties.  In addition to using
its cash flow from  operations,  Abraxas expects to use the new revolving credit
facility to fund capital  expenditures.  We cannot  assure you that we will have
sufficient capital resources in the future to finance our capital expenditures.

     Volatility in natural gas and crude oil prices,  the timing of our drilling
program and our  drilling  results  will  affect our cash flow from  operations.
Lower prices and/or lower production will also decrease  revenues and cash flow,
thus  reducing the amount of financial  resources  available to meet our capital
requirements,  including  reducing  the amount  available to pursue our drilling
opportunities. If our cash flow from operations does not increase as a result of
our planned  capital  expenditures,  a greater  percentage of our cash flow from
operations will be required for debt service  (including cash interest  payments
on the notes) and our planned  capital  expenditures  would,  by  necessity,  be
decreased.

     The  borrowing  base  under  the  new  revolving  credit  facility  will be
determined from time to time by Abraxas'  lenders under the new revolving credit
facility,  consistent  with their  customary  natural  gas and crude oil lending
practices.  Reductions  in  estimates  of  Abraxas'  natural  gas and  crude oil
reserves  could result in a reduction in Abraxas'  borrowing  base,  which would
reduce the  amount of  financial  resources  available  under the new  revolving
credit facility to meet Abraxas' capital requirements. Such a reduction could be
the  result of lower  commodity  prices  or  production,  inability  to drill or
unfavorable  drilling  results,  changes  in natural  gas and crude oil  reserve
engineering,  the lenders'  inability to agree to an adequate  borrowing base or
adverse changes in the lenders' practices regarding estimation of reserves.

     If cash flow from  operations or Abraxas'  borrowing  base decrease for any
reason,  Abraxas' ability to undertake  exploitation and development  activities
could be adversely affected. As a result, Abraxas' ability to replace production
may be limited. In addition,  if the borrowing base under Abraxas' new revolving
credit  facility is reduced,  Abraxas would be required to reduce its borrowings
under the new revolving  credit  facility so that such  borrowings do not exceed
the borrowing  base. This could further reduce the cash available to Abraxas for
capital  spending and, if Abraxas did not have sufficient  capital to reduce its
borrowing  level,  could cause Abraxas to default under the new revolving credit
facility, the notes and the bridge loan.

     We have sold producing  properties to provide us with liquidity and capital
resources in the past and may do so in the future. After any such sale, we would
expect to utilize  the  proceeds  to drill new wells.  If we cannot  replace the
production lost from  properties  sold with production from new properties,  our
cash flow from operations  will likely  decrease which, in turn,  would decrease
the amount of cash available for debt service and additional capital spending.



                                       19


     We may be unable to acquire or develop additional  reserves,  in which case
     our  results of  operations  and  financial  condition  would be  adversely
     affected.

     Our future natural gas and crude oil production, and therefore our success,
is highly  dependent  upon our ability to find,  acquire and develop  additional
reserves that are profitable to produce. The rate of production from our natural
gas and crude  oil  properties  and our  proved  reserves  will  decline  as our
reserves are produced unless we acquire additional  properties containing proved
reserves,   conduct   successful   exploration,   development  and  exploitation
activities or, through  engineering  studies,  identify  additional  behind-pipe
zones or secondary recovery reserves. We cannot assure you that our exploration,
exploitation  and development  activities will result in increases in our proved
reserves.  While we have had some success in pursuing these activities,  we have
not been able to fully  replace the  production  volumes lost from natural field
declines  and property  sales.  As our proved  reserves,  and  consequently  our
production,  decline,  our cash flow from operations and the amount that Abraxas
is able to borrow under the new revolving credit facility will also decline.  In
addition,  approximately  36% of Abraxas'  total  estimated  proved  reserves at
December 31, 2003 were  undeveloped.  By their nature,  estimates of undeveloped
reserves are less certain.  Recovery of such  reserves will require  significant
capital expenditures and successful drilling operations.

     Prior to the January 2003 financial restructuring,  we implemented a number
of measures to conserve our cash resources,  including  postponement of drilling
projects.  While these measures helped  conserve our cash  resources,  they also
limited our ability to replenish our depleting reserves.  We have also postponed
drilling projects as a result of the capital spending  limitations that 0existed
in the 11 1/2% secured notes due 2007 which have been called for redemption.  As
a result, our current producing properties have continued to deplete and we have
not been able to drill new wells at a rate  that we would  have  desired  in the
absence of these limitations. The terms of the new revolving credit facility and
the bridge loan place limits on Abraxas' capital expenditures,  which will limit
Abraxas' ability to replenish its reserves and increase production.

     Abraxas may incur additional  indebtedness,  which may exacerbate the risks
     described above, including its ability to service indebtedness.

     Abraxas may incur additional indebtedness. Although the terms of the notes,
and Abraxas' new revolving  credit  facility and bridge loan  restrict  Abraxas'
ability to incur additional  indebtedness,  these  restrictions are subject to a
number  of  qualifications  and  exceptions,  and under  certain  circumstances,
indebtedness   incurred  in  compliance   with  these   restrictions   could  be
substantial.  Also,  these  restrictions  do not prevent  Abraxas from incurring
obligations that do not constitute indebtedness.  Any additional indebtedness or
other  obligations  could  exacerbate the risks described  herein related to our
highly leveraged capital structure.

     Restrictive  debt covenants  could limit Abraxas' growth and its ability to
     finance  its  operations,  fund its  capital  needs,  respond  to  changing
     conditions and engage in other business  activities that may be in its best
     interests.

     The new revolving credit facility,  bridge loan and the indenture governing
the notes contain a number of significant  covenants  that,  among other things,
limit  Abraxas'  ability to: o incur or guarantee  additional  indebtedness  and
issue certain types of preferred stock or redeemable stock;

     o   transfer or sell assets;

     o   create liens on assets;

     o   pay  dividends  or make other  distributions  on capital  stock or make
         other  restricted  payments,   including  repurchasing,   redeeming  or
         retiring   capital  stock  or  subordinated   debt  or  making  certain
         investment or acquisitions;

     o   engage in transactions with affiliates;

     o   guarantee other indebtedness;

     o   make any change in the principal nature of its business;

                                       20


     o   prepay,  redeem,  purchase  or  otherwise  acquire  any  of  its or its
         restricted subsidiaries' indebtedness;

     o   permit a change of control;

     o   directly or indirectly make or acquire any investment;

     o   cause a restricted subsidiary to issue or sell its capital stock; and

     o   consolidate,  merge  or  transfer  all  or  substantially  all  of  the
         consolidated assets of the Company and its restricted subsidiaries.

     In  addition,  the new  revolving  credit  facility and bridge loan require
Abraxas to  maintain  compliance  with  specified  financial  ratios and satisfy
certain financial condition tests.  Abraxas' ability to comply with these ratios
and financial condition tests may be affected by events beyond its control,  and
it cannot  assure you that it will meet these  ratios  and  financial  condition
tests.  These financial ratio  restrictions and financial  condition tests could
limit  Abraxas'  ability  to  obtain  future  financings,  make  needed  capital
expenditures,  withstand  a future  downturn  in its  business or the economy in
general or otherwise conduct necessary or desirable corporate activities.

     A breach of any of these covenants or Abraxas' inability to comply with the
required financial ratios or financial condition tests could result in a default
under the new  revolving  credit  facility  and  bridge  loan and the  notes.  A
default, if not cured or waived,  could result in all of Abraxas'  indebtedness,
including the notes, becoming immediately due and payable. If that should occur,
Abraxas  may not be able to pay all such debt or to borrow  sufficient  funds to
refinance it. Even if new financing were then available,  it may not be on terms
that are  acceptable to Abraxas.  See  "Management's  Discussion and Analysis of
Financial  Condition  and  Results of  Operations--Long-Term  Indebtedness"  and
"Description of the Exchange Notes--Events of Default and Remedies."

     The marketability of our production  depends largely upon the availability,
     proximity  and capacity of natural gas  gathering  systems,  pipelines  and
     processing facilities.

     The  marketability  of our production  depends in part upon  processing and
transportation  facilities.  Transportation  space on such gathering systems and
pipelines is  occasionally  limited and at times  unavailable  due to repairs or
improvements  being made to such  facilities or due to such space being utilized
by other  companies  with  priority  transportation  agreements.  Our  access to
transportation  options  can also be affected  by U.S.  Federal  and state,  and
Canadian  Federal  and  provincial  regulation  of  natural  gas and  crude  oil
production and transportation, general economic conditions and changes in supply
and  demand.  These  factors  and the  availability  of  markets  are beyond our
control. If market factors dramatically change, the financial impact on us could
be  substantial  and adversely  affect our ability to produce and market natural
gas and crude oil.

     Hedging transactions have in the past and may in the future impact Abraxas'
     cash flow from operations.

     Abraxas  enters into hedging  arrangements  from time to time to reduce its
exposure to fluctuations in natural gas and crude oil prices and to achieve more
predictable cash flow. In 2001, 2002 and 2003, we experienced  hedging losses of
$12.1 million, $3.2 million and $842,000, respectively, resulting from the price
ceilings we  established  being  exceeded  by the index  prices.  Currently,  we
believe our hedging arrangements,  which are in the form of price floors, do not
expose us to significant  financial risk.  Although Abraxas' hedging  activities
may limit its  exposure to  declines  in natural gas and crude oil prices,  such
activities  may also limit,  and have in the past limited,  additional  revenues
from increases in natural gas and crude oil prices.

     Abraxas  cannot  assure you that the  hedging  transactions  it has entered
into, or will enter into, will adequately  protect it from financial loss due to
circumstances such as:

     o   highly volatile natural gas and crude oil prices;

     o   Abraxas' production being less than expected; or

     o   a counterparty to one of Abraxas'  hedging  transactions  defaulting on
         its contractual obligations.

                                       21


     We  have experienced recurring significant operating losses.

     We  recorded  net losses for 1998,  1999,  2001 and 2002 of $84.0  million,
$36.7 million, $19.7 million and $118.5 million, respectively.

     Although we recorded net income of $8.4 million for 2000, we  experienced a
significant  gain on the sale of an interest in a  partnership,  absent which we
would have  experienced  a net loss of $25.5  million for that year.  Similarly,
although we recorded  net income of $55.9  million for 2003,  if the gain on the
sale of  certain  of our  Canadian  properties  were  excluded,  we  would  have
experienced a net loss for the year of $13.0 million.  We cannot assure you that
we will become profitable in the future.

     Lower  natural  gas and  crude  oil  prices  increase  the risk of  ceiling
     limitation write-downs.

     We use the full cost  method to account  for our  natural gas and crude oil
operations.  Accordingly,  we  capitalize  the cost to acquire,  explore for and
develop natural gas and crude oil properties.  Under full cost accounting rules,
the net capitalized  cost of natural gas and crude oil properties may not exceed
a "ceiling limit" which is based upon the present value of estimated  future net
cash flows from proved  reserves,  discounted  at 10%, plus the lower of cost or
fair market value of unproved  properties.  If net capitalized  costs of natural
gas and crude oil properties exceed the ceiling limit, we must charge the amount
of the excess to  earnings.  This is called a "ceiling  limitation  write-down."
This charge does not impact cash flow from operating activities, but does reduce
our  stockholders'  equity and  earnings.  The risk that we will be  required to
write-down the carrying value of natural gas and crude oil properties  increases
when  natural gas and crude oil prices are low.  In  addition,  write-downs  may
occur if we experience  substantial downward adjustments to our estimated proved
reserves.  An expense recorded in one period may not be reversed in a subsequent
period even though  higher  natural gas and crude oil prices may have  increased
the ceiling applicable to the subsequent period.

     We have incurred  ceiling  limitation  write-downs in the past. At June 30,
2002, for example, we recorded a ceiling limitation  write-down of $116 million.
We cannot assure you that we will not experience  additional  ceiling limitation
write-downs in the future.

     Use of our net operating loss carryforwards may be limited.

     At December 31,  2003,  Abraxas had,  subject to the  limitation  discussed
below, $100.6 million of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire through 2022 if not utilized. In connection
with the January 2003 financial restructuring, certain of the loss carryforwards
were  utilized.  In  addition,  as to a portion of the U.S. net  operating  loss
carryforwards,  the amount of such  carryforwards  that we can use  annually  is
limited  under  U.S.  tax law.  Moreover,  uncertainties  exist as to the future
utilization  of the operating  loss  carryforwards  under the criteria set forth
under FASB  Statement  No.  109.  Therefore,  we have  established  a  valuation
allowance of $99.1 million and $76.1 million for deferred tax assets at December
31, 2002 and 2003, respectively.

     Abraxas  depends  on its  Chairman,  President  and CEO and the loss of his
     services could have an adverse effect on our operations.

     Abraxas  depends to a large extent on Robert L. G. Watson,  its Chairman of
the  Board,  President  and Chief  Executive  Officer,  for its  management  and
business  and  financial  contacts.  Mr.  Watson may  terminate  his  employment
agreement  with  Abraxas at any time on 30 days  notice,  but, if he  terminates
without cause, he would not be entitled to the severance benefits provided under
the terms of that agreement.  Mr. Watson is not precluded from working for, with
or on behalf of a competitor upon termination of his employment with Abraxas. If
Mr.  Watson were no longer able or willing to act as our  Chairman,  the loss of
his services could have an adverse effect on our operations.


                                       22

Risks Related to Our Industry

     We may not find  any  commercially  productive  natural  gas or  crude  oil
     reservoirs.

     We cannot assure you that the new wells we drill will be productive or that
we will  recover  all or any  portion of our capital  investment.  Drilling  for
natural  gas and crude  oil may be  unprofitable.  Dry holes and wells  that are
productive but do not produce sufficient net revenues after drilling,  operating
and other costs are unprofitable.  The inherent risk of not finding commercially
productive  reservoirs will be compounded by the fact that 36% of Abraxas' total
estimated  proved  reserves at  December  31,  2003 were  undeveloped.  By their
nature,  estimates of  undeveloped  reserves are less certain.  Recovery of such
reserves will require significant  capital  expenditures and successful drilling
operations.  In addition,  our  properties  may be  susceptible to drainage from
production by other operations on adjacent properties.  If the volume of natural
gas and crude oil we  produce  decreases,  our cash  flow from  operations  will
decrease.

     We operate in a highly competitive  industry which may adversely affect our
     operations,  including our ability to secure drilling  equipment to service
     our core areas.

     We operate in a highly  competitive  environment.  The principal  resources
necessary for the  exploration  and  production of natural gas and crude oil are
leasehold  prospects  under  which  natural  gas and crude oil  reserves  may be
discovered, drilling rigs and related equipment to explore for such reserves and
knowledgeable  personnel  to conduct  all  phases of  natural  gas and crude oil
operations.  We must compete for such  resources with both major natural gas and
crude oil companies and independent  operators.  Many of these  competitors have
financial and other resources  substantially  greater than ours. In the past, we
have had difficulty  securing  drilling  equipment in certain of our core areas.
Although we believe our current  operating and financial  resources are adequate
to preclude  any  significant  disruption  of our  operations  in the  immediate
future, we cannot assure you that such materials and resources will be available
to us.

     Market   conditions  for  natural  gas  and  crude  oil,  and  particularly
     volatility of prices for natural gas and crude oil, could adversely  affect
     our revenue, cash flows, profitability and growth.

     Our revenue,  cash flows,  profitability  and future rate of growth  depend
substantially  upon prevailing prices for natural gas and crude oil. Natural gas
prices affect us more than crude oil prices  because most of our  production and
reserves are natural gas.  Prices also affect the amount of cash flow  available
for capital  expenditures  and our ability to borrow  money or raise  additional
capital.  Lower prices may also make it uneconomical  for us to increase or even
continue current production levels of natural gas and crude oil.

     Prices for natural gas and crude oil are subject to large  fluctuations  in
response to  relatively  minor  changes in the supply and demand for natural gas
and crude oil,  market  uncertainty  and a variety of other  factors  beyond our
control, including:

     o   changes in foreign and  domestic  supply and demand for natural gas and
         crude oil;

     o   political stability and economic conditions in oil producing countries,
         particularly in the Middle East;

     o   general economic conditions;

     o   domestic and foreign governmental regulation; and

     o   the price and availability of alternative fuel sources.

     In addition to decreasing our revenue and cash flow from operations, low or
declining  natural  gas and crude oil  prices  could  have  additional  material
adverse effects on us, such as:

     o   reducing  the  overall  volume of natural gas and crude oil that we can
         produce   economically,   thereby  adversely   affecting  our  revenue,
         profitability  and cash flow and our ability to perform our obligations
         with respect to the notes; and

                                       23


     o   impairing  our  borrowing  capacity  and our  ability to obtain  equity
         capital.

     Estimates of our proved  reserves and future net revenue are  uncertain and
     inherently imprecise.

     The process of  estimating  natural gas and crude oil  reserves is complex,
involving  decisions  and  assumptions  in  evaluating   available   geological,
geophysical,  engineering  and economic data.  Accordingly,  these estimates are
imprecise. Actual future production, natural gas and crude oil prices, revenues,
taxes,   development   expenditures,   operating   expenses  and  quantities  of
recoverable  natural gas and crude oil reserves most likely will vary from those
estimated.  Any  significant  variance  could  materially  affect the  estimated
quantities  and  present  value of  reserves  set forth in this  prospectus.  In
addition,  we may adjust  estimates  of proved  reserves  to reflect  production
history,  results of exploration  and  development,  prevailing  natural gas and
crude oil prices and other factors, many of which are beyond our control.

     The  estimates of our reserves  are based upon  various  assumptions  about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of natural gas and crude oil reserves, future net
revenue from proved reserves and the PV-10 thereof for the natural gas and crude
oil properties  described in this  prospectus  are based on the assumption  that
future natural gas and crude oil prices remain the same as natural gas and crude
oil prices at December 31, 2003.  The average  sales prices as of such date used
for purposes of such estimates were $31.03 per Bbl of crude oil,  $27.19 per Bbl
of NGLs and $5.05 per Mcf of natural gas.  These  estimates  also assume that we
will make future  capital  expenditures  of  approximately  $50.4 million in the
aggregate  through 2019, which are necessary to develop and realize the value of
proved  undeveloped  reserves on our  properties.  Any  significant  variance in
actual results from these assumptions could also materially affect the estimated
quantity and value of reserves set forth in this prospectus.

     The present value of future net revenues referred to in this prospectus may
not be the  current  market  value of our  estimated  natural  gas and crude oil
reserves.  In accordance with SEC requirements,  the estimated discounted future
net cash flows from proved  reserves are generally  based on prices and costs as
of the end of the period of the estimate.  Actual future prices and costs may be
materially  higher or lower  than the prices and costs as of the end of the year
of the  estimate.  Any changes in  consumption  by natural gas  purchasers or in
governmental  regulations  or taxation  will also affect  actual future net cash
flows.  The timing of both the production and the expenses from the  development
and production of natural gas and crude oil properties will affect the timing of
actual future net cash flows from proved  reserves and their present  value.  In
addition,  the 10% discount  factor,  which is required by the SEC to be used in
calculating  discounted  future net cash flows for  reporting  purposes,  is not
necessarily the most accurate  discount factor.  The effective  interest rate at
various times and the risks  associated with us or the natural gas and crude oil
industry in general will affect the accuracy of the 10% discount factor.

     Our  operations  are subject to numerous risks of natural gas and crude oil
     drilling and production activities.

     Our  natural  gas and crude oil  drilling  and  production  activities  are
subject to numerous  risks,  many of which are beyond our  control.  These risks
include  the risk of  fire,  explosions,  blow-outs,  pipe  failure,  abnormally
pressured formations and environmental  hazards.  Environmental  hazards include
oil spills,  natural gas leaks,  ruptures  and  discharges  of toxic  gases.  In
addition,  title  problems,  weather  conditions and mechanical  difficulties or
shortages or delays in delivery of drilling rigs, work boats and other equipment
could  negatively  affect  our  operations.  If any of these  or  other  similar
industry  operating risks occur, we could have substantial  losses.  Substantial
losses  also may  result  from  injury  or loss of  life,  severe  damage  to or
destruction of property, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. In accordance with industry practice, we
maintain  insurance  against some, but not all, of the risks described above. We
cannot  assure  you that our  insurance  will be  adequate  to cover  losses  or
liabilities.  Also, we cannot predict the continued availability of insurance at
premium levels that justify its purchase.

     Our  natural  gas and crude oil  operations  are  subject to  various  U.S.
     Federal,  state and local and Canadian Federal and provincial  governmental
     regulations that materially affect our operations.

     Matters  regulated  include  discharge  permits  for  drilling  operations,
drilling and abandonment bonds,  reports concerning  operations,  the spacing of
wells and unitization and pooling of properties and taxation.  At various times,


                                       24


regulatory  agencies have imposed price controls and  limitations on production.
In order to conserve  supplies of natural gas and crude oil, these agencies have
restricted  the rates of flow of natural  gas and crude oil wells  below  actual
production  capacity.   Federal,  state,  provincial  and  local  laws  regulate
production,  handling,  storage,  transportation and disposal of natural gas and
crude oil,  by-products  from natural gas and crude oil and other substances and
materials  produced  or used in  connection  with  natural  gas  and  crude  oil
operations.  To date, our expenditures  related to complying with these laws and
for  remediation  of  existing   environmental   contamination   have  not  been
significant.  We  believe  that  we  are  in  substantial  compliance  with  all
applicable  laws and  regulations.  However,  the  requirements of such laws and
regulations  are  frequently  changed.  We cannot  predict the ultimate  cost of
compliance with these requirements or their effect on our operations.

Risks Related to the Notes

     Our  ability  to  generate  the  significant  amount  of cash  that will be
     required to service our  indebtedness  depends on many  factors  beyond our
     control,  and any failure to meet our debt service  obligations  could harm
     our business, financial condition and results of operations.

     Our ability to make payments on our indebtedness, including the notes, will
depend on our ability to  generate  cash from  operations  in the future and our
ability to  successfully  increase  production.  This, to a certain  extent,  is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control,  including the prices that we receive
for  natural  gas and  crude  oil.  It is also  dependent  upon our  ability  to
successfully complete our drilling opportunities.

     We cannot assure you that Abraxas will generate  sufficient  cash flow from
operations to pay its indebtedness,  including the notes, as well as to continue
drilling new wells. If Abraxas' cash flow from operations and capital  resources
are  insufficient  to fund  Abraxas'  debt service  obligations,  Abraxas may be
forced to decrease its drilling activities,  sell assets, seek additional equity
capital  or  restructure  its  debt.  We  cannot  assure  you  that any of these
alternatives could, if necessary,  be effected on commercially reasonable terms,
or at  all.  Our  cash  flow  from  operations  and  capital  resources  may  be
insufficient for payment of interest on and principal of our debt in the future,
including  payments  on the  notes,  and any such  alternative  measures  may be
unsuccessful  or may not permit us to meet scheduled  debt service  obligations,
which could cause us to default on our  obligations,  including  the notes,  and
could impair our liquidity.

     The  notes  are  subject  to  an   intercreditor   agreement   that  places
     limitations,  which  would  not  otherwise  exist,  on the  ability  of the
     noteholders  to deal with Abraxas with  respect to certain  matters.  Among
     such limitations is a requirement that during an event of default,  certain
     payments be made under the new revolving  credit facility before being made
     to holders of the notes.

     The  terms  of an  intercreditor  agreement  may  require  Abraxas  and the
subsidiary guarantors to make all payments in respect of the notes, Abraxas' new
revolving  credit facility and Abraxas' bridge loan to a collateral agent during
the existence of an event of default under the indenture.  The collateral  agent
will then be required to apply these  amounts,  together  with any proceeds from
any disposition of the collateral,

     o   if a minimum  collateral  coverage ratio of three times the outstanding
         obligations  under the new revolving credit facility is met, (i) to the
         payment  of  interest  on the notes  only if and when all  accrued  and
         unpaid interest on the new revolving  credit facility has been paid and
         (ii)  to the  payment  of  principal  of the  notes  after  the  entire
         principal  amount  outstanding  under the new revolving credit facility
         has been repaid; or

     o   if that  minimum  collateral  coverage  ratio is not then  met,  to the
         payment of interest on and  principal of the notes only if and when all
         outstanding  interest  on and  principal  of the new  revolving  credit
         facility have been paid.

The  terms  of  the  intercreditor  agreement  also  limit  the  ability  of the
noteholders to exercise remedies and other rights with respect to the collateral
following  an event of default  that would  otherwise  be  available  absent the
intercreditor agreement. Accordingly, your ability to recover your investment in
the notes could be  significantly  limited  and/or  delayed by the effect of the
intercreditor  agreement. The intercreditor agreement also limits the ability of


                                       25


Abraxas to modify certain terms of the notes if this would adversely  affect the
rights of the other  parties to that  agreement,  even if this  modification  is
approved  by the  holders  of the  notes in  accordance  with  the  terms of the
indenture.

     The collateral pledged to secure the notes may be inadequate to satisfy all
     amounts due and owing to the holders of the notes.

     Abraxas'  subsidiaries  that guarantee its obligations under the notes also
guarantee  Abraxas'  obligations  under the new revolving credit  facility.  The
notes and the subsidiary note guarantees, together with the new revolving credit
facility  and each  subsidiary  guarantor's  guarantee  thereof,  are secured by
shared  first  priority  security   interests,   subject  to  certain  permitted
encumbrances,  in  substantially  all of  Abraxas'  and  each of its  restricted
subsidiaries' material property and assets, including substantially all of their
respective  natural gas and crude oil properties,  and  substantially all of the
capital  stock of any  entity,  other than Grey Wolf,  owned by Abraxas  and its
restricted subsidiaries.  Except under limited circumstances,  the notes are not
guaranteed  or secured by any of the  property,  assets or capital stock of Grey
Wolf. We cannot assure you that the value of the collateral or the proceeds from
the sale of the collateral allocable to the notes would be sufficient to satisfy
all amounts due on the notes  following a foreclosure  upon the  collateral or a
liquidation  of  Abraxas'  assets.  The  ability of the  holders of the notes to
realize upon the  collateral is subject to certain  limitations in the indenture
governing  the  notes  and  the  related  collateral  documents,  including  the
intercreditor  agreement,  and may also be limited by applicable  state laws. If
the net proceeds  received from the sale of the  collateral,  after repayment of
principal  outstanding on the new revolving  credit  facility in accordance with
the  terms of the  intercreditor  agreement,  are not  sufficient  to repay  all
amounts due with  respect to the notes,  you would as a holder of notes,  to the
extent of the  insufficiency,  have only an  unsecured  claim  against  Abraxas'
remaining assets.

     The terms of the notes permit,  without the consent of holders of the notes
     or the  trustee  under the  indenture,  releases of  collateral  pledged to
     secure the notes in certain circumstances.

     Collateral that is sold, transferred or otherwise disposed of in accordance
with the terms of the new revolving credit facility, the indenture governing the
notes and the bridge loan will automatically be released from the liens securing
the notes and the subsidiary guarantees of the notes. For example, lenders under
the bridge loan may, if the bridge loan is not timely repaid,  direct Abraxas to
sell certain  property and assets included in the collateral.  If Abraxas sells,
transfers or otherwise  disposes of the collateral in  transactions  that do not
violate the asset  disposition  covenant in the  indenture  governing the notes,
that  collateral  will be  released  from the liens  securing  the notes and the
subsidiary  note  guarantees  without the consent of holders of the notes. If an
event of default has occurred and is  continuing,  the  collateral  agent,  upon
instructions  from the control  party  under the  intercreditor  agreement,  may
release  collateral in accordance with the terms of the intercreditor  agreement
in connection  with the  foreclosure,  sale or disposition of that collateral to
satisfy Abraxas' secured obligations. Any collateral released would cease to act
as security for the notes and the subsidiary note guarantees.

     Any subsidiary guarantee of the notes may be released without action by, or
     consent of, any holder of the notes or the trustee  under the  indenture if
     the  subsidiary  guarantor  is no longer a guarantor or an obligor of other
     indebtedness of Abraxas or any of its restricted subsidiaries.

     A subsidiary guarantor's guarantee may be released if the release occurs in
the  context of an asset sale of such  subsidiary  guarantor  or the  subsidiary
guarantor's  designation as an unrestricted subsidiary that is not prohibited by
the  indenture  or  the  collateral  documents.  Upon  release  of a  subsidiary
guarantor of the notes under its subsidiary guarantee,  the collateral documents
related to the  indenture  provide that the security  interests in the assets of
that subsidiary guarantor securing the notes and subsidiary note guarantees will
be released simultaneously.  You will not have a claim as a creditor against any
subsidiary  that is no longer a subsidiary  guarantor of the new notes,  and the
indebtedness and other liabilities, including trade payables, whether secured or
unsecured, of those subsidiaries will effectively be senior to your claims.

                                       26


     In  certain  circumstances,  lenders  under  Abraxas'  bridge  loan  may be
     entitled to direct asset sales and control certain rights and remedies with
     respect to the  collateral  pledged to secure the notes and the  subsidiary
     guarantees.

     Abraxas'  bridge loan is secured by a second  priority  perfected  security
interest on the  collateral  that is subordinate to the liens securing the notes
and the new  revolving  credit  facility  and is  guaranteed  on a  subordinated
secured  basis by its  restricted  subsidiaries  which also  guarantee  Abraxas'
obligations  under the notes and the new revolving credit facility.  The lenders
under the bridge loan are entitled to direct  Abraxas to consummate  one or more
asset sales if the bridge loan is not fully  repaid after 15 months and there is
not then an event of default  with  respect to the notes or under either the new
revolving  credit facility or bridge loan. The lenders under the bridge loan, as
the control  party  under the  intercreditor  agreement,  also have the right to
exclusively  control  certain rights and remedies with respect to the collateral
for at least 240 days  following a notice of an event of default with respect to
the notes or under  either the new  revolving  credit  facility or bridge  loan.
However,  in either case,  lenders under the new revolving  credit  facility and
holders of the notes, in the priority specified in the intercreditor  agreement,
will receive all proceeds  from any  realization  on the  collateral  until that
facility and the notes,  respectively,  are paid in full. If there were an event
of default under the notes, the bridge loan lenders, as the control party, could
decide not to proceed  against  the  collateral,  in which case the only  remedy
available to holders of the notes during the period of time that the bridge loan
lenders  remained the control party would be to sue for payment on the notes and
the  subsidiary  note   guarantees.   Abraxas'  bridge  loan  lenders  may  have
significantly  different or adverse  interests than Abraxas' first lien lenders,
including  the  holders  of the  notes,  and may have very  little  indebtedness
outstanding.  Abraxas'  bridge  loan  lenders  are under no  obligation  to take
interests of Abraxas'  first lien  lenders,  including the holders of the notes,
into  account in  determining  whether to direct  asset sales or exercise  their
rights and remedies in respect of the collateral,  subject to the  intercreditor
agreement, and their interests may differ or be adverse to yours. The collateral
agent is required to conduct  sales of the  collateral  in  accordance  with the
standards,  if  any,  under  applicable  law,  which  may  include  the  Uniform
Commercial Code. This method of sale will not necessarily benefit the first lien
lenders, including the holders of the notes or result in fair market value sales
as determined by other measures. In addition, the rights of the collateral agent
to exercise  significant  remedies (such as foreclosure) are, subject to certain
exceptions,  generally limited to a payment default,  Abraxas' bankruptcy or the
acceleration of the indebtedness.

    Bankruptcy laws may limit your ability to realize value from the collateral.

     Upon the occurrence of an event of default,  the collateral agent will have
the  right  to  repossess  and  dispose  of the  collateral  if so  directed  in
accordance  with the  provisions  of the  intercreditor  agreement.  This right,
however,   would  be  subject  to  limitations   under,  and  is  likely  to  be
significantly impaired by, applicable bankruptcy law if Abraxas becomes a debtor
in a case under the bankruptcy  code before the collateral  agent  repossess and
disposes of the  collateral.  Under the automatic stay imposed by the bankruptcy
code, a secured  creditor is prohibited  from  repossessing  its security from a
debtor  subject to a bankruptcy  case or  disposing of the security  repossessed
from  the  debtor,   without  bankruptcy  court  authorization.   Moreover,  the
bankruptcy  code permits the debtor to continue to retain and to use  collateral
even  though the debtor is in default  under the  applicable  debt  instruments,
provided  that the  bankruptcy  court can require  that the secured  creditor be
given "adequate  protection" if and at such times as the court in its discretion
determines that the value of the secured  creditor's  interest in the collateral
is declining during the pendency of the bankruptcy case. The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended in
general  to  protect  the  value  of  the  secured  creditor's  interest  in the
collateral and may include cash payments or the granting of additional security.
In view of the lack of a precise  definition of the term  "adequate  protection"
and the broad  discretionary  powers of a bankruptcy  court, it is impossible to
predict:

     o   how  long  payments   under  the  notes  could  be  delayed   following
         commencement  of a bankruptcy  case; 

     o   whether or when the  collateral  trustee could  repossess or dispose of
         the collateral; or

     o   whether or to what extent holders of the notes would be compensated for
         any delay in payment  or loss of value of the  collateral  through  the
         requirement of "adequate protection."

                                       27


     Under  certain  circumstances  a bankruptcy  court could order that certain
     payments made under the notes be returned.

     The bankruptcy  code allows the bankruptcy  trustee (or Abraxas,  acting as
debtor-in-possession)  to avoid  certain  transfers of a debtor's  property as a
"preference." Under the bankruptcy code a preference is:

     o   a transfer of the debtor's property;

     o   to or for the benefit of a creditor on account of an existing debt;

     o   made while the debtor was  insolvent  (presumed in the 90 days before a
         bankruptcy filing);

     o   if the  creditor  receives  more  than  it  would  have  received  in a
         bankruptcy liquidation if the transfer had not been made; and

     o   if the  transfer/payment  was made in the 90 days before the bankruptcy
         filing, or, if the creditor was an "insider" within one year before the
         bankruptcy  filing (a  creditor  that is also a  director,  officer  or
         controlling stockholder of a debtor may be deemed to be an insider).

     Abraxas'  payment of principal and/or accrued  interest,  or its grant of a
lien or  security  interest,  including  payments  made  or  liens  or  security
interests  granted  under the notes,  may be deemed to be a preference if all of
the factors  discussed  above are present,  subject to any applicable  defenses,
including that payments are made in the ordinary course.  If such transfers were
deemed to be  preferential  transfers,  the payments could be recovered from the
holders of the notes and the lien or security interest could be avoided.

     If the notes are fully secured (i.e.,  the value of collateral  exceeds the
amount it  secures),  payments on such notes would not  constitute  preferential
transfers.  However, if, or to the extent, the notes are undersecured (i.e., the
value of the  collateral  is less than the amount  which it  secures),  payments
could be considered preferential transfers. Therefore, if Abraxas is involved in
a  bankruptcy  proceeding,  holders  of the notes may be  required  to  disgorge
payments  made on such notes if all the  statutory  elements  of a  preferential
transfer are met and there are no valid defenses.

     The subsidiary  guarantees  could be voided if they  constitute  fraudulent
     transfers  under the  bankruptcy  code or similar  state laws,  which would
     prevent the holders of notes from relying on the  subsidiary  guarantors to
     satisfy our payment obligations under the notes.

     The  obligations  of  Abraxas  under the notes are  guaranteed  on a senior
secured basis by each of its current U.S. subsidiaries and by each of its future
restricted  subsidiaries.  Federal and state laws allow courts,  under  specific
circumstances,  to  subordinate  claims under the  subsidiary  guarantees to all
other debts of the subsidiary  guarantors or to void the  subsidiary  guarantees
and to require  creditors such as the  noteholders to return  payments  received
from  subsidiary  guarantors.   Under  Federal  bankruptcy  law  and  comparable
provisions of state  fraudulent  transfer laws, a subsidiary  guarantee could be
subordinated  to all other debts of the  subsidiary  guarantor or voided if, for
example,  a court  were to find  that a  subsidiary  guarantor,  at the  time it
entered into a subsidiary guarantee:

     o   intended to hinder, delay or defraud any present or future creditor;

     o   received less than fair  consideration  or reasonably  equivalent value
         for entering into the subsidiary guarantee;

     o   was insolvent or rendered insolvent by making the guarantee;

     o   was engaged in a business or transaction for which the remaining assets
         of the subsidiary guarantor constituted unreasonably small capital; or

     o   intended to incur,  or believed  that it would incur,  debts beyond its
         ability to pay such debts as they matured.

     The measures of insolvency for purposes of these  fraudulent  transfer laws
will vary depending on the law applied in any proceeding to determine  whether a
fraudulent  transfer has  occurred.  Generally,  however,  a guarantor  would be


                                       28


considered insolvent if: the sum of its debts, including contingent liabilities,
were greater than the value of its assets;  if the value of its assets were less
than the amount  that would be  required to pay its  probable  liability  on its
existing debts,  including contingent  liabilities,  as they become absolute and
mature;  or it could not pay its debts as they become due. In addition,  a legal
challenge  of a  guarantee  issued by a  subsidiary  guarantor  as a  fraudulent
transfer may focus on the benefits, if any, realized by the subsidiary guarantor
as a result of  Abraxas'  issuance  of the  notes.  A court  might find that the
subsidiary  guarantors  did not  benefit  from  incurrence  of the  indebtedness
represented by such notes.

     To the extent that a guarantee is voided as a fraudulent  transfer or found
unenforceable for any other reason, holders of the notes would cease to have any
claim in respect of the applicable  guarantor.  In such event, the claims of the
holders  of the notes  against  such  guarantor  would be  subject  to the prior
payment of all liabilities  and preferred stock claims of such guarantor.  There
can be no assurance  that,  after  providing for all claims and preferred  stock
interests, if any, there would be sufficient assets to satisfy the claims of the
holders of the notes relating to any voided portion of such guarantee.

     Abraxas may not be able to repurchase the notes upon a change of control.

     Upon the  occurrence of certain change of control  events,  Abraxas will be
required to offer to  repurchase  all or any part of their notes at a cash price
equal to 101% of their  aggregate  principal  amount,  plus  accrued  and unpaid
interest,  if any.  Abraxas  may not  have  sufficient  funds at the time of the
change of control to make the required  repurchases of such notes. The source of
funds for any  repurchase  required as a result of any change of control will be
Abraxas'  available  cash or cash  generated  from  natural  gas and  crude  oil
operations or other sources,  including  borrowings,  sales of assets,  sales of
equity or funds provided by a new controlling entity. Abraxas cannot assure you,
however,  that sufficient  funds would be available at the time of any change of
control to make any required  repurchases  of the notes  tendered.  Furthermore,
using  available cash to fund the potential  consequences of a change of control
may impair Abraxas' ability to obtain additional financing in the future.






                                       29


                                 USE OF PROCEEDS

     Abraxas will not receive any proceeds from the Series A/B exchange offer.

                                 CAPITALIZATION

                   The following table sets forth our cash, cash equivalents and
short-term investments and capitalization as of September 30, 2004:

     o   on an actual basis; and

     o   on an as adjusted basis to reflect the consummation of the refinancing.

     This table should be read in conjunction  with "Selected  Financial  Data,"
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and our  consolidated  financial  statements,  including  the notes
thereto, included elsewhere in this prospectus.



                                                                          As of September 30, 2004
                                                                     ------------------------------------
                                                                         Actual             As Adjusted
                                                                     -------------       ----------------
                                                                           (dollars in thousands)
                                                                                 (unaudited)
                                                                                              
Cash, cash equivalents and short-term investments..................  $       3,601       $        3,601
                                                                     ==============      ================

Debt:
     Previous credit facility......................................  $      47,362 (1)   $            --
     11 1/2% secured notes due 2007...................................     143,154 (1)                --
     New revolving credit facility.................................              --                   --
     Floating rate senior secured notes due 2009...................              --              125,000
     Bridge loan...................................................              --               25,000
     Grey Wolf term loan (2) ......................................              --               35,000
                                                                     --------------     ----------------
         Total debt................................................  $     190,516       $       185,000
                                                                     --------------     ----------------
Stockholders' equity:
     Common stock..................................................  $         364       $          364
     Additional paid-in capital....................................        143,076              144,263
     Retained earnings (deficit)...................................       (220,527)            (205,645)
     Treasury stock................................................           (549)                (549)
     Other comprehensive income....................................          1,249                   --
                                                                     --------------    -----------------
         Total stockholders' deficit...............................        (76,387)             (61,567)
                                                                     --------------    -----------------
Total capitalization...............................................  $     114,129       $      123,433
                                                                     ==============    =================
--------------


(1)      On October 28, 2004, Abraxas repurchased all of its outstanding 11 1/2%
         secured notes due 2007, including accrued interest.  The purchase price
         was financed by the issuance of the  outstanding  notes,  borrowings by
         Abraxas  under its new bridge loan and from a $35 million  payment from
         Grey Wolf from proceeds of Grey Wolf's new term loan.

(2)      Non-recourse to Abraxas.



                                       30


                       RATIO OF EARNINGS TO FIXED CHARGES

     Our consolidated ratio of earnings to fixed charges for each of the periods
indicated are as follows:






                                                     Years Ended December 31,                        Nine Months Ended
                                                                                                       September 30,
                                    ------------------------------------------------------------  ----------------------
                                      1999         2000        2001         2002        2003        2003        2004
                                    ----------   ----------  -----------  ----------  ----------  ----------  ----------
                                                                                          
Ratio of earnings to fixed charges   *            1.4x        *            *           4.0x        5.1x        *
--------------



* Earnings inadequate to cover fixed charges.


     Earnings  consist of income (loss) before income taxes plus fixed  charges.
Fixed charges consist of interest  expense,  amortization of deferred  financing
fees and premium on the 11 1/2% secured notes 2007. Our earnings were inadequate
to cover fixed charges in 1999,  2001 and 2002 by $49.0  million,  $15.6 million
and $148.2 million,  respectively.  In 2000 we had earnings of $44.9 million and
fixed  charges of $33.2  million,  in 2003, we had earnings of $74.9 million and
fixed charges of $18.6 million.  Our ratio of earnings to fixed charges was 1.4x
and 4.0x in 2000 and 2003, respectively. For the nine months ended September 30,
2003, we had earnings of $72.2 million and fixed charges of $14.1  million.  Our
ratio of earnings to fixed charges for the nine months ended  September 30, 2003
was 5.1x.  For the nine months  ended  September  30, 2004,  our  earnings  were
inadequate to cover fixed charges by $6.8 million.



                                       31

                          THE SERIES A/B EXCHANGE OFFER

Purpose of the Series A/B Exchange Offer

     Abraxas issued $125,000,000  principal amount of the outstanding notes in a
private  offering on October 28, 2004. In connection with the private  offering,
Abraxas agreed in an exchange and  registration  rights agreement to conduct the
Series A/B exchange offer.

     The offering of the exchange notes will be registered  under the Securities
Act, and,  therefore the exchange notes will not be subject to  restrictions  on
transfer,  and holders of the exchange  notes will not be entitled to additional
interest due to a registration default.

     Each  broker-dealer  that  receives  exchange  notes for its own account in
exchange for outstanding  notes,  where such outstanding  notes were acquired by
such  broker-dealer  as a result of  market-making  activities  or other trading
activities,  must  acknowledge  that it will deliver a prospectus  in connection
with any resale of such exchange notes. See "Plan of Distribution".

Series A/B Exchange Offer Registration Statement

9        The exchange and registration rights agreement requires Abraxas to:

     o   file a registration  statement with the SEC with respect to an offer to
         exchange the  outstanding  notes for the exchange  notes that have been
         registered under the Securities Act no later than December 27, 2004;

     o   use reasonable  best efforts to cause such exchange offer  registration
         statement to be declared  effective  under the  Securities Act by April
         26, 2005; and

     o   use its  reasonable  best  efforts to complete  the Series A/B exchange
         offer by June 6, 2005 and to keep the  Series A/B  exchange  offer open
         for not less than 30 days,  or longer if  required by  applicable  law,
         after the date on which  notice of the  Series  A/B  exchange  offer is
         mailed to the holders of the outstanding notes.

     If Abraxas fails to file the required registration statement,  the SEC does
not declare the required  registration  statement  effective or Abraxas does not
complete the Series A/B exchange  offer, in each case within the applicable time
period specified above, Abraxas has agreed to pay additional interest to holders
of the outstanding  notes.  For a more complete  description of the exchange and
registration rights agreement, see "Exchange and Registration Rights Agreement".

Terms of the Series A/B Exchange Offer

     Abraxas is offering to exchange  $125  million  total  principal  amount of
exchange  notes for a like total  principal  amount of  outstanding  notes.  The
outstanding notes must be tendered properly on or before the expiration time and
not withdrawn. In exchange for outstanding notes properly tendered and accepted,
Abraxas  will  issue a like  total  principal  amount of up to $125  million  in
exchange notes.

     The Series A/B exchange offer is not conditioned  upon holders  tendering a
minimum  principal  amount  of  outstanding  notes.  As  of  the  date  of  this
prospectus,  $125 million  aggregate  principal amount of outstanding  notes are
outstanding.

     Holders of the  outstanding  notes do not have any appraisal or dissenters'
rights in the Series A/B exchange  offer.  If holders do not tender  outstanding
notes  or  tender  outstanding  notes  that  Abraxas  does  not  accept,   their
outstanding notes will remain  outstanding.  Any outstanding notes will continue
to be entitled to the benefits  under the  indenture.  See "Risk  Factors--Risks
Related to the Series A/B Exchange Offer".

                                       32


     After the expiration  time,  Abraxas will return to the holder any tendered
outstanding notes that Abraxas did not accept for exchange.

     Holders  exchanging  outstanding  notes  will  not  have  to pay  brokerage
commissions  or fees or transfer  taxes if they follow the  instructions  in the
letter of  transmittal.  Abraxas will pay the charges and  expenses,  other than
certain taxes described below, in the Series A/B exchange offer. See "--Fees and
Expenses" for further information regarding fees and expenses.

     NEITHER ABRAXAS NOR ITS BOARD OF DIRECTORS  RECOMMENDS YOU TO TENDER OR NOT
TENDER OUTSTANDING NOTES IN THE SERIES A/B EXCHANGE OFFER. IN ADDITION,  ABRAXAS
HAS NOT AUTHORIZED ANYONE TO MAKE ANY RECOMMENDATION. YOU MUST DECIDE WHETHER TO
TENDER IN THE SERIES A/B  EXCHANGE  OFFER AND,  IF SO, THE  AGGREGATE  AMOUNT OF
OUTSTANDING NOTES TO TENDER.

     The  expiration  time is midnight,  New York City time,  on  _____________,
2005, unless Abraxas extends the Series A/B exchange offer.

     Abraxas has the right, in accordance with applicable law, at any time:

     o   to delay the acceptance of the outstanding notes;

     o   to terminate the Series A/B exchange offer if Abraxas  determines  that
         any of the  conditions  to the  Series  A/B  exchange  offer  have  not
         occurred or have not been satisfied;

     o   to extend the expiration time of the Series A/B exchange offer and keep
         all  outstanding   notes  tendered  other  than  those  notes  properly
         withdrawn; and

     o   to waive any  condition  or amend the terms of the Series A/B  exchange
         offer.

     If Abraxas  materially changes the Series A/B exchange offer, or if Abraxas
waives a material  condition  of the Series A/B  exchange  offer,  Abraxas  will
promptly  distribute a prospectus  supplement to the holders of the  outstanding
notes  disclosing the change or waiver.  Abraxas also will extend the Series A/B
exchange  offer as required by Rule 14e-1 under the  Securities  Exchange Act of
1934, as amended.

     If Abraxas  exercises any of the rights listed above, it will promptly give
oral or  written  notice of the  action to the  exchange  agent and will issue a
release  to an  appropriate  news  agency.  In  the  case  of an  extension,  an
announcement  will be made no later than 9:00 a.m.,  New York City time,  on the
next business day after the previously scheduled expiration time.

Acceptance for Exchange and Issuance of Exchange Notes

     Promptly after the expiration  time,  Abraxas will issue exchange notes for
outstanding  notes  tendered  and accepted  and not  withdrawn.  Delivery of the
exchange  notes issued in global form will occur through the  facilities of DTC,
and the exchange  agent will deliver the exchange  notes issued in  certificated
form. If a tendering  outstanding  noteholder tenders  certificated  outstanding
notes,  the exchange  agent might not deliver the exchange  notes to all of such
tendering holders at the same time. The timing of delivery depends upon when the
exchange agent receives and processes the required documents.

     Abraxas will be deemed to have exchanged outstanding notes validly tendered
and not  withdrawn  when  Abraxas  gives oral or written  notice to the exchange
agent of their  acceptance.  The  exchange  agent is an agent  for  Abraxas  for
receiving  tenders of  outstanding  notes,  letters of  transmittal  and related
documents.  The exchange agent is also an agent for tendering  holders for these
same purposes,  and in the case of holders who tender  certificated  outstanding
notes, the exchange agent is also their agent for the delivery of their exchange
notes.  If for any reason,  Abraxas (1) delays the acceptance or exchange of any
outstanding  notes;  (2) extends the Series A/B exchange offer; or (3) is unable
to accept or exchange  outstanding notes, then the exchange agent may, on behalf
of Abraxas and subject to Rule 14e-1(c) under the Exchange Act,  retain tendered
outstanding  notes.  Outstanding notes retained by the Exchange Agent may not be


                                       33


withdrawn, except according to the withdrawal procedures outlined in the section
entitled "--Withdrawal Rights" below.

     In  tendering  outstanding  notes,  you must  represent  and warrant in the
letter of transmittal or in an agent's message (described below) that:

     o   you have full power and authority to tender, exchange, sell, assign and
         transfer outstanding notes;

     o   Abraxas will acquire good,  marketable  and  unencumbered  title to the
         tendered outstanding notes, free and clear of all liens,  restrictions,
         charges and other encumbrances; and

     o   the  outstanding  notes  tendered  for  exchange are not subject to any
         adverse claims, rights or proxies.

     You also must warrant and agree that you will,  upon  request,  execute and
deliver any additional  documents  requested by Abraxas or the exchange agent to
complete the exchange, sale, assignment and transfer of the outstanding notes.

Procedures for Tendering Outstanding Notes

     Valid Tender

     You may tender your  outstanding  notes by book-entry  transfer or by other
means.  For  book-entry  transfer,  (1) you must deliver to the  exchange  agent
either a completed and signed letter of  transmittal  or (2) DTC must deliver an
agent's  message,  meaning a message  transmitted  to the exchange  agent by DTC
stating  that you agree to be bound by the terms of the  letter of  transmittal.
You must deliver your letter of transmittal by mail, facsimile, hand delivery or
overnight  courier or DTC must deliver the agent's message to the exchange agent
on or before  the  expiration  time.  In  addition,  to  complete  a  book-entry
transfer,  you must also either (1) have DTC transfer the outstanding notes into
the exchange agent's account at DTC using the ATOP procedures for transfer,  and
obtain a confirmation of such a transfer,  or (2) follow the guaranteed delivery
procedures described below under "--Guaranteed Delivery Procedures."

     If you tender fewer than all of your outstanding  notes, you should fill in
the amount of outstanding notes tendered in the appropriate box on the letter of
transmittal.  If you do not indicate the amount tendered in the appropriate box,
Abraxas will assume you are tendering all outstanding notes that you hold.

     To  tender  certificated  outstanding  notes or to  otherwise  tender  your
outstanding  notes  other  than by  book-entry  transfer,  you  must  deliver  a
completed  and signed  letter of  transmittal  to the exchange  agent.  You must
deliver the letter of transmittal by mail, facsimile, hand delivery or overnight
courier to the exchange agent on or before the expiration time. In addition,  to
complete a valid tender,  you must either (1) deliver your outstanding  notes to
the  exchange  agent  on or  before  the  expiration  time,  or (2)  follow  the
guaranteed  delivery  procedures  set forth below under  "--Guaranteed  Delivery
Procedures."

     DELIVERY OF  REQUIRED  DOCUMENTS  BY WHATEVER  METHOD YOU CHOOSE IS AT YOUR
SOLE RISK.  DELIVERY IS COMPLETE WHEN THE EXCHANGE AGENT  ACTUALLY  RECEIVES THE
ITEMS TO BE  DELIVERED.  DELIVERY OF DOCUMENTS TO DTC IN  ACCORDANCE  WITH DTC'S
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, THEN REGISTERED MAIL, RETURN RECEIPT  REQUESTED,  PROPERLY INSURED,  OR AN
OVERNIGHT  DELIVERY  SERVICE  IS  RECOMMENDED.  IN ALL CASES,  YOU SHOULD  ALLOW
SUFFICIENT TIME TO ENSURE TIMELY DELIVERY.




                                       34


     Signature Guarantees

     You do not  need to  endorse  certificates  for the  outstanding  notes  or
provide  signature  guarantees on the letter of transmittal,  unless (a) someone
other than the registered holder tenders the certificate or (b) you complete the
box entitled "Special Issuance  Instructions" or "Special Delivery Instructions"
in the letter of  transmittal.  In the case of (a) or (b)  above,  you must sign
your  outstanding  notes or provide a properly  executed  bond  power,  with the
signature  on the bond power and on the letter of  transmittal  guaranteed  by a
firm or other entity  identified  in Rule  17Ad-15  under the Exchange Act as an
"eligible guarantor institution." Eligible guarantor institutions include: (1) a
bank; (2) a broker, dealer,  municipal securities broker or dealer or government
securities  broker or dealer;  (3) a credit  union;  (4) a  national  securities
exchange, registered securities association or clearing agency; or (5) a savings
association that is a participant in a securities transfer association.

     Guaranteed Delivery Procedures

     If you want to tender  your  outstanding  notes in the Series A/B  exchange
offer and (1) the  certificates  for the outstanding  notes are not lost but are
not immediately available,  (2) all required documents are unlikely to reach the
exchange  agent on or before the expiration  time, or (3) a book-entry  transfer
cannot be completed in time, you may tender your outstanding notes if you comply
with the following guaranteed delivery procedures:

     o   the tender is made by or through an eligible guarantor institution;

     o   you  deliver a  properly  completed  and  signed  notice of  guaranteed
         delivery,  similar to the form provided with the letter of transmittal,
         to the exchange agent on or before the expiration time; and

     o   you deliver the  certificates or a confirmation of book-entry  transfer
         and a  properly  completed  and  signed  letter of  transmittal  to the
         exchange agent within three New York Stock Exchange  trading days after
         the notice of guaranteed delivery is executed.

     You may deliver the notice of  guaranteed  delivery by hand,  facsimile  or
mail to the exchange agent and must include a guarantee by an eligible guarantor
institution in the form described in the notice.

     Abraxas'  acceptance of properly  tendered  outstanding  notes is a binding
agreement between the tendering holder and Abraxas upon the terms and subject to
the conditions of the Series A/B exchange offer.

     Determination Of Validity

     Abraxas  will  resolve  all  questions  regarding  the  form of  documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered  outstanding notes.  Abraxas' resolution of these questions as well
as  Abraxas'  interpretation  of the  terms and  conditions  of the  Series  A/B
exchange offer (including the letter of transmittal) is final and binding on all
parties. A tender of outstanding notes is invalid until all irregularities  have
been cured or waived. Neither Abraxas, any affiliates or assigns of Abraxas, the
exchange  agent nor any other person is under any  obligation  to give notice of
any  irregularities  in tenders  nor will they be liable for failing to give any
such  notice.  Abraxas  reserves the  absolute  right,  in its sole and absolute
discretion, to reject any tenders determined to be in improper form or unlawful.
Abraxas also reserves the absolute  right to waive any of the  conditions of the
Series A/B  exchange  offer or any  condition or  irregularity  in the tender of
outstanding  notes by any holder.  Abraxas need not waive similar  conditions or
irregularities in the case of other holders.

     If any letter of transmittal,  endorsement,  bond power, power of attorney,
or any other  document  required  by the  letter of  transmittal  is signed by a
trustee,  executor,  administrator,  guardian,  attorney-in-fact,  officer  of a
corporation  or other person acting in a fiduciary or  representative  capacity,
that person must indicate that capacity when signing. In addition, unless waived
by Abraxas,  the person must submit proper evidence  satisfactory to Abraxas, in
its sole discretion, of his or her authority to so act.

     A beneficial  owner of outstanding  notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee or
custodian should contact that entity promptly if the holder wants to participate
in the Series A/B exchange offer.

                                       35


     Withdrawal Rights

     You can withdraw tenders of outstanding  notes at any time on or before the
expiration time.

     For a withdrawal to be effective, you must deliver a written,  telegraphic,
telex or facsimile  transmission of a notice of withdrawal to the exchange agent
on or before the expiration time. The notice of withdrawal must specify the name
of the  person  tendering  the  outstanding  notes to be  withdrawn,  the  total
principal amount of outstanding notes withdrawn,  and the name of the registered
holder of the  outstanding  notes if  different  from the person  tendering  the
outstanding  notes. If you delivered  outstanding notes to the exchange agent in
certificated  form, you must submit the serial numbers of the outstanding  notes
to be withdrawn and the signature on the notice of withdrawal must be guaranteed
by an eligible  guarantor  institution,  except in the case of outstanding notes
tendered for the account of an eligible guarantor  institution.  If you tendered
outstanding  notes as a  book-entry  transfer,  the  notice of  withdrawal  must
specify  the name and  number  of the  account  at DTC to be  credited  with the
withdrawal of outstanding notes and you must deliver the notice of withdrawal to
the exchange agent by written, telegraphic, telex or facsimile transmission. You
may not rescind withdrawals of tender.  Outstanding notes properly withdrawn may
again be tendered at any time on or before the expiration time.

     Abraxas will  determine  all questions  regarding  the  validity,  form and
eligibility  of withdrawal  notices.  Abraxas'  determination  will be final and
binding on all parties. Neither Abraxas, any affiliate or assign of Abraxas, the
exchange  agent nor any other person is under any  obligation  to give notice of
any  irregularities  in any  notice of  withdrawal,  nor will they be liable for
failing to give any such notice. Withdrawn outstanding notes will be returned to
the holder after withdrawal.

Resales of Exchange Notes

     Abraxas is exchanging the  outstanding  notes for exchange notes based upon
the position of the SEC staff set forth in interpretive letters to third parties
in other  similar  transactions.  Abraxas  will  not  seek its own  interpretive
letter,  unless  contractually  required to in accordance  with the terms of the
exchange and registration rights agreement.  As a result,  Abraxas cannot assure
you that the SEC staff will take the same  position  on the Series A/B  exchange
offer  as it did in  interpretive  letters  to other  parties.  Based on the SEC
staff's  letters to other  parties,  Abraxas  believes  that holders of exchange
notes,  other than  broker-dealers,  can offer the  exchange  notes for  resale,
resell and otherwise transfer the exchange notes without delivering a prospectus
to  prospective  purchasers.  However,  prospective  holders  must  acquire  the
exchange  notes in the  ordinary  course of business  and have no  intention  of
engaging in a distribution of the exchange notes, as a "distribution" is defined
by the Securities Act.

     Any holder of  outstanding  notes who is an  "affiliate"  of Abraxas or who
intends  to  distribute  exchange  notes,  or any  broker-dealer  who  purchased
outstanding  notes from  Abraxas  for resale  pursuant to Rule 144A or any other
available exemption under the Securities Act:

     o   cannot rely on the SEC staff's  interpretations in the  above-mentioned
         interpretive letters;

     o   cannot tender outstanding notes in the Series A/B exchange offer; and

     o   must comply with the registration and prospectus delivery  requirements
         of the Securities  Act to transfer the  outstanding  notes,  unless the
         sale is exempt.

     In addition,  each  broker-dealer  that receives exchange notes for its own
account in exchange for outstanding  notes,  where such  outstanding  notes were
acquired by such broker-dealer as a result of market-making  activities or other
trading  activities,  must  acknowledge  that it will  deliver a  prospectus  in
connection with any resale of such exchange notes. See "Plan of Distribution".

     If you want to exchange your outstanding notes for exchange notes, you will
be required to affirm that:

     o   you are not an "affiliate" of Abraxas;

     o   you are  acquiring  the exchange  notes in the ordinary  course of your
         business;

                                       36


     o   you have no arrangement or understanding with any person to participate
         in a  distribution  of the  exchange  notes  (within the meaning of the
         Securities Act); and

     o   you are not a  broker-dealer,  not  engaged  in,  and do not  intend to
         engage in, a distribution  of the exchange notes (within the meaning of
         the Securities Act).

     In addition,  Abraxas may require you to provide information  regarding the
number of  "beneficial  owners"  (within  the  meaning of Rule  13d-3  under the
Exchange  Act)  of the  outstanding  notes.  Each  broker-dealer  that  receives
exchange  notes  for its own  account  must  acknowledge  that it  acquired  the
outstanding notes for its own account as the result of market-making  activities
or other  trading  activities  and must agree that it will  deliver a prospectus
meeting the  requirements of the Securities Act in connection with any resale of
exchange notes. By making this acknowledgment and by delivering a prospectus,  a
broker-dealer will not be deemed to admit that it is an "underwriter"  under the
Securities  Act.  Based on the SEC  staff's  position  in  certain  interpretive
letters, Abraxas believes that broker-dealers who acquired outstanding notes for
their own  accounts as a result of  market-making  activities  or other  trading
activities may fulfill their prospectus  delivery  requirements  with respect to
the exchange notes with a prospectus  meeting the requirements of the Securities
Act.  Accordingly,  a  broker-dealer  may use this  prospectus  to satisfy  such
requirements.  Abraxas has agreed that a  broker-dealer  may use this prospectus
for a period ending 180 days after the  expiration  time or, if earlier,  when a
broker-dealer has disposed of all exchange notes. See "Plan of Distribution" for
further  information.  A  broker-dealer  intending to use this prospectus in the
resale of exchange  notes must  notify  Abraxas,  on or prior to the  expiration
time,  that it is a  participating  broker-dealer  (as  described  in  "Plan  of
Distribution").  This notice may be given in the letter of transmittal or may be
delivered to the  exchange  agent.  Any  participating  broker-dealer  who is an
"affiliate" of Abraxas may not rely on the SEC staff's  interpretive letters and
must comply with the  registration and prospectus  delivery  requirements of the
Securities Act when reselling exchange notes.

Conditions to the Series A/B Exchange Offer

     Abraxas need not exchange any outstanding  notes,  may terminate the Series
A/B exchange  offer or may waive any conditions to the Series A/B exchange offer
or amend the Series A/B exchange offer, if any of the following  conditions have
occurred:

     o   the SEC staff no longer  allows the  exchange  notes to be offered  for
         resale,  resold and otherwise  transferred by certain  holders  without
         compliance with the registration and prospectus  delivery provisions of
         the Securities Act;

     o   a governmental body passes any law, statute,  rule or regulation which,
         in Abraxas'  opinion,  prohibits  or prevents  the Series A/B  exchange
         offer;

     o   an action or proceeding shall have been instituted or threatened in any
         court or by or before  any  governmental  agency  with  respect  to the
         exchange offer which, in Abraxas' judgment would reasonably be expected
         to impair Abraxas' ability to proceed with the exchange offer;

     o   the  SEC  or  any  state  securities  authority  issues  a  stop  order
         suspending the effectiveness of the registration statement or initiates
         or threatens to initiate a proceeding to suspend the  effectiveness  of
         the registration statement; or

     o   Abraxas  is unable to obtain any  governmental  approval  that  Abraxas
         believes is necessary to complete the Series A/B exchange offer.

     If  Abraxas  reasonably  believes  that  any of the  above  conditions  has
occurred, it may (1) terminate the Series A/B exchange offer, whether or not any
outstanding  notes have been accepted for  exchange,  (2) waive any condition to
the Series A/B exchange  offer or (3) amend the terms of the Series A/B exchange
offer  in  any  respect  subject  to  Abraxas'  contractual  obligation  in  the
registration  rights  agreement  to seek a no-action  letter or other  favorable
decision  from the SEC that  would  permit  the  consummation  of the Series A/B
exchange offer. If Abraxas'  waiver or amendment  materially  changes the Series
A/B  exchange  offer,  Abraxas  will  promptly  disclose the waiver or amendment
through a prospectus  supplement,  distributed to the registered  holders of the
outstanding  notes.  The prospectus  supplement  also will extend the Series A/B
exchange offer as required by Rule 14e-1 of the Exchange Act.

                                       37



Exchange Agent

     Abraxas has appointed U.S. Bank National  Association as exchange agent for
the Series A/B exchange offer.  Holders should direct questions and requests for
assistance,  requests for additional  copies of this prospectus or of the letter
of  transmittal  and requests for notice of guaranteed  delivery to the exchange
agent addressed as follows:



                                      Regular Mail, Couriers Or By                           Requests for
By Registered Or Certified Mail:      Hand Delivery:                    By Facsimile:         Information:

                                                                                     
U.S. Bank National Association     U.S. Bank National Association     (651) 495-8158        (800) 934-6802 
60 Livingston Avenue               60 Livingston Avenue               Attn: Specialized
Finance St. Paul, MN 55107         St. Paul, MN 55107                 (For Eligible 
Attn.: Specialized Finance         Attn.: Specialized Finance          Institutions Only)


     If you deliver letters of transmittal or any other required documents to an
address or  facsimile  number  other than those  listed  above,  your  tender is
invalid.

Fees and Expenses

     Abraxas will pay the exchange  agent  reasonable and customary fees for its
services and reasonable out-of-pocket expenses.  Abraxas also will pay brokerage
houses  and  other   custodians,   nominees  and  fiduciaries  their  reasonable
out-of-pocket  expenses  for  sending  copies  of this  prospectus  and  related
documents to holders of  outstanding  notes,  and in handling or  tendering  for
their customers.

     Abraxas  will pay the transfer  taxes for the  exchange of the  outstanding
notes in the  Series  A/B  exchange  offer.  If,  however,  exchange  notes  are
delivered to or issued in the name of a person other than the registered holder,
or if a transfer  tax is imposed for any reason  other than for the  exchange of
outstanding  notes in the Series A/B exchange offer,  then the tendering  holder
will pay the transfer taxes. If a tendering holder does not submit  satisfactory
evidence  of  payment  of taxes or  exemption  from  taxes  with the  letter  of
transmittal, the taxes will be billed directly to the tendering holder.

     Abraxas  will not make any  payment to brokers,  dealers or other  nominees
soliciting acceptances in the Series A/B exchange offer.

Accounting Treatment

     The  exchange  notes will be  recorded  at the same  carrying  value as the
outstanding notes. Accordingly,  no gain or loss for accounting purposes will be
recognized  by  upon  the  closing  of the  Series  A/B  exchange  offer.  Costs
associated with the Series A/B exchange offer will be expensed as incurred.




                                       38

                    UNAUDITED PRO FORMA FINANCIAL INFORMATION

     The pro forma  financial  data  presented  below is unaudited  and has been
derived from our consolidated  financial  statements included in this prospectus
and from unaudited historical and pro forma consolidated financial data. The pro
forma financial information presented below for the year ended December 31, 2003
and for the nine months ended September 30, 2004 reflects consolidated statement
of  operations  data  relating  to  Abraxas  and  each  of the  U.S.  subsidiary
guarantors of the notes and gives effect to:

     o   the exclusion of Grey Wolf from Abraxas' statement of operations;

     o   the consummation of the October 2004 financial restructuring; and

     o   the  exclusion of the January 2003  financial  restructuring  described
         under "Management's  Discussion and Analysis of Financial Condition and
         Results of Operations."

     The pro forma  condensed  balance sheet reflects the  consolidated  balance
sheet data  relating to Abraxas  and each of the  subsidiary  guarantors  of the
notes and gives effect to the  exclusion of balance  sheet data relating to Grey
Wolf as of September 30, 2004.

     Grey Wolf,  through which we conduct our Canadian  operations  and hold our
properties and assets located in Canada,  is excluded from the pro forma results
because:

     o   except under the limited  circumstances  described in this  prospectus,
         the notes are not, and will not be,  guaranteed  by Grey Wolf,  and are
         structurally   subordinated   in  right  of   payment  to  all  of  its
         obligations,  including  Grey Wolf's term loan and trade  payables  and
         other debt of Grey Wolf;

     o   the notes are not secured by any of the property or assets of Grey Wolf
         (unless it becomes a restricted subsidiary); and

     o   the  shares of  capital  stock of Grey  Wolf  owned by  Abraxas  do not
         constitute a part of the collateral.

Accordingly, the notes are effectively junior to all the liabilities,  including
all trade payables and other debt, of Grey Wolf.

     The pro forma information set forth below is not necessarily  indicative of
the results that actually  would have been achieved if the Grey Wolf  operations
had not been part of Abraxas' operations or the refinancing had been consummated
as of the dates indicated.




                                       39





              UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
                      For the Year Ended December 31, 2003

                                            Historical
                                              Abraxas
                                             Petroleum                          Financing
                                            Corporation      Grey Wolf         Transaction          Pro Forma
                                           --------------   -------------      -------------       -------------
                                                        (dollars in thousands, except per share data)
Revenues:
                                                                                            
  Oil and gas production revenues......        $38,105          $(8,395)  (1)  $         --            $29,710
  Gas processing revenues..............            133             (133)  (1)            --                 --
  Rig revenues.........................            663                --                 --                663
  Other................................            118             (111)  (1)            --                  7
                                           --------------   -------------      -------------       -------------
         Total revenues................         39,019           (8,639)                 --             30,380
Operating costs and expenses:
  Lease operating and production taxes.          9,599           (1,257)  (1)            --              8,342
  Depreciation, depletion and
    Amortization....................            10,803           (3,195)  (1)            --              7,608
  Rig operations.......................            609                --                 --                609
  General and administrative...........          5,360           (1,365)  (1)            --              3,995
  Stock-based compensation.............          1,106                --                 --              1,106
                                           --------------   -------------      -------------       -------------
         Total operating expenses......         27,477           (5,817)                 --             21,660
                                           --------------   -------------      -------------       -------------
Operating income (loss)................         11,542           (2,822)                                 8,720
Other (income) expense:                                                                
  Interest income......................            (30)               --                 --                (30)
  Amortization of deferred                                                                   
    financing fees..................             1,678              (48)  (1)        (1,630) (2)    
                                                                                      2,260  (2)         2,260
  Interest expense....................          16,955             (632)  (1)       (16,323) (3)
                                                                                     15,150  (3)         15,150
Financing costs........................          4,406                --                --                4,406 (4)
Gain of sale of foreign subsidiary.....        (68,933)               --                --              (68,933)
Other..................................            774             (674)  (1)           --                  100
                                           --------------   -------------      -------------       -------------
Income (loss) from operations before           
  income tax...........................         56,692           (1,468)                543              55,767
Income tax expense (benefit):..........            377             (377)  (1)           --                   --
Cumulative effect of accounting change.            395                --                --                  395
                                           --------------   -------------      -------------       -------------
Net income.............................        $55,920          $(1,091)            $   543             $55,372
                                           ==============   =============      =============       =============


Weighted average common shares:
    Basic..............................     35,364,363                                               35,364,363
                                           --------------                                          -------------
    Diluted............................     36,076,291                                               36,076,291
                                           --------------                                          -------------

Net income per share:
    Basic..............................     $    1.58                                               $    1.57
                                           --------------                                          -------------
    Diluted............................     $    1.55                                               $    1.54
                                           --------------                                          -------------

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


See notes to unaudited pro forma financial information.


                                       40




              UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
                  For the Nine Months Ended September 30, 2004

                                          Historical
                                           Abraxas
                                           Petroleum                            Financing
                                          Corporation       Grey Wolf           Transaction          Pro Forma
                                          --------------    ---------------     ---------------     ------------
                                          (dollars in thousands, except per share data)
 Revenues:
                                                                                              
    Oil and gas production revenues..           $34,249          $(10,075)  (1)   $        --            $24,174
    Rig revenues.....................               518                 --                 --                518
    Other............................               218              (209)  (1)            --                  9
                                          --------------    ---------------     ---------------     ------------
          Total revenues.............            34,985           (10,284)                 --             24,701
 Operating costs and expenses:
    Lease operating and production taxes          9,318            (2,602)  (1)            --              6,716
    Depreciation, depletion and
      Amortization...................             9,398            (3,996)  (1)            --              5,402
    Rig operation....................               442                 --                 --                442
    General and administrative.......             4,813            (1,054)  (1)            --              3,759
    Stock-based compensation.........             1,122                 --                 --              1,122
                                          --------------    ---------------     ---------------     ------------
          Total operating expenses...            25,093            (7,652)                 --             17,441
                                          --------------    ---------------     ---------------     ------------
 Operating income (loss).............             9,892            (2,632)                 --              7,260
 Other (income) expense:
    Interest income..................              (12)                (5)  (1)            --                 (7)
    Interest expense.................            13,700              (284)  (1)       11,363    (3)    
                                                                                     (13,416)   (3)       11,363 
    Amortization of deferred                                                        
      financing fees.................             1,380                 --            (1,330)   (2)
                                                                                       1,695    (2)        1,695
    Financing cost...................             1,641                 --                 --              1,641
    Other............................                11                 --                 --                 11
                                          --------------    ---------------     ---------------     ------------
 Net income  (loss)..................          $(6,828)         $  (2,353)         $   1,738            $(7,443)

 Weighted average common shares:
 Basic...............................        36,164,268                                              36,164,268
                                          --------------                                            ------------
 Diluted.............................        36,164,268                                              36,164,268
                                          --------------                                            ------------

 Net loss per share:
 Basic...............................           $(0.19)                                                 $ (0.21)
                                          --------------                                            ------------
 Diluted.............................           $(0.19)                                                 $ (0.21)
                                          --------------                                            ------------
--------------


See notes to unaudited pro forma financial information.


                                       41




                   UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
                            As of September 30, 2004

                                   Historical
                                   Abraxas
                                   Petroleum                                  Financing
                                   Corporation       Grey Wolf                Transaction         Pro Forma
                                   --------------    ----------------         --------------      ----------------
                                   (dollars in thousands)
Assets:
                                                                                              
    Cash.........................  $     3,601       $        (707)    (1)    $        --         $        2,894
    Accounts receivable..........        4,804                (859     (1)             --                  3,947
    Other........................        1,282                (212)    (1)             --                  1,070
                                   --------------    ----------------         --------------      ----------------
      Total current assets.......        9,687              (1,776)                    --                  7,911

Net property and equipment.......      114,233             (38,745)    (1)             --                 75,488
Deferred financing fees..........        4,853                  --                  (4,853)  (2)          
                                                                                    11,300   (2)          11,300
Other assets.....................          294                  --                     --                    294
                                   --------------    ----------------         --------------      ----------------
      Total assets...............  $   129,067       $     (40,521)           $      6,447        $       94,993
                                   ==============    ================         ==============      ================

Liabilities and stockholders
 equity(deficit):

Current Liabilities:
    Accounts payable.............  $     5,820       $      (1,988)  (1)      $        --         $        3,832
    Other current liabilities....        7,354                   --                 (5,492)  (3)           1,862
                                   --------------    ----------------         --------------      ----------------
      Total current liabilities..       13,174              (1,988)                 (5,492)                5,694

Long-term debt:
    Secured notes due 2007.......      143,154                  --                 (143,154) (4)               --
    Existing credit facility.....       47,362                  --                  (47,362) (4)               --
    New notes due 2009...........           --                  --                  125,000  (4)          125,000
    Bridge facility..............           --                  --                   25,000  (4)           25,000
                                   --------------    ----------------         --------------      ----------------
      Total......................      190,516              (1,988)                 (40,516)              150,000
                                   
Other liabilities................        1,764                (898)  (1)               --                    866

  Stockholders' equity (deficit):
    Common stock.................          364                   --                    --                     364
    Additional paid-in capital...      143,076             (33,813)  (1)             35,000    (5)        144,263
    Accumulated deficit..........     (220,527)             (2,573)  (1)             17,455              (205,645)
    Accumulated other
      comprehensive
      Income adjustment..........        1,249              (1,249)  (1)                --                     --
    Treasury stock...............         (549)                  --                     --                   (549)
                                   --------------    ----------------         --------------      ----------------
      Total stockholders' equity       
        (deficit)................      (76,387)            (37,635)                  52,455               (61,567)
                                   --------------    ----------------         --------------      ----------------
      Total liabilities and
        stockholders' equity
        (deficit)................   $  129,067       $     (40,521)           $       6,447       $         94,993
                                   ==============    ================         ==============      ================
--------------


See notes to unaudited pro forma financial information.


                                       42


               NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

Notes  to  the  Unaudited  Pro  Forma  Condensed   Consolidated   Statements  of
Operations:

     1.  Adjust for Grey Wolf  operations  for the year ended  December 31, 2003
         and nine months ended September 30, 2004.

     2.  Reverse  recorded  amortization  of deferred  financing fees associated
         with retired debt and record  amortization  of deferred  financing fees
         related  to the new debt.  The  amortization  period  for the  deferred
         financing fees related to the transaction is 60 months.

     3.  Reverse  recorded  interest  expense  associated  with retired debt and
         record  interest  expense  on  new  debt,  interest  on  the  notes  is
         calculated at an assumed  annual rate of 9.72%.  Interest on the Bridge
         Facility is calculated at an assumed annual rate of 12.0%.

     4.  Financing costs relate to debt retired with this  transaction.  Had the
         described  transaction actually occurred at the beginning of the period
         presented, these costs would not have been incurred.

     There is no current deferred income tax expense  reflected in the pro forma
statements due to net operating loss carryforwards.

Notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet:

     1.  Remove balance sheet of Grey Wolf at September 30, 2004.

     2.  Reverse  deferred  financing  fees  related to retired  debt and record
         deferred  financing fees related to new debt.  Deferred  financing fees
         related to the retired  debt were charged to expenses as of October 28,
         2004.

     3.  Remove accrued interest related to retired debt

     4.  Remove retired debt and record notes and bridge facility.

     5.  Record dividend distribution from Grey Wolf.



                                       43


                 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     The historical consolidated financial data presented below has been derived
from  our  consolidated   financial  statements  included  in  this  prospectus.
Information for the years ended December 31, 1999,  2000, 2001, 2002 and 2003 is
derived from our audited financial  statements.  Information for the nine months
ended  September  30,  2003 and 2004 is  derived  from our  unaudited  financial
statements.  It is  important  that you read  this  financial  data  along  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and our  consolidated  financial  statements  and the notes thereto
included elsewhere in this prospectus.



                                                                                                              Nine Months Ended
                                                              Year Ended December 31,                           September 30,
                                           --------------------------------------------------------------   -----------------------
                                              1999        2000         2001          2002         2003         2003         2004
                                           ---------   ----------   ----------    ---------    ----------   ----------   ----------
                                                                (dollars in thousands, except per share data)
Consolidated Statements of
Operations Data:
  Operating revenue:
                                                                                                          
  Oil and gas production revenues........  $ 59,025    $  72,973    $  73,201     $  50,862    $  38,105    $ 29,277     $  34,249
  Gas processing revenue.................     4,244        2,717       2,438          2,420          133         132            --
  Rig and other revenue..................     3,501          910       1,604          1,038          781         562           736
                                            ---------   ----------   ----------   ---------    ----------   ----------   ----------
  Total operating revenue................    66,770       76,600      77,243         54,320       39,019      29,971        34,985
                                           ---------   ----------   ----------    ---------    ----------   ----------   ----------
  Operating costs and expenses:
  Lease operating and production taxes...    17,938       18,783      18,616         15,240        9,599       7,164         9,318
  Depreciation, depletion and
  amortization expense...................    34,811       35,857      32,484         26,539       10,803       7,861         9,398
  General and administrative expense.....     5,269        6,533       6,445          6,884        5,360       3,769         4,813
  General and administrative
  (Stock-based compensation)...........          --        2,767      (2,767)            --        1,106         467         1,122
  Other..................................       624          717         702            567          609         443           442
  Proved property impairment.............    19,100            --      2,638        115,993           --          --            --
                                           ---------   ----------   ----------    ---------    ----------   ----------   ----------
     Total operating expenses............    77,742       64,657      58,118        165,223       27,477      19,704        25,093
                                           ---------   ----------   ----------    ---------    ----------   ----------   ----------
Operating income (loss)..................   (10,972)      11,943      19,125       (110,903)      11,542      10,267         9,892
  Net interest expense...................    36,149       30,610      31,445         34,058       16,925      12,899        13,688
  Amortization of deferred financing
  Fees...................................     1,915        2,091       2,268          2,095        1,678       1,244         1,380
  Financing cost........................         --           --          --            967        4,406       4,182         1,641
  Gain on debt extinguishment............        --       (1,773)         --             --           --          --            --
  (Gain) loss  on sale of equity
  investment.............................        --      (33,983)        845             --           --          --            --
  Gain on sale of foreign subsidiaries...        --           --          --             --      (68,933)    (67,258)           --
  Other (income) expense.................        --        1,563         207            201          774         774            11
                                           ---------   ----------   ----------    ---------    ----------   ----------   ----------
Income (loss)  before taxes and             
  cumulative effect of accounting
  change.................................   (49,036)      13,435     (15,640)      (148,224)      56,692      58,426         (6,828)
  Cumulative effect of accounting
  change.................................        --           --          --             --         (395)       (395)           --
  Income tax (expense) benefit...........    12,625       (3,705)     (2,402)        29,697         (377)       (377)           --
  Minority interest in income (loss) of
  consolidated foreign subsidiaries......      (269)      (1,281)     (1,676)            --           --          --            --
                                           ---------   ----------   ----------    ---------    ----------   ----------   ----------
Income (loss)............................  $(36,680)   $   8,449    $(19,718)    $ (118,527)   $  55,920  $   57,654   $    (6,828)
                                           =========   ==========   ==========    =========    ==========   ==========   ==========


Income (loss) from per  common
share:
  Basic..................................  $  (5.41)   $    0.37    $  (0.76)     $   (3.95)    $   1.58   $     1.63   $    (0.19)
  Diluted................................  $  (5.41)   $    0.26    $  (0.76)     $   (3.95)    $   1.55   $     1.60   $    (0.19)

Consolidated Balance Sheet Data:
  Total assets...........................  $ 322,284    $ 335,560    $303,616       $181,425     $126,437    $124,203      $129,067
  Long-term debt - excluding current         273,421      266,441     285,184        236,943      184,649     177,012       190,516
  maturities.............................
  Stockholder's (deficit)................     (9,505)      (6,503)    (28,585)      (142,254)     (72,203)    (72,464)      (76,387)



                                       44



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

     The  following is a discussion  of our  consolidated  financial  condition,
results of operations,  liquidity and capital resources.  This discussion should
be read in conjunction with our consolidated  financial statements and the notes
thereto included in this prospectus.

General

     We are an independent  energy company  primarily engaged in the development
and production of natural gas and crude oil. Historically, we have grown through
the  acquisition  and  subsequent  development  and  exploitation  of  producing
properties,  principally  through the  redevelopment of old fields utilizing new
technologies  such as modern log analysis and reservoir  modeling  techniques as
well as 3-D  seismic  surveys  and  horizontal  drilling.  As a result  of these
activities,  we  believe  that  we  have a  substantial  inventory  of low  risk
development opportunities,  which provide a basis for significant production and
reserve  increases.  In addition,  we intend to expand upon our exploitation and
development  activities with complementary low risk exploration  projects in our
core areas.

     We  incurred  net  losses in three of the last  five  years and in the nine
months ended  September 30, 2004, and our financial  results  continue to depend
upon  many  factors  which  significantly  affect  our  results  of  operations,
including the following:

     o   the sales prices of natural gas, natural gas liquids and crude oil;

     o   the level of our total  sales  volumes  of  natural  gas,  natural  gas
         liquids and crude oil;

     o   the  availability  of,  and our  ability to raise  additional,  capital
         resources and provide liquidity to meet cash flow needs;

     o   our  ability  to  use  our  cash  flow  from   operations  for  capital
         expenditures to increase production and reserves;

     o   the level and  success of  exploitation,  exploration  and  development
         activity; and

     o   the level of our borrowings.


     During  2003,  Grey Wolf had $8.6  million of  revenues  and cash flow from
operations of $6.3 million,  all of which was used to fund operations in Canada.
In addition,  in 2003,  $6.0 million of Abraxas' cash flow from  operations  was
used to fund operations in Canada. It is anticipated that Grey Wolf will finance
its future operations out of its own financial resources.  However,  Abraxas may
also  provide  limited  funds to Grey Wolf under the terms of the new  revolving
credit facility, notes and the bridge loan. Grey Wolf is currently not permitted
to distribute  money or pay dividends to Abraxas.  Instead,  it is expected that
Grey Wolf's cash flow from  operations  will be used to pay debt  service and to
repay Grey Wolf's  indebtedness  under its term loan and to finance its on-going
operations.  Grey Wolf has pledged all of its  material  assets as security  for
that indebtedness.  In addition, Abraxas has pledged all of the capital stock of
Grey Wolf that it owns solely as security for the bridge loan,  and this capital
stock does not constitute a part of the collateral securing the notes or pledged
for the benefit of the noteholders.


     Commodity  Prices and Hedging  Activities.  Our results of  operations  are
significantly  affected by fluctuations in commodity prices. Price volatility in
the natural gas and crude oil markets  has  remained  prevalent  in the last few
years. In January 2001, the market price of natural gas was at its highest level
in our  operating  history  and the price of crude oil was also at a high level.
However, over the course of 2001 and the beginning of the first quarter of 2002,
prices again became depressed, primarily due to the economic downturn. Beginning
in March 2002,  commodity  prices began to increase and continued higher through
December 2003.  Prices  remained strong during 2004 and have continued to remain
strong during the beginning of 2005.


                                       45



     The table below  illustrates  how natural  gas prices  fluctuated  over the
eight quarters Ended September 30, 2004. The table below contains the last three
day average of NYMEX traded  contracts  price and the prices we realized  during
the eight quarters ended September 30, 2004, including the impact of our hedging
activities.




                          Natural Gas Prices by Quarter
                                 (in $ per Mcf)


                                  Quarter Ended
             -------------------------------------------------------------------------
             Dec. 31, March 31, June 30, Sept,30  Dec. 31, Mar. 31,  June 30,  Sept.30
              2002      2003      2003     2003     2003     2004     2004     2004
             -------- --------- -------- -------- -------- --------- --------- -------
                                                         
Index          $3.99   $6.61     $5.51    $5.10    $4.60    $5.69     $5.97    $5.85
Realized       $3.47   $5.13     $5.11    $4.50    $4.30    $4.83     $5.23    $5.46



         The NYMEX natural gas price on January 4, 2005 was $5.90 per Mcf.

     The table  below  contains  the last  three  day  average  of NYMEX  traded
contracts  price and the  prices we  realized  during the eight  quarters  ended
September 30, 2004.





                           Crude Oil Prices by Quarter
                                 (in $ per Bbl)

                                  Quarter Ended
             -------------------------------------------------------------------------
             Dec. 31, March 31, June 30, Sept,30  Dec. 31, Mar. 31,  June 30,  Sept.30
              2002      2003      2003     2003     2003     2004     2004     2004
             -------- --------- -------- -------- -------- --------- --------- -------
                                                          
Index         $28.29   $33.71    $29.87   $30.85   $29.64   $34.76    $38.48   $42.32
Realized      $24.83   $33.22    $28.53   $29.52   $29.73   $34.19    $37.09   $42.37



         The NYMEX crude oil price on January 4, 2005 was $44.08 per Bbl.


     We seek  to  reduce  our  exposure  to  price  volatility  by  hedging  our
production  through  swaps,  floors,  options  and  other  commodity  derivative
instruments.  In 2001 and 2002, we  experienced  hedging losses of $12.1 million
and $3.2 million,  respectively.  In October 2002, all of these hedge agreements
expired.  We made total payments over the term of these  arrangements to various
counterparties in the amount of $35.1 million.

     Under the terms of  Abraxas'  new  revolving  credit  facility,  Abraxas is
required to maintain  hedging  positions  with  respect to not less than 25% nor
more than 75% of its  natural  gas and crude oil  production,  on an  equivalent
basis, for a rolling six month period.  As of November 1, 2004,  Abraxas had the
following hedges in place:





           Time Period                         Notional Quantities                      Price
---------------------------------- -------------------------------------------- ----------------------
                                                                              
January 2005                       7,100 MMbtu of production per day            Floor of $4.50
                                   400 Bbls of crude oil production per day     Floor of $25.00
February 2005                      7,100 MMbtu of production per day            Floor of $4.50
                                   400 Bbls of crude oil production per day     Floor of $25.00
March 2005                         7,100 MMbtu of production per day            Floor of $4.50
                                   400 Bbls of crude oil production per day     Floor of $25.00
April 2005                         7,100 MMbtu of production per day            Floor of $4.50 
                                   400 Bbls of crude oil production per day     Floor of $25.00
May - December 2005                9,500 MMbtu of production per day            Floor of $5.00



                                       46

     Production  Volumes.  Because our proved  reserves  will decline as natural
gas,  natural  gas  liquids  and  crude  oil are  produced,  unless  we  acquire
additional   properties   containing  proved  reserves  or  conduct   successful
exploration  and  development  activities,  our  reserves  and  production  will
decrease.  Our ability to acquire or find additional reserves in the near future
will be dependent,  in part, upon the amount of available funds for acquisition,
exploitation, exploration and development projects.


     Abraxas  anticipates  making capital  expenditures for U.S.  properties for
2005 of approximately $20.0 million,  which Abraxas anticipates will development
activities  related to approximately  23 projects.  If natural gas and crude oil
prices return to depressed  levels or if our  production  levels  decrease,  our
revenues,  cash flow from operations and financial  condition will be materially
adversely affected.

     Availability  of Capital.  As  described  more fully under  "Liquidity  and
Capital  Resources"  below,  Abraxas'  sources of  capital  going  forward  will
primarily be cash from  operating  activities,  funding  under its new revolving
credit  facility,  cash on  hand,  and if an  appropriate  opportunity  presents
itself,   proceeds  from  the  sale  of   properties.   Abraxas   currently  has
approximately  $13.6  million of  availability  under its new  revolving  credit
facility. Similarly, Grey Wolf's sources of capital going forward will primarily
be cash from operating  activities,  funding under its term loan,  cash on hand,
and if an appropriate  opportunity  presents  itself,  proceeds from the sale of
properties.


     Exploitation  and  Development  Activity.  Despite the $10 million  capital
spending limits  contained in 11 1/2% secured notes due 2007, which caused us to
put a priority on those  projects  which  allowed us to maintain  our  leasehold
positions  and comply with drilling  requirements  on  non-operated  properties,
rather than on those  opportunities which we believe have the greatest potential
for increasing our  production and reserves,  during 2003, we increased  average
daily  production  from the producing  properties that we continued to own after
the sale of most of our Canadian  properties in January 2003 from  approximately
19 MMcfe in January 2003 to  approximately 24 MMcfe in June 2004, while drilling
a total of 43 wells with a 93% success rate. In addition,  during 2003, we added
16 Bcfe of proved reserves at a finding cost of $1.15 per Mcfe.

     Abraxas  believes  that  its  high  quality  asset  base,  high  degree  of
operational  control and large  inventory of drilling  projects  position it for
future growth. Abraxas' properties are concentrated in locations that facilitate
substantial  economies of scale in drilling and  production  operations and more
efficient reservoir management practices. Abraxas operates 94% of the properties
accounting  for  approximately  90% of its  PV-10,  giving  Abraxas  substantial
control over the timing and incurrence of operating and capital expenditures. In
addition,  Abraxas has 47 proved  undeveloped  locations and has identified over
100 drilling and recompletion  opportunities on its existing U.S.  acreage,  the
successful  development of which Abraxas believes could  significantly  increase
its daily production and proved reserves.

     Abraxas'  future  natural gas and crude oil  production,  and therefore its
success,  is highly  dependent  upon its  ability to find,  acquire  and develop
additional reserves that are profitable to produce.  The rate of production from
Abraxas'  natural  gas and crude oil  properties  and its proved  reserves  will
decline  as  its  reserves  are  produced  unless  Abraxas  acquires  additional
properties   containing  proved  reserves,   conducts  successful   exploration,
development  and  exploitation   activities  or,  through  engineering  studies,
identifies additional behind-pipe zones or secondary recovery reserves.  Abraxas
cannot assure you that its exploration,  exploitation and development activities
will result in increases in its proved reserves. In addition,  approximately 36%
of  Abraxas'  total  estimated   proved  reserves  at  December  31,  2003  were
undeveloped.  By  their  nature,  estimates  of  undeveloped  reserves  are less
certain. Recovery of such reserves will require significant capital expenditures
and  successful  drilling  operations.  For a more complete  discussion of these
risks  please  see  "Risk  Factors--We  may be  unable  to  acquire  or  develop
additional  reserves,  in which case our  results of  operations  and  financial
condition would be adversely affected."


     Borrowings  and  Interest.  Abraxas  currently  has total  indebtedness  of
approximately  $150  million and  availability  of $13.6  million  under the new
revolving  credit  facility.  In addition,  Grey Wolf has total  indebtedness of
approximately $35 million.  We paid interest under our 11 1/2% secured notes due
2007 by the issuance of additional notes, which caused our cash interest expense
to be $4.3 million  during 2003 and $3.7 million during the first nine months of
2004. On a pro forma basis, Abraxas would have paid interest of $12.4 million in
2003 and $11.4 million  during the first nine months of 2004 and Grey Wolf would
have paid $3.9  million  and $2.9  million  during the same time  periods.  This



                                       47


increase in cash interest expense will require us to increase our production and
cash flow from  operations  in order to meet our debt service  requirements,  as
well as to fund the development of Abraxas' numerous drilling opportunities.

     Selected  Operating  Data.  The  following  table sets forth certain of our
operating data for the periods presented.



                                                                                               Nine Months Ended
                                                               Years Ended                       September 30,
                                                              December 31,                        (unaudited)
                                                  --------------------------------------   --------------------------
                                                             (dollars in thousands, except per unit data)
                                                    2001(1)      2002(1)      2003(1)        2003(1)        2004
                                                  ------------ ------------ ------------   ------------- ------------
Operating revenue:
                                                                                                
Crude oil sales(2)................................   $11,184   $    7,114   $   7,627        $  5,490     $  7,226
NGLs sales........................................     5,979        4,343         911             761        1,314
Natural gas sales(2)..............................    56,038       39,405      29,567          23,026       25,709
Gas processing revenue............................     2,438        2,420         133             132            --
Rig and other.....................................     1,604        1,038         781             562          736
                                                  ------------ ------------ ------------   ------------- ------------
Total operating revenues..........................   $77,243   $   54,320     $39,019         $29,971      $34,985

Operating income (loss)...........................   $19,125    $(110,903)    $11,542         $10,267      $ 9,892

Crude oil production (MBbls)......................       454          292         252             180          192
NGLs production (MBbls)...........................       278          242          37              31           41
Natural gas production (MMcf).....................    17,496       15,453       6,189           4,669        5,093

Average crude oil sales price (per Bbl)(2)........   $ 24.63    $   24.34     $ 30.32        $  30.55     $  37.84
Average NGLs sales price (per Bbl)................   $ 21.51    $   17.94     $ 24.47        $  24.27     $  32.00
Average natural gas sales price (per Mcf)(2)... ...  $  3.20    $    2.55     $  4.78        $   4.93     $   5.05
----------


(1)  Data  for  2001,  2002  and the  first  23 days of 2003  includes  Canadian
     subsidiaries sold in January 2003.

(2)  Revenue and average sales prices are net of hedging activities.

     The above table  includes  operations  data relating to Grey Wolf.  Because
Grey Wolf is not a guarantor of the notes,  and Abraxas'  obligations  under the
notes are not secured by any of the properties,  assets or capital stock of Grey
Wolf, the notes are structurally  subordinated in right of payment to all of the
obligations,  including  trade  payables  and  other  debt,  of Grey  Wolf.  The
"Unaudited Pro Forma Financial  Information"  included in this prospectus  gives
effect to the exclusion of the  statement of  operations  and balance sheet data
relating to Grey Wolf and the  completion of the  refinancing  described in this
prospectus,  as if Grey Wolf were excluded and the refinancing  were consummated
as of the dates indicated.


                                       48

Comparison  of Nine  Months  Ended  September  30,  2004 to  Nine  Months  Ended
September 30, 2003

     Operating  Revenue.  During  the nine  months  ended  September  30,  2004,
operating  revenue  from crude oil,  natural gas and  natural gas liquids  sales
increased to $34.2 million as compared to $29.3 million in the nine months ended
September  30, 2002.  The  increase in revenue was due to  increased  production
volumes and higher  commodity  prices  during the period.  Increased  production
volumes  contributed $2.6 million while higher commodity prices contributed $2.3
million  to crude oil and  natural  gas  revenue  during the nine  months  ended
September 30, 2004.

     Average  sales  prices  net of  hedging  costs  for the nine  months  ended
September 30, 2004 were:

     o   $37.84 per Bbl of crude oil,
     o   $32.00 per Bbl of natural gas liquids, and
     o   $5.05 per Mcf of natural gas

     Average  sales  prices  net of  hedging  costs  for the nine  months  ended
September 30, 2003 were:

     o   $30.55 per Bbl of crude oil,
     o   $24.27 per Bbl of natural gas liquids, and
     o   $4.93 per Mcf of natural gas

     Crude oil  production  volumes  increased  to 191.0  MBbls  during the nine
months  ended  September  30, 2004 from 179.7 MBbls for the same period of 2003.
Crude oil production  volumes  related to our Canadian  operations  increased to
25.4 MBbls during the nine months ended  September  30, 2004 from 15.2 MBbls for
the same period of 2003.  Offsetting  the increased  production  was the loss of
production  related to the  properties  sold in connection  with the sale of Old
Grey Wolf and Canadian  Abraxas in January 2003. The properties sold contributed
2.4 MBbls  during  the  first 23 days of 2003  prior to the  sale.  Natural  gas
production  volumes  increased to 5,093 MMcf for the nine months ended September
30,  2004 from 4,669 MMcf for the same period of 2003.  As with the  increase in
crude oil volumes, the increase in natural gas production volumes was the result
of drilling  activities during the latter part of 2003 and the first nine months
of 2004,  primarily related to our Canadian  operations.  Natural gas production
related to our Canadian operations  increased from 1,123 MMcf for the first nine
months  of 2003 to 1,711  MMcf  for the same  period  of  2004.  Offsetting  the
increase was the loss of production  related to the Canadian  properties sold in
January 2003. Prior to the sale, these properties contributed 559 MMcf to 2003.

     Lease  Operating  Expenses.  Lease  operating  expenses for the nine months
ended  September  30, 2004  increased  to $9.3 million from $7.2 million for the
same period in 2003.  The increase was due to  increased  production  taxes as a
result  of higher  production  volumes  as well as  pipeline  charges  in Canada
related to startup cost associated  with  previously  stranded gas. LOE on a per
Mcfe basis for the nine months ended  September  30, 2004 was $1.44  compared to
$1.21 for the same period of 2003.

     G&A  Expenses.  G&A  expenses  increased to $4.8 million for the first nine
months of 2004 from $3.8 million for the first nine months of 2003. The increase
was primarily due to performance bonuses paid during the second quarter of 2004.
G&A  expense  on a per Mcfe  basis was $0.74 for the first  nine  months of 2004
compared to $0.63 for the same period of 2003.

     Stock-based Compensation.  Effective July 1, 2000, the Financial Accounting
Standards  Board ("FASB") issued FIN 44,  "Accounting  for Certain  Transactions
Involving Stock Compensation",  an interpretation of Accounting Principles Board
Opinion No. ("APB") 25. Under the interpretation, certain modifications to fixed
stock option  awards which were made  subsequent  to December 15, 1998,  and not
exercised  prior to July 1, 2000,  require that the awards be  accounted  for as
variable expenses until they are exercised,  forfeited,  or expired.  In January
2003, we amended the exercise  price to $0.66 per share on certain  options with
an existing  exercise price greater than $0.66 per share. We recognized  expense
of approximately $1.1 million and approximately  $467,000 during the nine months
ended September 30, 2004 and 2003 respectively related to these repricings,  due
to an increase in the price of our common stock.

                                       49


     DD&A Expenses.  Depreciation,  depletion and amortization expense increased
to $9.4 million for the nine months ended  September  30, 2004 from $7.9 million
for the same  period  of 2003.  The  increase  was  primarily  due to  increased
production  volumes during the nine months ended  September 30, 2004 as compared
to the same  period of 2003.  Our DD&A on a per Mcfe  basis for the nine  months
ended September 30, 2004 was $1.45 per Mcfe as compared to $1.32 in 2003.

     Interest Expense. Interest expense increased to $13.7 million for the first
nine months of 2004 compared to $12.9 million in 2003.  The increase in interest
expense was due to an increase in our overall long-term debt from $177.0 million
as of  September  30,  2003 to $190.5  million as of  September  30,  2004.  The
increase  in  long-term  debt was due to the  issuance  of  additional  notes in
payment of interest on our 11 1/2% secured notes due 2007.

     Income  taxes.  Income  taxes  decreased  to zero for the nine months ended
September 30, 2004 from  $377,000 for the nine months ended  September 30, 2003.
There is no current or  deferred  income tax  benefit for the current net losses
due to the valuation allowance which has been recorded against such benefits.

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002.

     Operating  Revenue.  During the year ended  December  31,  2003,  operating
revenue from crude oil,  natural gas and natural gas liquids sales  decreased by
$12.8 million from $50.9 million in 2002 to $38.1 million in 2003.  The decrease
in revenue was primarily due to decreased  production volumes,  primarily due to
the sale of our  Canadian  subsidiaries  in January  2003,  which was  partially
offset by higher commodity  prices realized during the period.  Higher commodity
prices  contributed  $16.5  million to natural gas and crude oil  revenue  while
reduced production  volumes had a $29.3 million negative impact on revenue.  The
Canadian properties which were sold in January 2003 contributed $29.3 million to
revenues  from  natural gas and crude oil for the year ended  December 31, 2002,
compared to $3.1 million in 2003 through the date of sale (January 23, 2003).

     Natural gas liquids volumes declined from 242.0 MBbls in 2002 to 37.3 MBbls
in 2003. The decline in natural gas liquids  volumes was due almost  entirely to
the  sale  of our  Canadian  subsidiaries  in  January  2003.  These  properties
contributed  232.5 MBbls of natural  gas liquids in 2002  compared to 11.7 MBbls
during 2003.  Crude oil sales volumes declined from 292.3 MBbls in 2002 to 251.6
MBbls  during  2003.  The  Canadian  properties  which were sold in January 2003
contributed  27.7 MBbls of crude oil production in 2002 compared to 2.4 MBbls in
2003 through the date of the sale. Crude oil production  volumes relating to the
Canadian  properties  which were  retained and current  drilling  activities  in
Canada  resulted in an  increase to 29.0 MBbls in 2003  compared to 9.5 MBbls in
2002.  Crude oil  production  from U.S.  operations  decreased  due primarily to
natural field  declines.  Natural gas sales volumes  decreased  from 15.5 Bcf in
2002 to 6.2 Bcf in  2003.  This  decrease  is  primarily  due to the sale of our
Canadian  subsidiaries in January 2003. The Canadian properties sold contributed
9.8 Bcf in 2002 compared to .5 Bcf in 2003 through the date of sale.

Average sales prices in 2003 net of hedging costs were:

     o   $30.32 per Bbl of crude oil,
     o   $24.47 per Bbl of natural gas liquids, and
     o   $4.78 per Mcf of natural gas.

Average sales prices in 2002 net of hedging costs were:

     o   $24.34 per Bbl of crude oil,
     o   $17.94 per Bbl of natural gas liquids, and
     o   $2.55 per Mcf of natural gas.

     Lease Operating Expense.  Lease operating  expense,  or LOE, decreased from
$15.2 million in 2002 to $9.6 million in 2003. The decrease in LOE was primarily
due to the sale of most of our Canadian  properties in January 2003. LOE related
to these  Canadian  properties  was $7.3 million for the year ended December 31,
2002.  Excluding the properties  sold, LOE  attributable to on going  operations
increased,  primarily  due to higher  production  taxes  associated  with higher


                                       50


commodity  prices in 2003 as compared  to 2002.  Our LOE on a per Mcfe basis for
the year ended  December 31, 2003 was $1.21 per Mcfe compared to $0.82 for 2002,
primarily due to the decrease in production volumes.

     G&A Expense.  General and  administrative,  or G&A, expense  decreased from
$6.9  million in 2002 to $5.4  million in 2003.  The decrease in G&A expense was
primarily due to a reduction in personnel in connection with the sale of most of
our Canadian properties on January 23, 2003. Our G&A expense on a per Mcfe basis
increased from $0.37 in 2002 to $0.67 in 2003. The increase in the per Mcfe cost
was due primarily to lower production volumes in 2003 as compared to 2002.

     G&A -  Stock-based  Compensation  Expense.  Effective  July  1,  2000,  the
Financial  Accounting  Standards Board ("FASB")  issued FIN 44,  "Accounting for
Certain  Transactions  Involving  Stock  Compensation",   an  interpretation  of
Accounting  Principles  Board Opinion No. ("APB") 25. Under the  interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998,  and not  exercised  prior to July 1, 2000,  require that the
awards be subject to variable accounting until they are exercised, forfeited, or
expired.  In March 1999,  we amended the exercise  price to $2.06 on all options
with an existing  exercise price greater than $2.06. In January 2003, we amended
the  exercise  price to $0.66  per share on  certain  options  with an  existing
exercise  price  greater  than  $0.66  per  share  which  resulted  in  variable
accounting.  We charged  approximately  $1.1 million to stock based compensation
expense in 2003 related to these  repricings.  During 2002, we did not recognize
any  stock-based  compensation  due to the  decline  in the price of our  common
stock.

     DD&A Expense.  Depreciation,  depletion and amortization,  or DD&A, expense
decreased by $15.7  million from $26.5 million in 2002 to $10.8 million in 2003.
The decrease in DD&A was primarily due to the sale of our Canadian  subsidiaries
in January 2003 as well as ceiling limitation  write-downs in the second quarter
of 2002.  Our DD&A  expense  on a per Mcfe  basis for 2003 was $1.33 per Mcfe as
compared to $1.42 per Mcfe in 2002.

     Interest  Expense.  Interest expense  decreased from $34.1 million to $17.0
million for 2003 compared to 2002.  The decrease in interest  expense was due to
the  reduction  in debt in 2003.  Total  debt  was  reduced  as a result  of the
transactions  which occurred on January 23, 2003.  Total debt was $300.4 million
as of December 31, 2002 compared to $184.6 million at December 31, 2003.

     Ceiling Limitation Write-down.  We record the carrying value of our natural
gas and crude oil properties using the full cost method of accounting.  For more
information  on the  full  cost  method  of  accounting,  you  should  read  the
description under "Critical Accounting  Policies--Full Cost Method of Accounting
for Natural Gas and Crude Oil Activities". At June 30, 2002, our net capitalized
costs of natural gas and crude oil properties  exceeded the present value of our
estimated  proved  reserves  by  $138.7  million  ($28.2  million  on  the  U.S.
properties  and $110.5 million on the Canadian  properties).  These amounts were
calculated  considering June 30, 2002 prices of $26.12 per Bbl for crude oil and
$2.16 per Mcf for  natural gas as  adjusted  to reflect  the  expected  realized
prices for each of the full cost pools.  Subsequent to June 30, 2002,  commodity
prices increased in Canada and we utilized these increased prices in calculating
the ceiling limitation write-down. The total write-down was approximately $116.0
million.  At December 31, 2003 our net capitalized cost of natural gas and crude
oil properties did not exceed the present value of our estimated  reserves,  due
to  increased  commodity  prices  during 2003 and, as such,  no  write-down  was
recorded in 2003.  We cannot assure you that we will not  experience  additional
ceiling limitation write-downs in the future.

     The risk that we will be required to write-down  the carrying  value of our
natural gas and crude oil assets increases when natural gas and crude oil prices
are  depressed  or  volatile.  In  addition,  write-downs  may  occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or  governmental  action cause an abrogation  of, or if we  voluntarily  cancel,
long-term  contracts  for our natural gas. We cannot assure you that we will not
experience additional  write-downs in the future. If commodity prices decline or
if any of our proved resources are revised downward, a further write-down of the
carrying value of our natural gas and crude oil properties may be required.

     Income taxes.  Income tax expense increased from a benefit of $29.7 million
for the year ended  December  31,  2002 to an expense of  $377,000  for the year
ended  December 31, 2003.  The expense in 2003 was related to the  operations of
the Canadian  properties  prior to their sale on January 23,  2003.  There is no
current or deferred  income tax expense for 2003 related to on-going  operations


                                       51


due to the valuation  allowance which has been recorded against the deferred tax
asset.

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001

     Operating  Revenue.  During the year ended  December  31,  2002,  operating
revenue from crude oil,  natural gas and natural gas liquids sales  decreased by
$22.3 million from $73.2 million in 2001 to $50.9 million in 2002. This decrease
was  primarily  attributable  to a  decrease  in  production  volumes  and lower
commodity prices in 2002 as compared to 2001.  Natural gas and crude oil revenue
was  impacted  by $11.5  million  from a decline in  commodity  prices and $10.8
million  from  reduced  production.  The  decline in  production  was due to the
disposition of certain properties in south Texas and natural field declines.

     Natural  gas  liquids  volumes  declined  from 278.0 MBbls in 2001 to 242.0
MBbls in 2002.  Crude oil sales  volumes  declined  from 454.1  MBbls in 2001 to
292.3 MBbls during 2002.  Natural gas sales volumes  decreased  from 17.5 Bcf in
2001 to 15.5 Bcf in 2002. Production declines were primarily attributable to our
disposition of assets during 2002 and natural field declines.

Average sales prices in 2002 net of hedging losses were:

     o   $24.34 per Bbl of crude oil,
     o   $17.94 per Bbl of natural gas liquids, and
     o   $2.55 per Mcf of natural gas.

Average sales prices in 2001 net of hedging losses were:

     o   $24.63 per Bbl of crude oil,
     o   $21.51 per Bbl of natural gas liquids, and
     o   $3.20 per Mcf of natural gas.

     Lease Operating  Expense.  Lease operating  expense ("LOE")  decreased from
$18.6 million in 2001 to $15.2 million in 2002. LOE on a per Mcfe basis for 2002
was $0.82 per Mcfe as  compared to $0.83 per Mcfe in 2001.  The  decrease in the
per Mcfe cost is due to a  reduced  operating  cost  offset  by the  decline  in
production volumes.

     G&A Expense.  General and administrative ("G&A") expense increased slightly
from  $6.4  million  in 2001 to $6.9  million  in 2002.  This  increase  was due
primarily to increased legal expenses related to ongoing litigation in 2002. Our
G&A expense on a per Mcfe basis  increased  from $0.30 in 2001 to $0.37 in 2002.
The increase in the per Mcfe cost was due primarily to lower production  volumes
in 2002 as compared to 2001.

     G&A -  Stock-based  Compensation  Expense.  Effective  July  1,  2000,  the
Financial  Accounting  Standards Board ("FASB")  issued FIN 44,  "Accounting for
Certain  Transactions  Involving  Stock  Compensation",   an  interpretation  of
Accounting  Principles  Board Opinion No. ("APB") 25. Under the  interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998,  and not  exercised  prior to July 1, 2000,  require that the
awards be subject to variable accounting until they are exercised, forfeited, or
expired.  In March 1999,  we amended the exercise  price to $2.06 on all options
with an existing  exercise  price greater than $2.06.  We charged  approximately
$2.8 million to stock-based  compensation  expense in 2000 compared to crediting
approximately  $2.8  million in 2001.  This was due to the decline in the market
price of our common stock during 2001.  During 2002,  we did not  recognize  any
stock-based  compensation  expense due to the decline in the price of our common
stock.

     DD&A Expense.  Depreciation,  depletion and  amortization  ("DD&A") expense
decreased by $5.9 million from $32.4  million in 2001 to $26.5  million in 2002.
The decline in DD&A is due to  reductions in our full cost pool  resulting  from
ceiling test write-downs,  as well as lower production volumes. Our DD&A expense
on a per Mcfe basis for 2002 was $1.42 per Mcfe as compared to $1.74 per Mcfe in
2001.

                                       52


     Interest  Expense.  Interest expense  increased from $31.5 million to $34.1
million for 2002  compared to 2001.  The increase  was the result of  additional
sales pursuant to our production  payment  arrangement  with Mirant  Americas as
well  as  increased  borrowings  under a  previously  existing  Canadian  credit
facility  in 2002.  The  production  payment  was  reacquired  in June  2002 for
approximately $6.8 million.

     Ceiling Limitation Write-down.  We record the carrying value of our natural
gas and crude oil properties using the full cost method of accounting.  For more
information  on the  full  cost  method  of  accounting,  you  should  read  the
description  under  "--Critical   Accounting   Policies--Full   Cost  Method  of
Accounting for Natural Gas and Crude Oil  Activities".  As of December 31, 2001,
our net capitalized  costs of natural gas and crude oil properties  exceeded the
present value of its estimated  proved reserves by $71.3 million.  These amounts
were calculated considering 2001 year-end prices of $19.84 per Bbl for crude oil
and $2.57 per Mcf for natural gas as adjusted to reflect the  expected  realized
prices for each of the full cost pools. We did not adjust our capitalized  costs
for its U.S. properties because subsequent to December 31, 2001, natural gas and
crude oil prices increased such that capitalized  costs for its U.S.  properties
did not exceed the present value of the estimated  proved  natural gas and crude
oil reserves for its U.S.  properties as  determined  using  increased  realized
prices on March 22,  2002 of $24.16  per Bbl for crude oil and $2.89 per Mcf for
natural gas.

     At June 30, 2002,  our net  capitalized  costs of natural gas and crude oil
properties exceeded the present value of our estimated proved reserves by $138.7
million ($28.2 million on the U.S. properties and $110.5 million on the Canadian
properties).  These amounts were calculated  considering June 30, 2002 prices of
$26.12 per Bbl for crude oil and $2.16 per Mcf for  natural  gas as  adjusted to
reflect the expected realized prices for each of the full cost pools. Subsequent
to June 30, 2002,  commodity  prices  increased in Canada and we utilized  these
increased  prices in calculating the ceiling  limitation  write-down.  The total
write-down  was  approximately  $116.0  million.  At  December  31, 2002 our net
capitalized  cost of  natural  gas and crude oil  properties  did not exceed the
present  value of our  estimated  reserves,  due to increased  commodity  prices
during the fourth quarter and, as such, no further  write-down was recorded.  We
cannot  assure you that we will not  experience  additional  ceiling  limitation
write-downs in the future.

     The risk that we will be required to write-down  the carrying  value of our
natural gas and crude oil assets increases when natural gas and crude oil prices
are  depressed  or  volatile.  In  addition,  write-downs  may  occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or  governmental  action cause an abrogation  of, or if we  voluntarily  cancel,
long-term  contracts  for our natural gas. We cannot assure you that we will not
experience additional  write-downs in the future. If commodity prices decline or
if any of our proved resources are revised downward, a further write-down of the
carrying value of our natural gas and crude oil properties may be required.

     Income taxes.  Income tax expense decreased from an expense of $2.4 million
for the year ended  December 31, 2001 to a benefit of $29.7 million for the year
ended  December 31, 2002.  The  decrease  was  primarily  due to the tax benefit
relating  to  the  ceiling   limitation   write-down  related  to  our  Canadian
properties.

Liquidity and Capital Resources

     General.  The  natural  gas and  crude  oil  industry  is a highly  capital
intensive and cyclical business. Our capital requirements are driven principally
by our obligations to service debt and to fund:

     o   the  development  of  existing   properties,   including  drilling  and
         completion costs of wells;

     o   acquisition  of  interests  in  additional  natural  gas and  crude oil
         properties; and

     o   production and transportation facilities.

The amount of capital  expenditures  we are able to make has a direct  impact on
our ability to increase cash flow from  operations and,  thereby,  will directly
affect our ability to service our debt  obligations  and to continue to grow the
business  through the development of existing  properties and the acquisition of
new properties.

     Abraxas'  sources of capital  going  forward  will  primarily  be cash from
operating activities,  funding under its new revolving credit facility,  cash on
hand, and if an appropriate  opportunity presents itself, proceeds from the sale


                                       53


of properties. However, under the terms of the notes, proceeds of optional sales
of Abraxas'  assets that are not timely  reinvested in new natural gas and crude
oil assets will be required to be used to reduce  indebtedness  and  proceeds of
mandatory sales must be used to repay or redeem indebtedness.

     Working  Capital.   At  September  30,  2004,  we  had  current  assets  of
approximately  $9.7  million  and current  liabilities  of  approximately  $13.2
million,  resulting in a working capital deficit of $3.5 million.  This compares
to a working capital deficit of approximately  $2.4 million at December 31, 2003
and $9.3 million at September  30, 2003.  Current  liabilities  at September 30,
2004 consisted of trade payables of $3.6 million,  revenues due third parties of
$2.3  million and accrued  interest of $5.5  million,  of which $5.1  million is
non-cash and other accrued  liabilities of $1.9 million.  At September 30, 2004,
current  assets  relating to U.S.  operations  of  approximately  $14.5  million
exceeded current liabilities  relating to U.S. operations of approximately $11.2
million,  resulting in working capital of  approximately  $3.3 million.  Current
liabilities   at  September  30,  2004   relating  to  Canadian   operations  of
approximately   $8.5  million  exceeded  current  assets  relating  to  Canadian
operations of approximately $1.8 million, resulting in a working capital deficit
of  approximately  $6.7  million.  On a pro forma basis,  at September 30, 2004,
Abraxas'  current  assets  of $7.9  million  would  have  exceeded  its  current
liabilities  of  approximately  $5.7  million,  resulting in working  capital of
approximately $2.2 million.

     Capital  Expenditures.  The table  below sets forth the  components  of our
capital  expenditures  for the three years ended  December  31, 2003 and for the
nine months ended September 30, 2003 and 2004.



                                                                              Nine Months Ended
                                          Year Ended December 31,               September 30,
                                   ---------------------------------------   -------------------------
                                      2001          2002         2003         2003           2004
                                   ------------ ------------- ------------ ------------  -------------
                                                          (dollars in thousands)
Expenditure category:
                                                                                 
     Development...................   $56,694       $38,560     $18,313      $15,595        $10,836
     Facilities and other..........       362           154          36          732            149
                                   ------------ ------------- ------------ ------------  -------------
                                      $57,056       $38,714     $18,349      $16,327        $10,985
                                   ============ ============= ============ ============  =============



     During the nine months  ended  September  30, 2003 and 2004 and during 2002
and 2003,  capital  expenditures  were devoted  primarily to the  development of
existing  properties.  Abraxas anticipates making capital  expenditures for U.S.
properties for 2005 of approximately 20.0 million,  respectively,  which Abraxas
anticipates  will include  development  activities  related to  approximately 23
projects.  Grey  Wolf  anticipates  making  capital  expenditures  for  Canadian
properties for 2005 of  approximately  $14.4 million.  Our capital  expenditures
could also include  expenditures for acquisition of producing properties if such
opportunities  arise,  but we  currently  have no  agreements,  arrangements  or
undertakings regarding any material acquisitions.  We have no material long-term
capital  commitments  and are  consequently  able to  adjust  the  level  of our
expenditures  as  circumstances  dictate.  Additionally,  the  level of  capital
expenditures  will vary during future periods depending on market conditions and
other related economic  factors.  Should the prices of natural gas and crude oil
decline from current levels,  our cash flows will decrease which may result in a
reduction  of the  capital  expenditures  budget.  If we  decrease  our  capital
expenditures  budget,  we may not be able to  offset  natural  gas and crude oil
production  volumes  decreases  caused by natural  field  declines  and sales of
producing properties, if any.



                                       54

     Sources  of  Capital.  The net funds  provided  by  and/or  used in each of
operating,  investing and financing  activities  are summarized in the following
table:



                                                                                              Nine Months Ended
                                                    Year Ended December 31,                     September 30,
                                            ----------------------------------------      --------------------------
                                            2001           2002          2003             2003           2004
                                            ----------     ----------    -----------      ----------     -----------
                                            (dollars in thousands)
Net cash provided by (used in) operating
                                                                                               
activities...............................   $ 16,263       $  (8,336)     $ 23,850         $  9,587       $ 15,306
Net cash provided by (used in) investing
activities...............................    (30,797)         (5,036)       67,461           70,524        (10,985)
Net cash provided by (used in) financing
activities...............................     20,685          10,836       (95,662)         (82,974)        (1,288)
                                            ----------     ----------    -----------      ----------     -----------
Total....................................   $  6,151       $  (2,536)    $  (4,351)       $  (2,863)      $  3,033
                                            ==========     ==========    ===========      ==========     ===========


     Operating  activities  during the nine  months  ended  September  30,  2004
provided us with $15.3  million in cash  compared  with $9.6 million in the same
period in 2003.  Net  income  plus  non-cash  expense  items and net  changes in
operating  assets and liabilities  accounted for most of these funds.  Financing
activities used $1.3 million for the first nine months of 2004 compared to using
$83.0  million  for the same  period of 2003.  Most of these  funds were used to
reduce our long-term  debt and for financing  fees. In 2003,  funds were used to
reduce  our  long-term  debt and  were  generated  by the  sale of our  Canadian
subsidiaries  and the Series  A/B  exchange  offer  completed  in January  2003.
Expenditures  during the nine months ended September 30, 2004 were primarily for
the development of existing properties.  Investing activities used $11.0 million
during the nine months ended  September  30, 2004  compared to  providing  $70.5
million for the nine months ended  September 30, 2003.  The sale of our Canadian
subsidiaries in January 2003 contributed  $86.6 million in 2003 reduced by $10.0
million in exploration and development expenditures.

     Operating  activities for the year ended December 31, 2003 provided us with
$23.9 million of cash.  Investing  activities  provided us $67.5 million  during
2003.  Financing  activities used $95.7 million during 2003. Most of these funds
were used to reduce our  long-term  debt and were  generated  by the sale of our
Canadian  subsidiaries  and the Series A/B exchange  offer  completed in January
2003. The sale of our Canadian  subsidiaries  contributed  $85.8 million in 2003
reduced  by  $18.3  million  in  exploration   and   development   expenditures.
Expenditures in 2003 were primarily for the development of natural gas and crude
oil properties.

     Operating activities for the year ended December 31, 2002 used $8.3 million
of cash.  Investing  activities  used $5.0 million  during 2002.  Our  investing
activities included the sale of properties which provided $33.9 million, and the
use of $38.9 million  primarily  for the  development  of producing  properties.
Financing  activities  provided  us with $10.8  million  during  2002,  relating
primarily to advances on a previously existing Canadian credit facility.

     Operating  activities  for the year ended  December 31,  2001,  provided us
$16.3  million of cash.  Investing  activities  included the sale of  properties
which provided $28.9 million,  and the use of $57.1 million for the  development
of producing  properties  and $2.7 million for the  acquisition  of the minority
interest in Grey Wolf.  Financing activities provided $20.7 million during 2001,
including  the  provision  of  additional  funding  of  $11.7  million  under  a
production  payment,  and the  provision  of $18.3  million  under a  previously
existing Canadian credit facility.  Payments on long term debt used $9.3 million
during 2001.

     Future Capital  Resources.  Abraxas currently has four principal sources of
liquidity going forward: (i) cash from operating activities,  (ii) funding under
its  new  revolving  credit  facility,  (iii)  cash  on  hand,  and  (iv)  if an
appropriate opportunity presents itself, the sale of producing properties. While
Abraxas  is  no  longer  subject  to  the  $10  million  limitation  on  capital
expenditures  under its 11 1/2%  secured  notes due  2007,  covenants  under the
indenture for the new notes and the new revolving credit facility restrict


                                       55


Abraxas' use of cash from  operating  activities,  cash on hand and any proceeds
from asset sales.  Under the terms of the notes,  proceeds of optional  sales of
Abraxas' assets that are not timely  reinvested in new natural gas and crude oil
assets  will be  required  to be used to reduce  indebtedness  and  proceeds  of
mandatory sales must be used to redeem indebtedness.  The terms of the notes and
the new revolving credit facility also  substantially  restrict Abraxas' ability
to:

     o   incur additional indebtedness;

     o   grant liens;

     o   pay dividends or make certain other restricted payments;

     o   merge or consolidate with any other person; or

     o   sell, assign,  transfer,  lease,  convey or otherwise dispose of all or
         substantially all of our assets.

     Our cash flow from operations  depends heavily on the prevailing  prices of
natural  gas and crude oil and our  production  volumes of natural gas and crude
oil. Significant  downturns in commodity prices, such as that experienced in the
last nine months of 2001 and the first quarter of 2002, can reduce our cash flow
from operating activities.  Although we have hedged a portion of our natural gas
and crude oil production and will continue this practice as required pursuant to
the new  revolving  credit  facility,  future  natural  gas and  crude oil price
declines  would have a  material  adverse  effect on our  overall  results,  and
therefore,  our  liquidity.  Low  natural  gas and crude oil  prices  could also
negatively affect our ability to raise capital on terms favorable to us.


     Our cash flow from  operations  will also depend upon the volume of natural
gas and crude oil that we produce.  Unless we  otherwise  expand  reserves,  our
production  volumes  will  decline as  reserves  are  produced.  Due to sales of
properties in 2002 and January 2003, and  restrictions  on capital  expenditures
under the terms of our existing indebtedness,  we now have significantly reduced
reserves and production as compared with pre-2003 levels.  In the future,  if an
appropriate  opportunity  presents  itself,  we may sell additional  properties,
which  could  further  reduce  our  production  volumes.  To offset  the loss in
production  volumes resulting from natural field declines and sales of producing
properties, we must conduct successful exploration, exploitation and development
activities,  acquire  additional  producing  properties  or identify  additional
behind-pipe zones or secondary recovery reserves. While we have had some success
in pursuing  these  activities  since  January 1, 2003, we have not been able to
fully  replace the  production  volumes  lost from  natural  field  declines and
property sales. We believe our numerous drilling  opportunities will allow us to
increase our production volumes; however, our drilling activities are subject to
numerous risks,  including the risk that no commercially  productive natural gas
or crude oil  reservoirs  will be found.  The risk of not  finding  commercially
productive  reservoirs will be compounded by the fact that 36% of Abraxas' total
estimated proved reserves at December 31, 2003 were  undeveloped.  If the volume
of natural gas and crude oil we produce decreases, our cash flow from operations
will decrease.

     The  increase  in our total  indebtedness  and in  Abraxas'  cash  interest
expense as a result of issuing the new notes and entering into the new revolving
credit  facility  require  Abraxas to increase its production and cash flow from
operations  in order to meet its debt service  requirements,  as well as to fund
the  development of Abraxas'  numerous  drilling  opportunities.  The ability to
satisfy these new obligations will depend upon Abraxas' drilling success as well
as prevailing commodity prices.





                                       56



Contractual Obligations

     We are  committed  to making cash  payments in the future on the  following
types of agreements:

     o   Long-term debt, and

     o   Operating leases for office facilities.

We have no  off-balance  sheet debt or  unrecorded  obligations  and we have not
guaranteed  the debt of any  other  party.  Below is a  schedule  of the  future
payments  that we would have been  obligated  to make with  respect to Long-Term
Debt and are  obligated  to make  with  respect  to  Operating  Leases  based on
agreements in place as of September 30, 2004:



      Contractual Obligations                                   Payments due in:
                                                  Less than                                          More than
                                   Total           one year        1-3 years         3-5 years        5 years
                                ------------     -------------    -------------     ------------    -------------
                                                             (dollars in thousands)
                                                                                        
      Long-Term Debt (1)         $245,367            $    -         $245,367              $  -           -
      Operating Leases (2)          1,081               412              629                40           -


(1)  These amounts represent the balances  outstanding under our previous credit
     facility and the 11 1/2% secured notes due 2007.  These  repayments  assume
     that interest would have been  capitalized  under the 11 1/2& secured notes
     due 2007 and that periodic  interest on our previous  credit facility would
     have  been paid on a monthly  basis and that we would not have  drawn  down
     additional funds thereunder.  The long-term debt described above was repaid
     in  connection  with the October  2004  refinancing.  For more  information
     regarding  the  October  2004  refinancing,   see  "Liquidity  and  Capital
     Resources--Recent Events".

(2)  Office lease  obligations for office space for Abraxas and Grey Wolf expire
     in April 2006 and April 2008, respectively.


     Other  Obligations.  We make and will continue to make substantial  capital
expenditures for the  acquisition,  exploitation,  development,  exploration and
production  of  natural  gas and crude  oil.  In the past,  we have  funded  our
operations and capital expenditures primarily through cash flow from operations,
sales of properties,  sales of production payments and borrowings under our bank
credit facilities and other sources. Given our high degree of operating control,
the timing and  incurrence  of  operating  and capital  expenditures  is largely
within our discretion.


     Contingencies.  In 2001,  the Company and a limited  partnership,  of which
Wamsutter Holdings, Inc. is the general partner (the "Partnership"),  were named
in a lawsuit filed in U.S. District Court in the District of Wyoming.  The claim
asserted  breach of  contract,  fraud  and  negligent  misrepresentation  by the
Company  and the  Partnership  related  to the  responsibility  for year 2000 ad
valorem  taxes on crude oil and natural gas  properties  sold by Abraxas and the
Partnership.  In February 2002, a summary  judgment was granted to the plaintiff
in this matter and a final  judgment in the amount of $1.3  million was entered.
The Company and the Partnership  appealed the District  Court's  judgment and on
November 3, 2004,  the U.S.  Court of Appeals for the 10th Circuit  affirmed the
District Court's  decision.  On December 14, 2004, the U.S. Court of Appeals for
the 10th  Circuit  eneteed a  mandate  for the  District  Court of  enforce  the
judgement.  As of December 27, 2004 the final judgement amount was approximately
$1.55 million (which includes  accrued and unpaid interest since February 2002).
The Company has  decided  not to pursue  further  appeals and intends to pay its
portion of the final judgement,  approximately $1 million, for which the Company
had previously established a reserve in the amount of $845,000.



                                       57

Long-Term Indebtedness

     The following  table sets forth our long-term  indebtedness as of September
30, 2004 as adjusted for the  completion  of the  offering  and the  refinancing
transactions described in this prospectus.

                             Long-Term Indebtedness

                                               September 30,
                                                   2004
                                             ------------------
                                                (dollars in
                                                 thousands)

Floating rate senior secured notes due 2009..     $125.0
New revolving credit facility................        0.0
                                             ------------------
Grey Wolf term loan (1).....................        35.0
Bridge loan.................................        25.0
Less current maturities.....................         0.0
                                             ------------------
                                                  $185.0
                                              =================
----------

(1)      Non-recourse to Abraxas

     Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in principal aggregate
amount of Floating  Rate Senior  Secured  Notes due 2009.  The notes were issued
under an indenture  with U.S.  Bank  National  Association.  For a more complete
description of the notes,  see  "Description of the Exchange Notes" contained in
this prospectus.

     Abraxas' New $15 Million  Senior  Secured  Revolving  Credit  Facility.  On
October 28, 2004,  Abraxas entered into an agreement for a new revolving  credit
facility  having a maximum  commitment  of $15  million,  which  includes a $2.5
million subfacility for letters of credit.  Availability under the new revolving
credit  facility  is subject to a  borrowing  base  consistent  with  normal and
customary natural gas and crude oil lending transactions.

     Outstanding  amounts under the new revolving  credit facility bear interest
at the prime rate  announced  by Wells Fargo  Bank,  National  Association  plus
1.00%.

     Subject to earlier  termination  rights and events of  default,  the stated
maturity date under the new revolving credit facility is October 28, 2008.

     Abraxas is permitted to terminate the new revolving  credit  facility,  and
under certain circumstances,  may be required, from time to time, to permanently
reduce  the  lenders'  aggregate  commitment  under  the  new  revolving  credit
facility. Such termination and each such reduction is subject to a premium equal
to the percentage listed below multiplied by the lenders'  aggregate  commitment
under the new revolving credit facility,  or, in the case of partial  reduction,
the amount of such reduction.


                                          Year             % Premium
                                      -------------- --------------------
                                            1                1.5
                                            2                1.0
                                            3                0.5
                                            4                0.0

     Each  of  Abraxas'  current   subsidiaries,   other  than  Grey  Wolf,  has
guaranteed,  and each of Abraxas' future restricted subsidiaries will guarantee,
Abraxas' obligations under the new revolving credit facility on a senior secured
basis. In addition, any other subsidiary or affiliate of Abraxas, including Grey
Wolf, that in the future guarantees any other  indebtedness of Abraxas or of its
restricted subsidiaries will be required to guarantee Abraxas' obligations under
the new revolving  credit facility.  Obligations  under the new revolving credit
facility  are  secured,  together  with the notes,  by a shared  first  priority


                                       58


perfected security interest,  subject to certain permitted encumbrances,  in all
of Abraxas'  and each of its  restricted  subsidiaries'  material  property  and
assets,  including  substantially  all  of  their  natural  gas  and  crude  oil
properties  and all of the  capital  stock  (or in the  case of an  unrestricted
subsidiary  that  is  a  controlled  foreign  corporation,  up  to  65%  of  the
outstanding capital stock) in any entity, other than Grey Wolf, owned by Abraxas
and its  restricted  subsidiaries.  The new  revolving  credit  facility  is not
secured  by any of the  property  or assets of Grey Wolf  (unless  it  becomes a
restricted subsidiary).

     Under the new revolving  credit  facility,  Abraxas is subject to customary
covenants, including certain financial covenants and reporting requirements. The
new revolving  credit facility  requires  Abraxas to maintain a minimum net cash
interest coverage and also requires Abraxas to enter into hedging  agreements on
not less than 25% or more than 75% of Abraxas'  projected  natural gas and crude
oil production.

     In  addition  to the  foregoing  and  other  customary  covenants,  the new
revolving  credit  facility  contains a number of  covenants  that,  among other
things, restrict Abraxas' ability to:

     o   incur or guarantee  additional  indebtedness and issue certain types of
         preferred stock or redeemable stock;

     o   transfer or sell assets;

     o   create liens on assets;

     o   pay  dividends  or make other  distributions  on capital  stock or make
         other  restricted  payments,   including  repurchasing,   redeeming  or
         retiring   capital  stock  or  subordinated   debt  or  making  certain
         investments or acquisitions;

     o   engage in transactions with affiliates;

     o   guarantee other indebtedness;

     o   make any change in the principal nature of its business;

     o   prepay,  redeem,  purchase  or  otherwise  acquire  any  of  its or its
         restricted subsidiaries' indebtedness;

     o   permit a change of control;

     o   directly or indirectly make or acquire any investment;

     o   cause a restricted subsidiary to issue or sell its capital stock; and

     o   consolidate,  merge  or  transfer  all  or  substantially  all  of  the
         consolidated assets of the Company and its restricted subsidiaries.

     The new  revolving  credit  facility  also  contains  customary  events  of
default, including nonpayment of principal or interest, violations of covenants,
cross default and cross acceleration to certain other  indebtedness,  bankruptcy
and material  judgments  and  liabilities,  and is subject to the  intercreditor
agreement,  the  material  terms of which  are  described  under  "Intercreditor
Agreement."

     Abraxas'  New $25 Million  Second Lien  Increasing  Rate  Bridge  Loan.  On
October 28, 2004,  Abraxas borrowed $25 million under its new $25 million bridge
loan.

     Interest on the bridge loan currently  accrues at a rate of 12.0% per annum
until October 28, 2005, and is payable  monthly in cash.  Interest on the bridge
loan will  thereafter  accrue at a rate of 15.0% per annum,  and will be payable
in-kind. Subject to earlier termination rights and events of default, the stated
maturity date under the bridge loan is October 28, 2010.

     Abraxas'  obligations  under  the  bridge  loan are  guaranteed  by each of
Abraxas'  current  subsidiaries,  other than Grey  Wolf,  and each of its future
restricted  subsidiaries.  Obligations  under the bridge  loan are  secured by a
second  priority  perfected  security  interest,  subject to  certain  permitted
encumbrances,  in all of  Abraxas'  and  each  of its  restricted  subsidiaries'
material property and assets,  including  substantially all of their natural gas
and  crude oil  properties  and all of the  capital  stock (or in the case of an
unrestricted  subsidiary that is a controlled foreign corporation,  up to 65% of


                                       59


the  outstanding  capital stock) in any entity,  other than Grey Wolf,  owned by
Abraxas and its restricted subsidiaries.

     The bridge  loan is also  secured by a first  priority  perfected  security
interest  in all of the  capital  stock of Grey Wolf  owned by  Abraxas  and its
restricted  subsidiaries.  The  bridge  loan  provides  for the  release of such
security  interest in  connection  with a sale of such capital  stock by Abraxas
permitted by the terms of the bridge  loan,  but not a  distribution  thereof to
Abraxas' shareholders.  Except under the limited circumstances described herein,
the bridge loan is not directly secured by any of the property or assets of Grey
Wolf (unless it becomes a restricted subsidiary).

     Any  prepayment  of  principal  on the bridge  loan will be repaid  with an
additional amount equal to the principal amount being so prepaid multiplied by a
repayment factor.  The repayment factor is currently equal 1.025 and,  following
July 28, 2004, will increase monthly by 0.03.

     If the bridge loan is not fully repaid by January 28,  2006,  so long as an
event of default does not exist  thereunder  or under the new  revolving  credit
facility  or the  notes,  the  bridge  loan  lenders  have the right to  require
Abraxas' and its restricted  subsidiaries to consummate one or more asset sales.
Each such asset sale is required  to be at fair market  value and to generate at
least 80% of the  proceeds in cash or cash  equivalents.  The net cash  proceeds
from each such asset sale (other than with respect to any capital  stock of Grey
Wolf,  which  will be  exclusively  applied  to repay the  bridge  loan) will be
applied by Abraxas and its restricted  subsidiaries  in the following  order, to
the extent available:

     o   first, to pay any interest then due and payable under the new revolving
         credit facility;

     o   second, to pay any interest then due and payable on the notes;
         

     o   third,  to pay any  accrued and unpaid  interest  on the new  revolving
         credit  facility  that  was  not  paid  under  clause  "first"  of this
         paragraph;

     o   fourth,  to pay any outstanding  principal of the new revolving  credit
         facility;
         
     o   fifth,  if the remaining  aggregate  amount of such net cash  proceeds,
         together with any net cash proceeds in the bridge loan ----- asset sale
         proceeds  account from a previous asset sale  consummated in accordance
         with  the  provisions   described  in   "Description  of  the  Exchange
         Notes--Repurchase  at the  Option of  Holders  Upon the  Occurrence  of
         Certain  Asset Sales,"  exceeds $5.0 million,  the entire amount in the
         bridge  loan  asset sale  proceeds  account is to be used to make a net
         proceeds  offer to  purchase  notes from all holders of the notes as if
         such net cash  proceeds  remaining  after any payment made  pursuant to
         clause "first,"  "second,"  "third" or "fourth" of this paragraph,  and
         any other net cash  proceeds  in the bridge  loan  asset sale  proceeds
         account,   are  excess  proceeds  (see  "Description  of  the  Exchange
         Notes--Certain Covenants--Limitation on Asset Sales"); and

     o   sixth,  after the  payment of all amounts  required  by a net  proceeds
         offer made in accordance with clause "fifth" of this paragraph to repay
         all amounts outstanding under the bridge loan.

     Under the  bridge  loan,  Abraxas  is  subject  to  substantially  the same
covenants  and  reporting  requirements,  and  substantially  the same events of
default,  as are set forth in the new revolving credit facility (see "--Abraxas'
New $15 Million Senior Secured Revolving Credit Facility").

     The bridge loan is subject to the  intercreditor  agreement,  the  material
terms of which are described under "--Intercreditor Agreement."

     Grey Wolf's $35 Million Senior Secured Term Loan. On October 28, 2004, Grey
Wolf entered into an agreement with Guggenheim  Corporate Funding, LLC for a $35
million senior secured term loan.  Interest on the Grey Wolf term loan currently
accrues at the prime rate announced by the  administrative  agent plus 6.25% and
will increase by 0.75% at the end of each six month period during which the Grey
Wolf term loan is outstanding.  Such interest is payable quarterly in cash, with
the first interest  payment to be made on January 1, 2005. If the Grey Wolf term
loan is still outstanding at the end of the first year, an amortization schedule
requires  Grey Wolf to prepay at least 5.0% of the initial  principal  amount of
the loan at the end of each of the first  three  years and 10.0% of the  initial


                                       60


principal  amount of the loan at the end of the fourth year, with the balance of
the loan due at maturity.  Subject to earlier  termination  rights and events of
default,  the Grey Wolf term loan will mature on October 29, 2009.  Abraxas paid
pay all of the fees and costs related to the establishment of the Grey Wolf term
loan.

     Grey Wolf's  obligations under its term loan are guaranteed by each of Grey
Wolf's  future  subsidiaries.  Obligations  under  the Grey  Wolf  term loan are
secured by a first  priority  perfected  security  interest,  subject to certain
permitted  encumbrances,  in all of Grey  Wolf's  and each of its  subsidiaries'
material property and assets,  including  substantially all of their natural gas
and crude oil  properties  and all of the capital  stock in any entity  owned by
Grey Wolf and its subsidiaries.

     The Grey Wolf term loan is prepayable,  in whole or in part,  upon not less
than 10 days  written  notice,  at Grey Wolf's  option at any time at a price of
100% of the principal amount of the loan being prepaid,  plus accrued and unpaid
interest to the date of prepayment.


     Under  this term  loan,  Grey Wolf is  subject  to  substantially  the same
covenants  and  reporting  requirements,  and  substantially  the same events of
default,  as are set forth in the new revolving credit facility (see "--Abraxas'
New $15 Million Senior Secured  Revolving Credit  Facility").In  connection with
the October 20004 refinancing transactions described in this prospectus, Abraxas
issued $125 million  aggregate  principal amount of floating rate senior secured
notes due December 1, 2009.  The notes were issued under an indenture  with U.S.
Bank National  Association.  For a more complete  description of the notes,  see
"Description of the Exchange Notes" contained in this prospectus.

Hedging Activities

     Our results of operations are  significantly  affected by  fluctuations  in
commodity  prices  and we seek to reduce our  exposure  to price  volatility  by
hedging our production  through swaps,  options and other  commodity  derivative
instruments.  Under  our new  revolving  credit  facility,  we are  required  to
maintain hedge  positions on not less than 25% or more than 75% of our projected
oil and gas production for a six month rolling period. See  "--Quantitative  and
Qualitative  Disclosures  about Market  Risk--Hedging  Sensitivity"  for further
information.

Net Operating Loss Carryforwards

     At December 31, 2003 we had,  subject to the  limitation  discussed  below,
$100.6 million of net operating loss carryforwards for U.S. tax purposes.  These
loss carryforwards will expire through 2022 if not utilized.  In connection with
financial   restructuring   transactions  described  in  Note  2,  in  Notes  to
Consolidated  Financial  Statements,  certain  of the  loss  carryforwards  were
utilized.

     Uncertainties  exist as to the future  utilization  of the  operating  loss
carryforwards  under the  criteria  set forth  under  FASB  Statement  No.  109.
Therefore,  we have established a valuation allowance of $99.1 million and $76.1
million for deferred tax assets at December 31, 2002 and 2003, respectively.


                                       61



Quantitative and Qualitative Disclosures about Market Risk

     Commodity Price Risk. As an independent natural gas and crude oil producer,
our revenue, cash flow from operations, other income and profitability,  reserve
values, access to capital and future rate of growth are substantially  dependent
upon the  prevailing  prices of crude oil,  natural gas and natural gas liquids.
Declines in commodity  prices will  materially  adversely  affect our  financial
condition,  liquidity,  ability to obtain financing and operating results. Lower
commodity  prices may reduce the amount of natural gas and crude oil that we can
produce economically. Prevailing prices for such commodities are subject to wide
fluctuation  in response to relatively  minor changes in supply and demand and a
variety of additional  factors beyond our control,  such as global political and
economic conditions. Historically, prices received for natural gas and crude oil
production have been volatile and unpredictable, and such volatility is expected
to continue. Most of our production is sold at market prices.  Generally, if the
commodity  indexes fall, the price that we receive for our production  will also
decline.  Therefore,  the  amount  of  revenue  that  we  realize  is  partially
determined  by factors  beyond our control.  Assuming the  production  levels we
attained during the year ended December 31, 2003 a 10% decline in unhedged crude
oil, natural gas and natural gas liquids prices would have reduced our operating
revenue, cash flow and net income by approximately $3.8 million for the year.

     Hedging Sensitivity.  On January 1, 2001, we adopted SFAS 133 as amended by
SFAS 137 and SFAS 138. Under SFAS 133, all derivative  instruments  are recorded
on the balance  sheet at fair  value.  If the  derivative  does not qualify as a
hedge or is not  designated  as a hedge,  the gain or loss on the  derivative is
recognized  currently  in  earnings.  To  qualify  for  hedge  accounting,   the
derivative  must qualify either as a fair value hedge or cash flow hedge. If the
derivative  qualifies  for cash flow hedge  accounting,  the gain or loss on the
derivative  is deferred in Other  Comprehensive  Income  (Loss),  a component of
Stockholders' Equity, to the extent that the hedge is effective. As of September
30,  2004,  none of the  derivatives  that we have in place  are  designated  as
hedges.  Accordingly,  changes in the fair market value of the  derivatives  are
recorded in current period oil and gas revenue.

     If the derivative qualifies for hedge accounting,  the relationship between
the hedging instrument and the hedged item must be highly effective in achieving
the offset of changes in cash flows  attributable to the hedged risk both at the
inception  of  the  contract  and  on an  ongoing  basis.  Hedge  accounting  is
discontinued  prospectively when a hedge instrument becomes  ineffective.  Gains
and losses deferred in accumulated Other Comprehensive  Income/Loss related to a
cash flow hedge that becomes  ineffective,  remain  unchanged  until the related
production  is  delivered.  If we  determine  that it is probable  that a hedged
transaction will not occur,  deferred gains or losses on the hedging  instrument
are recognized in earnings immediately.

     Gains and losses on qualified  hedging  instruments  related to accumulated
Other  Comprehensive  Income  and  adjustments  to  carrying  amounts  on hedged
production  are included in natural gas or crude oil  production  revenue in the
period that the related production is delivered.  For derivatives not qualifying
for hedge  accounting,  changes in the fair market value of the  instrument  are
charged to income in the current period.

     In 2001 and 2002,  we  experienced  hedging costs of $12.1 million and $3.2
million,  respectively.  In October 2002, all of these hedge agreements expired.
We made total  payments to various  counterparties  of $35.1 million  during the
terms of these expired hedge agreements.

     Under the terms of our new revolving  credit  facility,  we are required to
maintain  hedging  positions with respect to not less than 25% nor more than 75%
of our natural gas and crude oil production for a rolling six month period.

     All hedge transactions are subject to our risk management policy, which has
been approved by the Board of Directors.  We formally document all relationships
between  hedging  instruments  and hedged items,  as well as our risk management
objectives  and  strategy  for  undertaking  the hedge.  This  process  includes
specific  identification of the hedging  instrument and the hedged  transaction,
the  nature  of  the  risk  being  hedged  and  how  the  hedging   instrument's
effectiveness  will be  assessed.  Both at the  inception of the hedge and on an
ongoing  basis,  we assess  whether  the  derivatives  that are used in  hedging
transactions are highly effective in offsetting  changes in cash flows of hedged
items.

                                       62




     As of November 1, 2004, Abraxas had the following hedges in place:


           Time Period                         Notional Quantities                      Price
---------------------------------- -------------------------------------------- ----------------------
                                                                            
Jaunuar 2005                       7,100 MMbtu of production per day            Floor of $4.50
                                   400 Bbls of crude oil production per day     Floor of $25.00
February 2005                      7,100 MMbtu of production per day            Floor of $4.50
                                   400 Bbls of crude oil production per day     Floor of $25.00
March 2005                         7,100 MMbtu of production per day            Floor of $4.50
                                   400 Bbls of crude oil production per day     Floor of $25.00
April 2005                         7,100 MMbtu of production per day            Floor of $4.50
                                   400 Bbls of crude oil production per day     Floor of $25.00
May - December 2005                9,500 MMbtu of production per day            Floor of $5.00



     Interest Rate Risk. As a result of the October 2004  refinancing,  the debt
under our new  revolving  credit  facility  bears  interest  at the  prime  rate
announced by the  administrative  agent plus 1.00%.  As of September 30, 2004 we
had  $47.4  million  in  outstanding  indebtedness  under  our  previous  credit
facility,  which pursuant to the October 2004  refinancing has been repaid.  Our
new notes accrue  interest at a per annum rate of six-month LIBOR plus 7.5%. The
current rate on the new notes is 9.72%.  For each percentage point that the base
rate increases, interest expense would increase by $1.5 million annually.

     Foreign  Currency Risk.  Our Canadian  operations are measured in the local
currency of Canada.  As a result,  our financial results are affected by changes
in foreign  currency  exchange rates or weak economic  conditions in the foreign
markets.  Our Canadian  operations reported a pre-tax income of $218,000 for the
year ended  December 31, 2003. It is estimated  that a 5% change in the value of
the U.S.  dollar to the  Canadian  dollar  would have  changed our net income by
approximately $10,900. We do not maintain any derivative instruments to mitigate
the exposure to translation risk.  However,  this does not preclude the adoption
of specific hedging strategies in the future.

Related Party Transactions

     Accounts  receivable - Other in the  consolidated  balances sheets includes
approximately   $51,211  and   $35,558  as  of  December   31,  2002  and  2003,
respectively,  representing amounts due from officers and stockholders  relating
to advances made to employees.

     Wind River Resources  Corporation ("Wind River"),  all of the capital stock
of which  was  owned  by  Abraxas'  President,  previously  owned a  twin-engine
airplane.  The airplane was  available  for business use by employees of Abraxas
from time to time at Wind  River's  cost.  Abraxas  paid  Wind  River a total of
approximately   $314,000,   $345,000  and  $132,000  in  2001,  2002  and  2003,
respectively. The airplane was sold in July 2003 to a third party. In connection
with the sale,  Abraxas  acquired Wind River from Mr. Watson in consideration of
the  issuance  of 106,977  shares of  Abraxas  common  stock and the  payment of
$35,000. Wind River was subsequently dissolved.

     Abraxas  has  adopted a policy that  transactions  between  Abraxas and its
officers, directors,  principal stockholders, or affiliates of any of them, will
be on terms no less favorable to Abraxas than can be obtained on an arm's length
basis in transactions  with third parties and must be approved by the vote of at
least a majority of the disinterested directors.

                                       63


Critical Accounting Policies

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting   principles  requires  that  management  apply  accounting
policies and make  estimates and  assumptions  that affect results of operations
and the reported amounts of assets and liabilities in the financial  statements.
The  following   represents   those  policies  that   management   believes  are
particularly  important to the financial  statements and that require the use of
estimates and assumptions to describe matters that are inherently uncertain.

     Full Cost Method of  Accounting  for Natural Gas and Crude Oil  Activities.
SEC Regulation S-X defines the financial  accounting and reporting standards for
companies  engaged in natural  gas and crude oil  activities.  Two  methods  are
prescribed:  the successful efforts method and the full cost method. Abraxas has
chosen to follow the full cost  method  under  which all costs  associated  with
property  acquisition,  exploration  and development  are  capitalized.  We also
capitalize  internal costs that can be directly identified with our acquisition,
exploration and  development  activities and do not include any costs related to
production,   general  corporate  overhead  or  similar  activities.  Under  the
successful  efforts  method,  geological  and  geophysical  costs  and  costs of
carrying  and  retaining  undeveloped  properties  are  charged  to  expense  as
incurred.  Costs of  drilling  exploratory  wells  that do not  result in proved
reserves  are  charged to expense.  Depreciation,  depletion,  amortization  and
impairment of natural gas and crude oil properties are generally calculated on a
well by well or lease  or  field  basis  versus  the  "full  cost"  pool  basis.
Additionally,  gain or loss is generally  recognized on all sales of natural gas
and crude oil properties  under the successful  efforts method.  As a result our
financial  statements  will  differ  from  companies  that apply the  successful
efforts  method since we will  generally  reflect a higher level of  capitalized
costs  as well as a  higher  depreciation,  depletion  and  amortization  on our
natural gas and crude oil properties.

     At the time it was adopted,  management  believed that the full cost method
would be  preferable,  as  earnings  tend to be less  volatile  than  under  the
successful efforts method. However, the full cost method makes us susceptible to
significant  non-cash charges during times of volatile  commodity prices because
the full cost pool may be impaired  when prices are low.  These  charges are not
recoverable  when  prices  return to higher  levels.  We have  experienced  this
situation  several times over the years,  most recently in 2002. Our natural gas
and crude oil reserves have a relatively long life. However,  temporary drops in
commodity  prices can have a material  impact on our business  including  impact
from the full cost method of accounting.

     Under full cost accounting  rules,  the net capitalized cost of natural gas
and crude oil  properties  may not exceed a "ceiling  limit" which is based upon
the  present  value of  estimated  future net cash flows from  proved  reserves,
discounted  at 10%,  plus the  lower of cost or fair  market  value of  unproved
properties.  If net  capitalized  costs of natural gas and crude oil  properties
exceed the ceiling  limit,  we must charge the amount of the excess to earnings.
This is called a "ceiling  limitation  write-down."  This charge does not impact
cash flow from operating  activities,  but does reduce our stockholders'  equity
and  reported  earnings.  The risk that we will be  required  to write  down the
carrying  value of natural gas and crude oil  properties  increases when natural
gas and crude oil prices are depressed or volatile. In addition, write-downs may
occur if we experience  substantial downward adjustments to our estimated proved
reserves  or if  purchasers  cancel  long-term  contracts  for our  natural  gas
production.  An  expense  recorded  in  one  period  may  not be  reversed  in a
subsequent  period even though higher  natural gas and crude oil prices may have
increased the ceiling applicable to the subsequent period.

     For the year ended  December 31, 2002,  we recorded a write-down  of $116.0
million.  The  write-down  in 2002 was due to low  commodity  prices.  We cannot
assure you that we will not experience additional write-downs in the future.

     Estimates of Proved  Natural Gas and Crude Oil  Reserves.  Estimates of our
proved reserves included in this prospectus are prepared in accordance with GAAP
and SEC guidelines. The accuracy of a reserve estimate is a function of:

     o   the quality and quantity of available data;

     o   the interpretation of that data;

     o   the accuracy of various mandated economic assumptions; and

                                       64


     o   and the judgment of the persons preparing the estimate.

     Our proved  reserve  information  included in this  prospectus was based on
evaluations prepared by independent  petroleum engineers.  Estimates prepared by
other third parties may be higher or lower than those included  herein.  Because
these  estimates  depend on many  assumptions,  all of which  may  substantially
differ from future actual results,  reserve estimates will be different from the
quantities of oil and gas that are ultimately recovered. In addition, results of
drilling,  testing  and  production  after the date of an  estimate  may justify
material revisions to the estimate.

     You should not assume  that the  present  value of future net cash flows is
the current market value of our estimated  proved  reserves.  In accordance with
SEC requirements,  we based the estimated  discounted future net cash flows from
proved  reserves on prices and costs on the date of the estimate.  Actual future
prices and costs may be materially  higher or lower than the prices and costs as
of the date of the estimate.

     The estimates of proved  reserves  materially  impact DD&A expense.  If the
estimates of proved reserves  decline,  the rate at which we record DD&A expense
will increase,  reducing future net income. Such a decline may result from lower
market prices, which may make it uneconomic to drill for and produce higher cost
fields.

     Use of Estimates.  The preparation of consolidated  financial statements in
conformity with accounting principles generally accepted in the United States of
America  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  consolidated  financial  statements and the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results  could  differ  from those  estimates.  Management  believes  that it is
reasonably  possible that estimates of proved natural gas and crude oil revenues
could significantly change in the future.

     Revenue  Recognition.  We recognize  natural gas and crude oil revenue from
our interest in producing  wells as natural gas and crude oil is sold from those
wells,  net  of  royalties.  Revenue  from  the  processing  of  natural  gas is
recognized in the period the service is  performed.  We utilize the sales method
to account for gas production volume  imbalances.  Under this method,  income is
recorded based on our net revenue interest in production taken for delivery.  We
had no material gas imbalances.

     Asset  Retirement  Obligations.  The  estimated  costs of  restoration  and
removal of facilities are accrued.  The fair value of a liability for an asset's
retirement  obligation is recorded in the period in which it is incurred and the
corresponding  cost capitalized by increasing the carrying amount of the related
long-lived  asset.  The  liability  is accreted to its then  present  value each
period,  and the  capitalized  cost is  depreciated  over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount,  a gain or loss  is  recognized.  For  all  periods  presented,  we have
included  estimated  future costs of abandonment and  dismantlement  in our full
cost  amortization base and amortize these costs as a component of our depletion
expense.

     Hedge Accounting. From time to time, we use commodity price hedges to limit
our  exposure to  fluctuations  in natural gas and crude oil prices.  Results of
those hedging transactions are reflected in natural gas and crude oil sales.

     Statement of Financial Accounting Standards,  ("SFAS") No. 133, "Accounting
for  Derivative  Instruments  and Hedging  Activities",  was effective for us on
January 1, 2001. SFAS 133, as amended and  interpreted,  establishes  accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.  Under this
statement, all derivatives,  whether designated in hedging relationships or not,
are required to be recorded at fair value on our balance  sheet.  The accounting
for changes in the fair value of a derivative instrument depends on the intended
use of the derivative and the resulting designation, which is established at the
inception of a derivative.  Special  accounting for  qualifying  hedges allows a
derivative's  gains and losses to offset  related  results of the hedged item in
the consolidated statement of operations.  For derivative instruments designated
as cash  flow  hedges,  changes  in fair  value,  to the  extent  the  hedge  is
effective, are recognized in other comprehensive income until the hedged item is
recognized  in earnings.  For  derivative  instruments  designated as fair value
hedges,  changes  in fair  value,  to the  extent  the hedge is  effective,  are
recognized  as an increase or decrease to the value of the hedged item until the
hedged item is recognized in earnings.  Hedge effectiveness is measured at least


                                       65


quarterly  based on the relative  changes in fair value  between the  derivative
contract and the hedged item over time.  Any change in the fair value  resulting
from  ineffectiveness,  as defined by SFAS 133,  is  recognized  immediately  in
earnings.  Changes  in fair  value  of  contracts  that do not meet the SFAS 133
definition  of a cash flow or fair value hedge are also  recognized  in earnings
through risk management  income.  All amounts initially recorded in this caption
are  ultimately  reversed  within the same  caption and  included in oil and gas
sales or interest expense, as applicable, over the respective contract terms.

     One of the  primary  factors  that can have an  impact  on our  results  of
operations is the method used to value our derivatives.  We have established the
fair value of all  derivative  instruments  using  estimates  determined  by our
counterparties  and subsequently  evaluated  internally using  established index
prices and other  sources.  These  values are based upon,  among  other  things,
futures  prices,  volatility,  time to maturity and credit  risk.  The values we
report in our  financial  statements  change as these  estimates  are revised to
reflect actual results,  changes in market conditions or other factors,  many of
which are beyond our control.

     Another factor that can impact our results of operations each period is our
ability to estimate the level of correlation  between future changes in the fair
value of the hedge  instruments and the transactions  being hedged,  both at the
inception and on an ongoing  basis.  This  correlation  is  complicated  because
energy commodity  prices,  the primary risk we hedge,  have quality and location
differences that can be difficult to hedge  effectively.  The factors underlying
our  estimates of fair value and our  assessment of  correlation  of our hedging
derivatives are impacted by actual results and changes in conditions that affect
these factors, many of which are beyond our control.

     Due to the  volatility of natural gas and crude oil prices and, to a lesser
extent, interest rates, our financial condition and results of operations can be
significantly  impacted  by  changes  in the  market  value  of  our  derivative
instruments. As of December 31, 2003 the net market value of our derivatives was
an asset of $21,136.  As of December 31, 2002,  we did not have any  outstanding
derivatives.

New Accounting Pronouncements

     In June  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for  Asset
Retirement  Obligations."  SFAS No. 143 addresses  accounting  and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement  costs. SFAS No. 143 was effective for us January 1,
2003.  SFAS No. 143 requires  that the fair value of a liability  for an asset's
retirement  obligation be recorded in the period in which it is incurred and the
corresponding  cost capitalized by increasing the carrying amount of the related
long-lived  asset.  The  liability  is accreted to its then  present  value each
period,  and the  capitalized  cost is  depreciated  over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount,  a gain or loss  is  recognized.  For  all  periods  presented,  we have
included  estimated  future costs of abandonment and  dismantlement  in our full
cost  amortization base and amortize these costs as a component of our depletion
expense in the accompanying financial statements.

     We adopted SFAS 143 effective  January 1, 2003. For the year ended December
31,  2003 we  recorded a charge of  $395,341  for the  cumulative  effect of the
change in accounting principal and a liability of $1.3 million.  During 2003, we
charged  approximately  $379,000  to  expense  related to the  accretion  of the
liability. The impact on each of the prior periods was not material.

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets" (SFAS 144).  Effective  January 1,
2002,  we adopted  SFAS 144.  SFAS 144 retains the  requirement  to recognize an
impairment  loss only  where the  carrying  value of a  long-lived  asset is not
recoverable  from its  undiscounted  cash flows and to measure  such loss as the
difference  between the carrying  amount and fair value of the asset.  SFAS 144,
among  other  things,  changes the  criteria  that have to be met to classify an
asset as  held-for-sale  and requires that  operating  losses from  discontinued
operations be recognized in the period that the losses are incurred  rather than
as of the measurement  date. This new standard had no impact on our consolidated
financial statements for the years ended December 31, 2002 and 2003.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities"  (SFAS 146).  Effective January 1,


                                       66


2003 we  adopted  SFAS 146.  SFAS 146  requires  costs  associated  with exit of
disposal  activities to be recognized  when they are incurred rather than at the
date of commitment to an exit or disposal plan.  This new standard had no impact
on our financial statement for the year ended December 31, 2003.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative  Instruments and Hedging  Activities" (SFAS 149). SFAS 149 amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging  activities under SFAS No. 133,  "Accounting for Derivative  Instruments
and  Hedging  Activities."  SFAS No.  149,  among other  things,  clarifies  the
circumstances  under which a contract with an initial net  investment  meets the
characteristic  of a derivative and amends the definition of an  "underlying" to
conform it to language  used in FIN 45. SFAS No. 149 is effective  for contracts
entered  into or  modified  after  June 30,  2003.  We  adopted  this  statement
effective  July 1, 2003.  Implementation  of this new  standard  did not have an
effect on our consolidated financial position or results of operations.

     In  November  2002 the FASB  issued  FASB  Interpretation  No. 45 (FIN 45),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others."  FIN 45  elaborates  on the
disclosures  to be made by a guarantor  in its  financial  statements  about its
obligations  under  certain  guarantees  that  it  has  issued,  including  loan
guarantees  such as standby  letters of credit.  It also requires a guarantor to
recognize,  at the  inception of a guarantee,  a liability for the fair value of
the obligations it has undertaken in issuing the guarantee.  The  Interpretation
does not  specify  the  subsequent  measurement  of the  guarantor's  recognized
liability  over the term of the related  guarantee.  The guidance in FIN 45 does
not apply to certain  guarantee  contracts,  such as those  issued by  insurance
companies  or for a lessee's  residual  value  guarantee  embedded  in a capital
lease.  The  provisions  related to  recognizing a liability at inception of the
guarantee for the fair value of the guarantor's  obligations  would not apply to
product  warranties or to guarantees  accounted for as derivatives.  The initial
recognition and initial  measurement  provisions apply on a prospective basis to
guarantees  issued or  modified  after  December  31,  2002,  regardless  of the
guarantor's fiscal year-end.  FIN 45 specifies additional  disclosures effective
for financial  statements of interim or annual periods ending after December 15,
2002.

     In  January   2003   (amended   December   2003),   the  FASB  issued  FASB
Interpretation  No. 46 (FIN 46),  "Consolidation of  Variable-Interest  Entities
(VIEs)." FIN 46 establishes  the definition of VIEs to encompass a broader group
of entities than those previously  considered  special-purpose  entities (SPEs).
FIN 46 specifies the criteria under which it is  appropriate  for an investor to
consolidate VIEs; in order for an investor to consolidate a VIE, the entity must
fall  within  the  definition  of VIE and the  investor  must  fall  within  the
definition of primary beneficiary,  both newly defined terms under this FIN. The
revised  effective date of FIN 46 for public companies with VIEs meeting certain
conditions  will be the end of the first  interim or annual  period ending after
December 15, 2003. In December  2003,  the FASB issued FASB  Interpretation  no.
46(R)m which expanded and clarified the guidelines of FIN 46.

     In May 2003, the FASB issued FAS No. 150, entitled  "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150).  This  statement is effective  for financial  instruments  entered into or
modified after May 31, 2003, and is otherwise  effective at the beginning of the
first  interim  period  beginning  after  June 15,  2003.  We have no  financial
instruments  affected by SFAS 150,  therefore,  our adoption of it as of July 1,
2003 will not impact our financial statements.

     In March 2004, the Emerging Issues Task Force ("EITF")  reached a consensus
that mineral rights, as defined in EITF Issue No. 04-2,  "Whether Mineral Rights
Are Tangible or Intangible  Assets," are tangible assets and that they should be
removed  as  examples  of   intangible   assets  in  SFAS  No.  141,   "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets".  The FASB has
recently  ratified this consensus and directed the FASB staff to amend SFAS Nos.
141 and 142  through  the  issuance of FASB Staff  Position  FAS Nos.  141-1 and
142-1.  Historically,  the Company has included the costs of such mineral rights
as tangible assets, which is consistent with the EITF's consensus. As such, EITF
04-02 has not affected the Company's consolidated financial statements.


     On December 16, 2004,  the FASB  published  FASB Statement No. 123 (revised
2004)  "Share-Based   Payment"  This  statement  addresses  the  accounting  for
share-based  payment  transactions  in which  an  enterprise  receives  employee
services  in exchange  for:  (1) equity  instruments  of the  enterprise  or (2)
liabilities  that  are  based  on the  fair  value  of the  enterprise's  equity
instruments or that may be settled by the issues of such equity instruments. The

                                       67



statement  eliminates  the  ability  to  account  for  share-based  compensation
transactions  using  APB  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
Employees" and generally requires that public companies instead account for such
transactions be using a fair value-based  method. This statement is be effective
for the Company for fiscal periods  (including  both interim and annual periods)
beginning after June 15, 2005. The Company is currently unable to determine what
effect this statement will have on the Company's  financial  position or results
of operations.



                                       68


                             INTERCREDITOR AGREEMENT

     The  trustee,  on behalf  of the  holders  of the  notes,  entered  into an
intercreditor,  security and collateral  agency  agreement  (the  "Intercreditor
Agreement")  with Abraxas and its  restricted  subsidiaries,  the new  revolving
credit  facility  administrative  agent,  on behalf of the new revolving  credit
facility lenders, the bridge loan administrative  agent, on behalf of the bridge
loan lenders, and the collateral agent. The Intercreditor Agreement provides for
the  allocation  of rights  among the  holders of the notes,  the new  revolving
credit  facility  lenders  and the bridge  loan  lenders  with  respect to their
respective  interests in the collateral and the exercise of remedies relating to
the collateral,  and with respect to certain payments  received from Abraxas and
the subsidiary guarantors and in respect of the collateral.

     The following  description is an overview of the material provisions of the
Intercreditor  Agreement.  The summary  does not purport to be  complete.  It is
qualified in its entirety by reference to the  provisions  of the  Intercreditor
Agreement and to the Trust  Indenture Act of 1939.  Copies of the  Intercreditor
Agreement  will be made  available  to  prospective  investors  by Abraxas  upon
written request.

Granting of Security Interests

     Each of Abraxas and its restricted  subsidiaries  (the "Borrower  Parties")
has granted to the collateral agent:

     o   a shared first priority security interest (subject to certain permitted
         encumbrances)  in the  collateral  for the benefit of the new revolving
         credit facility lenders, which is pari passu with the security interest
         granted for the benefit of the holders of the notes except as described
         under "--Priority of Distributions;"

     o   a shared first priority security interest (subject to certain permitted
         encumbrances)  in the  collateral for the benefit of the holders of the
         notes,  which is pari passu with the security  interest granted for the
         benefit  of  the  new  revolving  credit  facility  lenders  except  as
         described under "--Priority of Distributions;" and

     o   a second priority  security  interest in the collateral for the benefit
         of the bridge loan  lenders,  which is junior only to the shared  first
         priority security interest in the collateral granted for the benefit of
         the new revolving  credit facility lenders and the holders of the notes
         (and to certain permitted encumbrances).

Payment of Obligations; Collateral Account

     So long as an event of default does not exist under the indenture,  the new
revolving  credit  facility or the bridge loan, the collateral  agent  generally
will not collect  distributions  under any of the new revolving  credit facility
documents or note documents (collectively, the "Senior Documents") or the bridge
loan documents (the "Bridge Loan  Documents"  and  collectively  with the Senior
Documents,  the "Secured Documents"),  and all payments will be made directly to
the respective creditor under the applicable Secured Document.

     Upon  notice of any such  event of  default  and for so long as an event of
default exists, payments to each new revolving credit facility lender, holder of
the notes and bridge loan lender (collectively,  the "Secured Parties") from the
Borrower  Parties,  and proceeds from any disposition of any  collateral,  will,
subject to limited exceptions,  be collected by the collateral agent for deposit
into a collateral account and then distributed as described under "--Priority of
Distributions;" provided,  however, any payment made with proceeds from the sale
or other  disposition  of Grey Wolf  stock will be  applied  exclusively  to pay
amounts with respect to the bridge loan,  and no such proceeds will be deposited
into the collateral account or will be subject to the payment priority described
under "--Priority of Distributions."


                                       69

Priority of Distributions

     Upon notice of any such event of default and so long as an event of default
exists,  funds in the  collateral  account will be distributed by the collateral
agent generally in the following order of priority:

     first,    to  reimburse  the  collateral  agent for  expenses  incurred  in
               protecting and realizing upon the value of the collateral;

     second,   to reimburse the new  revolving  credit  facility  administrative
               agent, the trustee and the bridge loan administrative agent, on a
               pro rata basis, for expenses incurred in protecting and realizing
               upon the value of the  collateral  while any of these parties was
               acting on behalf of the Control Party (as defined below);

     third,    to reimburse the new  revolving  credit  facility  administrative
               agent, the trustee and the bridge loan administrative agent, on a
               pro rata basis, for expenses incurred in protecting and realizing
               upon the value of the  collateral  while any of these parties was
               not acting on behalf of the Control Party;

     fourth,   to pay all  accrued  and  unpaid  interest  (and then any  unpaid
               commitment fees) under the new revolving credit facility;

     fifth,    if, a  minimum  collateral  coverage  ratio of  three  times  the
               outstanding  obligations  under the new revolving credit facility
               would be met after giving effect to any payment under this clause
               "fifth," to pay all accrued and unpaid interest on the notes;

     sixth,    to pay all  outstanding  principal  of (and then any other unpaid
               amounts,  including,  without  limitation,  any  fees,  expenses,
               premiums and reimbursement  obligations) the new revolving credit
               facility;

     seventh,  to pay all accrued and unpaid  interest on the notes (if not paid
               under clause "fifth");

     eighth,   to pay all  outstanding  principal  of (and then any other unpaid
               amounts, including,  without limitation, any premium with respect
               to) the notes;

     ninth,    to pay the bridge loan  lenders  all accrued and unpaid  interest
               under the bridge loan;

     tenth,    to pay all  outstanding  principal  of (and then any other unpaid
               amounts, including,  without limitation, any premium with respect
               to) the bridge loan; and

     eleventh, to pay each new revolving credit facility  lender,  holder of the
               notes,  bridge loan lender and other secured party, on a pro rata
               basis,  all other  amounts  outstanding  under the new  revolving
               credit facility, the notes and the bridge loan.

     To the extent there exists any excess monies or property in the  collateral
account after all obligations of Abraxas and the subsidiary guarantors under the
new revolving credit  facility,  the indenture and the notes and the bridge loan
are paid in full,  the  collateral  agent is  required  to return such excess to
Abraxas.

Control Party

     The  collateral  agent  will  act  in  accordance  with  the  Intercreditor
Agreement and as directed by the "Control  Party." Prior to the occurrence of an
event of default under the new revolving credit  facility,  the indenture or the
bridge  loan,  the  Control  Party will be the  holders of the notes and the new
revolving  credit  facility  lenders,  acting as a single class,  by vote of the
holders  of  a  majority  of  the  aggregate  principal  amount  of  outstanding
obligations  under the notes and the new revolving  credit facility (the "Senior
Secured  Parties").  Upon notice of any such event of  default,  the bridge loan
lenders will be the Control Party for 240 days following such notice.  If a stay


                                       70


under the Bankruptcy Code occurs during such 240-day period, that period will be
extended  by the number of days  during  which that stay was  effective.  If the
Senior  Secured  Parties have not been paid in full by the end of such specified
period,  the Senior Secured  Parties will become the Control Party,  acting as a
single class,  by vote of the holders of a majority of the  aggregate  principal
amount of outstanding  obligations  under the notes and the new revolving credit
facility.  The bridge loan  lenders  can remain the Control  Party by paying the
outstanding  obligations  under the new revolving  credit facility and the notes
(collectively, the "Senior Indebtedness") in full, at which time the bridge loan
lenders will be subrogated to the rights of the Senior Secured Parties. Once the
Senior Indebtedness is paid in full, the bridge loan lenders will be the Control
Party.

Exercise of Remedies and Disposition of Collateral

     The Intercreditor  Agreement provides that, upon the occurrence of an event
of default under the indenture,  the new revolving credit facility or the bridge
loan for which  notice is given,  the Control  Party will have the sole right to
direct the  collateral  agent in the  exercise of remedies  with  respect to the
collateral  under the Secured  Documents,  including the sale of the collateral.
The collateral agent will, upon receipt of any funds pursuant to the exercise of
remedies with respect to the  collateral,  deposit such funds in the  collateral
account for distribution  according to the priority  described under "--Priority
of Distributions."

Amendments

     The  Intercreditor  Agreement  provides that none of its  provisions may be
modified without the consent of the parties thereto,  except that the consent of
Abraxas is not  required  if such  amendment  does not have a  material  adverse
effect on Abraxas and its subsidiaries, taken as a whole.

     The  Intercreditor  Agreement  also  provides  that none of the bridge loan
documents may be amended without the prior consent of the Senior Secured Parties
acting by  majority  vote,  except that that the bridge  loan  documents  may be
supplemented,  amended or modified without such consent in order (i) to cure any
ambiguity or omission or to correct any mistake,  (ii) to correct or  supplement
any provision (to the extent not adverse to the interests of the Senior  Secured
Parties) or (iii) in  connection  with any permitted  refinancing  of the bridge
loan.

     In addition,  the  Intercreditor  Agreement  provides that none of the note
documents may be amended  without the prior consent of the new revolving  credit
facility  lenders and bridge loan  lenders  acting by majority  vote as a single
class,  except that the note documents may be supplemented,  amended or modified
without  such  consent  in order (i) to cure any  ambiguity  or  omission  or to
correct any mistake,  (ii) to correct or supplement any provision (to the extent
not adverse to the interests of the other Senior  Secured  Parties or the bridge
loan lenders) or (iii) in connection with any permitted  refinancing of the note
documents.

     Similarly,  the Intercreditor  Agreement also provides that none of the new
revolving credit facility  documents may be amended without the prior consent of
the holders of the notes and the bridge loan lenders  acting by majority vote as
a single class,  except that the new revolving credit facility  documents may be
supplemented,  amended or modified without such consent in order (i) to cure any
ambiguity or omission or to correct any mistake,  (ii) to correct or  supplement
any  provision  (to the extent not adverse to the  interests of the other Senior
Secured  Parties or the bridge  loan  lenders) or (iii) in  connection  with any
permitted refinancing of the revolving credit facility documents.

Release of Lien; Termination of the Security Interests

     Abraxas  and its  restricted  subsidiaries  have the  right  to  consummate
certain  asset  sales and other  dispositions  so long as any such asset sale or
other disposition  complies with the limitations on asset sales contained in the
Secured  Documents  (including,  with respect to the notes,  as described  under
"Description  of the  Exchange  Notes--Certain  Covenants--Limitation  on  Asset
Sales"  and  "Description  of the  Exchange  Notes--Repurchase  at the Option of
Holders Upon the Occurrence of Certain Asset Sales").

     The  Intercreditor   Agreement   provides  that  the  lien  on  the  assets
constituting  part of the  collateral  that is sold or otherwise  disposed of in
accordance  with the terms of each  Secured  Document  may be released if (i) no


                                       71


default or event of default  exists  under any of the  Secured  Documents,  (ii)
Abraxas has delivered an officers'  certificate to each of the collateral agent,
the trustee,  the new revolving  credit  facility  administrative  agent and the
bridge loan  administrative  agent,  certifying  that the proposed sale or other
disposition  of assets is either  permitted or required by, and is in accordance
with  the  provisions  of,  the  applicable  Secured  Documents  and  (iii)  the
collateral agent has acknowledged such certificate.

     The  Intercreditor  Agreement  provides  for the  termination  of  security
interests on the date that all obligations  under the Secured Documents are paid
in full.

Concerning the Collateral Agent

     U.S. Bank National  Association is currently the collateral agent under the
Intercreditor Agreement.  Abraxas and its affiliates may from time to time enter
into  banking  and  trustee  relationships  with the  collateral  agent  and its
affiliates,  and the  collateral  agent  is  currently  the  trustee  under  the
indenture  governing  the notes.  The  collateral  agent's  address is U.S. Bank
National Association, 60 Livingston Avenue, Saint Paul, Minnesota 55107.

     The  collateral  agent may resign at any time,  in which  event a successor
collateral agent will be appointed as provided in the  Intercreditor  Agreement.
Abraxas is  permitted  to, at any time,  when no event of default  under the new
revolving  credit  facility,  indenture or bridge loan  exists,  and the Control
Party is permitted to, at any time,  when there exists such an event of default,
remove the collateral agent as provided in the Intercreditor  Agreement. In such
circumstances, a successor collateral agent will be appointed as provided in the
Intercreditor  Agreement. Any resignation or removal of the collateral agent and
appointment  of a successor  collateral  agent will not become  effective  until
acceptance of the appointment by the qualified successor collateral agent.


                                       72

                                    BUSINESS

General

     We are an independent  energy company  primarily engaged in the development
and production of natural gas and crude oil. Historically, we have grown through
the  acquisition  and  subsequent  development  and  exploitation  of  producing
properties,  principally  through the  redevelopment of old fields utilizing new
technologies  such as modern log analysis and reservoir  modeling  techniques as
well as 3-D  seismic  surveys  and  horizontal  drilling.  As a result  of these
activities,  we  believe  that  we  have a  substantial  inventory  of low  risk
development opportunities,  which provide a basis for significant production and
reserve  increases.  In addition,  we intend to expand upon our exploitation and
development  activities with complementary low risk exploration  projects in our
core areas of operation.

     Abraxas'  core  areas of  operation  are in south  and west  Texas and east
central   Wyoming.   Abraxas'   current   producing   properties  are  typically
characterized by long-lived  reserves,  established  production  profiles and an
emphasis on natural gas. Grey Wolf conducts operations in western Canada.

     In January 2003, we completed a series of transactions,  which we sometimes
refer to as the January 2003 financial restructuring, including the sale of most
of our Canadian properties and the issuance of Abraxas' existing 11 1/2% secured
notes due 2007.  The terms of those  notes  currently  limit our ability to make
capital expenditures  exceeding $10 million per year, which has caused us to put
a priority on those projects which allow us to maintain our leasehold  positions
and comply with drilling requirements on non-operated properties, rather than on
those  opportunities which we believe have the greatest potential for increasing
our production and reserves. Despite this limitation on capital expenditures, we
have increased  average daily  production from the producing  properties that we
continued to own after the Canadian sale in January 2003 from  approximately  19
MMcfe in January 2003 to  approximately  24 MMcfe in June 2004, while drilling a
total of 43 wells with a 93% success rate. In addition, during 2003, we added 16
Bcfe of proved reserves at a finding cost of $1.15 per Mcfe.

     Abraxas  believes  that  its  high  quality  asset  base,  high  degree  of
operational  control and large  inventory of drilling  projects  position it for
future growth. Abraxas' properties are concentrated in locations that facilitate
substantial  economies  of scale  in  drilling  and  production  operations  and
efficient reservoir management practices. Abraxas operates 94% of its properties
accounting  for  approximately  90% of its  PV-10,  giving  Abraxas  substantial
control over the timing and incurrence of operating and capital expenditures. In
addition,  Abraxas has 47 proved  undeveloped  locations and has identified over
100 drilling and recompletion  opportunities on its existing U.S.  acreage,  the
successful  development of which Abraxas believes could  significantly  increase
its daily production and proved reserves.

Recent Refinancing

     On October 28, 2004, in order to provide  Abraxas with greater  flexibility
in conducting its business, including increasing capital spending and exploiting
its  additional  drilling  opportunities,  Abraxas  refinanced  all of its  then
existing  indebtedness  by  redeeming  its 11 1/2%  secured  notes  due 2007 and
terminating its previous credit facility with the net proceeds from:

     o   the private  issuance of $125.0 million  aggregate  principal amount of
         the Floating Rate Senior Secured Notes due 2009, Series A;

     o   the  proceeds  of its new $25.0  million  second lien  increasing  rate
         bridge loan; and

     o   the payment to Abraxas by Grey Wolf of $35.0  million from the proceeds
         of Grey Wolf's new $35.0 million term loan.


As a part of the  refinancing,  Abraxas  also  entered  into a new  $15  million
revolving  credit  facility,  under which Abraxas  currently has availability of
approximately $13.6 million.


                                       73



     Abraxas anticipates making capital expenditures on U.S. properties for 2005
of  approximately   $20.0  million,   which  Abraxas  anticipates  will  include
development  activities  related to approximately 23 projects.  Abraxas has five
new drilling  projects  planned,  which,  combined  with several  workovers  and
facility  upgrades,  have a total cost of approximately  $7.5 million.  One 100%
owned Edwards horizontal well will be drilled in south Texas to a total measured
depth of 15,800 feet. In west Texas:


     o   a 100%  owned  horizontal  Devonian  well  will be  drilled  to a total
         measured depth of 17,000 feet;
     o   a shallow  development  drilling  program will commence on a waterflood
         project in which Abraxas owns a 58% working interest;
     o   development  will continue in the 100% owned  Clearfork Slope oil plays
         at depths ranging from 5,600 feet to 8,500 feet; and
     o   a 6,500-foot  infill well will be drilled in the Abraxas  Cherry Canyon
         field in which the Company owns an 81% working interest.

Primary Operating Areas

     Texas.  Abraxas'  operations are  concentrated in south and west Texas with
over 99% of the PV-10 of its  natural gas and crude oil  properties  at December
31, 2003  located in those two  regions.  Abraxas  operates  94% of its wells in
Texas.  During  2003,  Abraxas  drilled a total of six wells (3.73 net) in Texas
with a 100% success rate. During the first nine months of 2004,  Abraxas drilled
2 wells (2) net in Texas with a 50% success rate.

     Operations in South Texas are concentrated  along the Edwards trend in Live
Oak and Dewitt Counties, the Frio/Vicksburg trend in San Patricio County and the
Wilcox trend in Goliad  County.  In total in South Texas Abraxas owns an average
93% working  interest in 43 wells with average daily  production of 239 net Bbls
of crude oil and NGLs and 6,210 net Mcf of  natural  gas per day (7,644 net Mcfe
per day) for the year ended  December  31,  2003.  During the nine months  ended
September 30, 2004,  average daily  production was 329 net Bbls of crude oil and
NGLs and 7,547 net Mcf of natural gas (9,521 net Mcfe).  As of December 31, 2003
Abraxas  had  estimated  net proved  reserves  in South  Texas of 28.6 Bcfe (82%
natural gas) with a PV-10 of $57.7  million,  70% of which was  attributable  to
proved developed reserves. In South Texas, Abraxas has four incremental drilling
locations  on  its  existing  acreage  in  addition  to  12  proved  undeveloped
locations.

     Abraxas'   West  Texas   operations   are   concentrated   along  the  deep
Devonian/Ellenburger  formations  and shallow  Cherry Canyon  sandstones in Ward
County and in the Sharon Ridge  Clearfork  Field in Scurry  County.  In total in
West  Texas,  Abraxas  owns an average  74%  working  interest in 158 wells with
average daily production of 338 net Bbls of crude oil and NGLs and 6,887 net Mcf
of natural  gas per day (8,915  Mcfe per day) for the year  ended  December  31,
2003. During the nine months ended September 30, 2004,  average daily production
was 566 net Bbls of crude oil and NGLs and 11,034 net Mcf of natural gas (14,433
net Mcfe). As of December 31, 2003, Abraxas had estimated net proved reserves in
West Texas of 71.1 Bcfe (80% natural gas) with a PV-10 of $103.6 million, 60% of
which was attributable to proved developed reserves.  In West Texas, Abraxas has
identified 31 incremental drilling locations on its existing acreage in addition
to 35 proved undeveloped locations.

     Wyoming. Abraxas currently holds over 56,000 contiguous acres in the Powder
River Basin in East Central Wyoming.  Abraxas has drilled and currently operates
five wells in Converse and Niobrara  counties that were  completed in the Turner
and Niobrara  formations.  Abraxas  owns a 100% working  interest in these wells
that  produced an average of 31 net barrels of crude oil per day in 2003.  As of
December  31,  2003,  Abraxas had  estimated  net proved  producing  reserves in
Wyoming of 68,669  barrels of crude oil with a PV-10 of  $280,343.  During 2001,
Abraxas shot 3-D seismic over  approximately  one-third of its acreage position.
Based on  interpretation  of the 3-D  seismic  and  well  control,  Abraxas  has
identified  18  prospective  locations  on its  existing  acreage.  During 2004,
Abraxas drilled one successful well that is currently on a long-term  production
test in the Muddy formation.

     Western Canada.  Grey Wolf owns  properties in western  Canada,  consisting
primarily of natural gas reserves and  undeveloped  acreage in the  provinces of
Alberta  and  British  Columbia.  Grey  Wolf's  Alberta  properties  are  in two
concentrated  areas: the Caroline field, 60 miles northwest of Calgary,  and the
Peace River Arch area in northwestern  Alberta. Grey Wolf entered into a farmout
agreement  with   PrimeWest  in  connection   with  the  sale  of  our  Canadian


                                       74


subsidiaries in January 2003 to jointly develop these areas in the future.  Grey
Wolf's other  Canadian  operations are located in the Ladyfern area of northeast
British  Columbia.  During 2003,  Grey Wolf drilled a total of 18 new wells (8.1
net) with a 95% success rate.  During the nine months ended  September 30, 2004,
Grey Wolf drilled a total of 11 new wells (5.6 net) with a 91% success rate.

     As of December 31, 2003,  Grey Wolf had  estimated  net proved  reserves of
21.0  Bcfe (77%  natural  gas)  with a PV-10 of $55.2  million  of which 76% was
attributable to proved developed reserves. For the year ended December 31, 2003,
the Canadian  properties  produced an average of  approximately  111 net Bbls of
crude oil and NGLs per day and 2,328 net Mcf of natural gas per day.

Markets and Customers

     The revenue generated by our operations is highly dependent upon the prices
of, and demand  for,  natural gas and crude oil.  Historically,  the markets for
natural  gas and crude oil have been  volatile  and are likely to continue to be
volatile in the future.  The prices we receive for our natural gas and crude oil
production  are  subject to wide  fluctuations  and depend on  numerous  factors
beyond our control  including  seasonality,  the  condition of the United States
economy  (particularly the  manufacturing  sector),  foreign imports,  political
conditions in other crude oil-producing and natural gas-producing countries, the
actions of the  Organization  of  Petroleum  Exporting  Countries  and  domestic
regulation, legislation and policies. Decreases in the prices of natural gas and
crude oil have had,  and could  have in the  future,  an  adverse  effect on the
carrying value of our proved  reserves and our revenue,  profitability  and cash
flow from operations.  You should read the discussion under "Risk Factors--Risks
Relating to Our  Business--Market  conditions for natural gas and crude oil, and
particularly volatility of prices for natural gas and crude oil, could adversely
affect our revenues,  cash flows,  profitability  and growth" and  "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Critical  Accounting  Policies" for more information relating to the
effects on us of decreases in natural gas and crude oil prices.

     In order to manage our  exposure  to price  risks in the  marketing  of our
natural gas and crude oil,  from time to time we have  entered  into fixed price
delivery  contracts,  financial  swaps and  natural  gas and  crude oil  futures
contracts as hedging devices. To ensure a fixed price for future production,  we
may sell a futures contract and thereafter  either (i) make physical delivery of
natural  gas or crude oil to comply  with such  contract  or (ii) buy a matching
futures  contract to unwind our futures  position and sell our  production  to a
customer. These contracts may expose us to the risk of financial loss in certain
circumstances,  including instances where production is less than expected,  our
customers fail to purchase or deliver the  contracted  quantities of natural gas
or crude oil, or a sudden,  unexpected event  materially  impacts natural gas or
crude oil prices.  These contracts may also restrict our ability to benefit from
unexpected  increases  in natural gas and crude oil prices.  You should read the
discussion under  "Management's  Discussion and Analysis of Financial  Condition
And Results of  Operations--Liquidity  and Capital Resources," and "Quantitative
and Qualitative  Disclosures about Market  Risk--Commodity  Price Risk" for more
information regarding our historical hedging activities.

     Substantially  all of our  natural  gas and  crude  oil is sold at  current
market prices under  short-term  arrangements,  as is customary in the industry.
During  the year  ended  December  31,  2003,  three  purchasers  accounted  for
approximately  80% of our United  States  natural  gas and crude oil  sales.  We
believe  that there are  numerous  other  companies  available  to purchase  our
natural  gas and crude oil and that the loss of one or more of these  purchasers
would not  materially  affect our ability to sell natural gas and crude oil. The
prices we realize  for the sale of our  natural gas and crude oil are subject to
our hedging  activities.  You should  read the  discussion  under  "Management's
Discussion    and   Analysis   of   Financial    Condition    And   Results   of
Operations--Liquidity  and Capital  Resources" and "Quantitative and Qualitative
Disclosures  about  Market  Risk--Commodity  Price  Risk"  for  more  historical
information regarding our hedging activities.




                                       75



Exploratory and Developmental Acreage

     Our principal natural gas and crude oil properties consist of non-producing
and producing  natural gas and crude oil leases,  including  reserves of natural
gas and crude oil in place.  The  following  table  indicates  our  interest  in
developed and undeveloped acreage as of December 31, 2003:


             
                                                     Developed and Undeveloped Acreage
                                 -----------------------------------------------------------------------
                                                         As of December 31, 2003
                                 -----------------------------------------------------------------------
                                       Developed Acreage                      Undeveloped Acreage
                                 ---------------------------------   -----------------------------------
                                   Gross Acres         Net Acres        Gross Acres        Net Acres
                                 ---------------   ---------------   --------------   ------------------
           Grey Wolf
                                                                                    
                Canada......          18,238              9,075          155,246             93,866
           Abraxas
                Texas.......          23,671             18,978            5,864              4,692
                Wyoming.....           3,200              3,200           57,431             53,519
                N. Dakota...               -                  -               80                 24
                                 ---------------   ---------------   --------------   ------------------
                  Total.....          45,109             31,253          218,621            152,101
                                 ===============   ===============   ==============   ==================


Productive Wells

     The  following  table sets forth our total gross and net  productive  wells
expressed separately for natural gas and crude oil, as of December 31, 2003:



                                                                  Productive Wells
                                    ---------------------------------------------------------------------
                                                              As of December 31, 2003
                                    ---------------------------------------------------------------------
                                               Crude Oil                            Natural Gas
                                    --------------------------------   ----------------------------------
                                        Gross               Net             Gross              Net
                                    ---------------   --------------   ---------------   ----------------
           Grey Wolf
                                                                                     
                Canada.........            29.0               5.1            205.0              17.0
           Abraxas
                Texas..........           140.5             112.6             60.5              44.7
                Wyoming........             5.0               5.0             18.0                 -
                N. Dakota......             1.0                 -                -                 -
                                    ---------------   --------------   ---------------   ----------------
                   Total.......           175.5             122.7            283.5              61.7
                                    ===============   ==============   ===============   ================


Reserves Information

     The natural gas and crude oil  reserves  of Abraxas'  operations  only have
been  estimated as of January 1, 2004,  January 1, 2003, and January 1, 2002, by
DeGolyer  and  MacNaughton,  of Dallas,  Texas.  The  reserves  of the  Canadian
operations as of January 1, 2004 have been estimated by DeGolyer and MacNaughton
and the reserves as of January 1, 2002 were estimated by McDaniel and Associates
Consultants Ltd. of Calgary,  Alberta. The January 1, 2003 reserves attributable
to the  Canadian  operations  were  estimated  internally.  The  January 1, 2004
reserves  related to an override  which was retained by Grey Wolf after the sale
of certain Canadian assets, were estimated internally. Natural gas and crude oil
reserves  and  the  estimates  of the  present  value  of  future  net  revenues
therefrom,  were  determined  based on then  current  prices and costs.  Reserve
calculations  involve the estimate of future net recoverable reserves of natural
gas and crude  oil and the  timing  and  amount of  future  net  revenues  to be
received therefrom.  Such estimates are not precise and are based on assumptions
regarding a variety of factors, many of which are variable and uncertain.



                                       76

     The following table sets forth certain  information  regarding estimates of
our crude oil,  natural gas  liquids  and natural gas  reserves as of January 1,
2002, January 1, 2003 and January 1, 2004:



                                                  Abraxas/U.S.                             Grey Wolf/Canada(1)
                                           Estimated Proved Reserves                   Estimated Proved Reserves
                                           -------------------------                   -------------------------
                                 Proved            Proved            Total             Proved             Proved            Total
                               Developed        Undeveloped          Proved           Developed        Undeveloped         Proved
                              --------------    ---------------    ------------    -------------    ---------------    ------------

As of January 1, 2004
                                                                                                             
     Crude oil (MBbls)            1,791             1,264              3,055                260              315               575
     NGLs (MBbls)                    95               170                265                167               73               240
     Natural gas (MMcf)          39,372            40,830             80,202             13,027            3,055            16,082

As of January 1, 2003
     Crude oil (MBbls)            1,647             1,317              2,964                134                -               134
     NGLs (MBbls)                   105               168                273              1,117              117             1,234
     Natural gas (MMcf)          34,776            43,419             78,195             55,598            5,039            60,637

As of January 1, 2002
     Crude oil (MBbls)            1,841             1,170              3,011                139                -               139
     NGLs (MBbls)                 1,051               345              1,396              2,016              240             2,256
     Natural gas (MMcf)          40,514            67,954            108,468             70,729            9,560            80,289
------------------


(1)  January 2002 and 2003 numbers include reserves of Canadian  operations sold
     in the January 2003 financial restructuring.


     The process of estimating natural gas and crude oil reserves is complex and
involves  decisions and  assumptions in the evaluation of available  geological,
geophysical,  engineering  and economic  data.  Therefore,  these  estimates are
imprecise.

     Actual  future  production,  natural  gas and crude oil  prices,  revenues,
taxes,   development   expenditures,   operating   expenses  and  quantities  of
recoverable  natural gas and crude oil reserves most likely will vary from those
estimated.  Any  significant  variance  could  materially  affect the  estimated
quantities  and  present  value of  reserves  set forth in this  prospectus.  In
addition,  we may adjust  estimates  of proved  reserves  to reflect  production
history,  results of exploration  and  development,  prevailing  natural gas and
crude oil prices and other factors, many of which are beyond our control.

     You  should  not  assume  that the  present  value of future  net  revenues
referred to in this  prospectus  is the current  market  value of our  estimated
natural gas and crude oil reserves.  In accordance  with SEC  requirements,  the
estimated  discounted  future net cash flows from proved  reserves are generally
based  on  prices  and  costs  as of the  end of the  year of the  estimate,  or
alternatively,  if prices  subsequent to that date have increased,  a price near
the periodic  filing date of our financial  statements.  Because we use the full
cost  method to account for our  natural  gas and crude oil  operations,  we are
susceptible to significant  non-cash charges during times of volatile  commodity
prices  because the full cost pool may be impaired  when prices are low. At June
30, 2002, we incurred a ceiling test writedown of approximately  $116.0 million.
A ceiling test writedown does not impact cash flow from operating activities but
does reduce our stockholders' equity and reported earnings. We cannot assure you
that we will not experience  additional  ceiling  limitation  write-downs in the
future. For more information  regarding the full cost method of accounting,  you
should read the  information  under  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operation--Critical Accounting Policies."

     Actual future  prices and costs may be materially  higher or lower than the
prices  and  costs as of the end of the year of the  estimate.  Any  changes  in
consumption by natural gas purchasers or in governmental regulations or taxation
will also affect actual future net cash flows. The timing of both the production
and the expenses from the  development  and  production of natural gas and crude
oil  properties  will  affect  the  timing of actual  future net cash flows from
proved reserves and their present value. In addition,  the 10% discount  factor,
which is required  by the SEC to be used in  calculating  discounted  future net
cash flows for reporting purposes, is not necessarily the most accurate discount


                                       77


factor.  The effective  interest rate at various times and the risks  associated
with us or the  natural gas and crude oil  industry  in general  will affect the
accuracy of the 10% discount factor.

     The  estimates of our reserves  are based upon  various  assumptions  about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of natural gas and crude oil reserves, future net
revenue from proved reserves and the PV-10 thereof for the natural gas and crude
oil properties  described in this  prospectus  are based on the assumption  that
future natural gas and crude oil prices remain the same as natural gas and crude
oil prices at December 31, 2003.  The average  sales prices as of such date used
for purposes of such estimates were $31.03 per Bbl of crude oil,  $27.19 per Bbl
of NGLs and $5.05 per Mcf of natural  gas. It is also  assumed that we will make
future capital  expenditures  of  approximately  $50.4 million in the aggregate,
which are  necessary  to develop  and  realize  the value of proved  undeveloped
reserves on our  properties.  Any  significant  variance in actual  results from
these assumptions could also materially affect the estimated  quantity and value
of reserves set forth herein.

     We file reports of our  estimated  natural gas and crude oil reserves  with
the Department of Energy and the Bureau of the Census.  The reserves reported to
these  agencies  are  required  to be  reported  on a gross  operated  basis and
therefore are not comparable to the reserve data reported herein.

Crude Oil, Natural Gas Liquids, and Natural Gas Production and Sales Prices

     The following table presents our net crude oil, net natural gas liquids and
net natural gas  production,  the average sales price per Bbl of natural gas and
crude oil liquids and per Mcf of natural gas  produced  and the average  cost of
production  per BOE of production  sold,  for the three years ended December 31,
2003, and for the nine months ended September 30, 2004.



                                                                                                           September 30,
                                                    2001 (1)(2)        2002 (1)(2)        2003 (1)(2)         2004 (1)
                                                   --------------    ----------------    --------------    ---------------
                                                                                                       
Crude oil production (Bbls)                            454,063            292,264            251,567           190,981
Natural gas production (Mcf)                        17,495,598         15,452,721          6,189,359         5,092,826
Natural gas liquids production (Bbls)                  277,969            242,032             37,258            41,043
MMcfe                                                   21,888             18,658              7,922             6,485
Average sales price per Bbl of crude oil           $     24.63       $      24.34        $     30.32       $     37.84
Average sales price per Mcf of natural gas         $      3.20       $       2.55        $      4.78       $      5.05
Average sales price per Bbl of natural gas         
   liquids                                         $     21.51       $      17.94        $     24.47       $     32.00
Average sales price per Mcfe                       $      3.34       $       2.72        $      4.81       $      5.28
Average cost of production  per Mcfe produced (3)  $      0.85       $       0.82        $      1.21       $      1.44


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

(1)  Average sales prices are net of hedging activity.

(2)  Data for  2001,  2002 and the  first  23 days of  2003,  includes  Canadian
     subsidiaries sold in January 2003.

(3)  Natural gas and crude oil were combined by converting natural gas and crude
     oil  liquids to a Mcf  equivalent  on the basis of 1 Bbl of natural gas and
     crude oil liquid  equals 6 Mcf of natural  gas.  Production  costs  include
     direct operating costs, ad valorem taxes and gross production taxes.


                                       78

Drilling Activities

         The following table sets forth our gross and net working interests in
exploratory and development wells drilled during the three years ended December
31, 2003, and for the nine months ended September 30, 2004.



                                                                                                     September 30,
                             2001                     2002                      2003                     2004
                     ---------------------    ----------------------    ---------------------    ----------------------
                      Gross         Net         Gross         Net        Gross         Net         Gross         Net
                     ---------    --------    ----------    --------    ---------    --------    ----------     -------
Exploratory
  Productive
                                                                                          
     Crude oil            -           -           1.0          1.0         1.0         1.0           2.0          2.0
     Natural gas        2.0         1.0           3.0          0.5           -           -             -            -
     Dry holes          1.0          .5           3.0          1.5         1.0         0.5             -            -
                     ---------    --------    ----------    --------    ---------    --------    ----------     -------
         Total          3.0         1.5           7.0          3.0         2.0         1.5           2.0          2.0
                     =========    ========    ==========    ========    =========    ========    ==========     =======
Development
  Productive
     Crude oil          2.0         2.0             -            -         2.0         2.0           3.0          3.0
     Natural gas       13.0        11.0          14.0         11.8        20.0         8.3           7.0          2.2
     Dry holes            -           -           1.0          1.0           -           -           2.0          1.3
                     ---------    --------    ----------    --------    ---------    --------    ----------     -------
        Total          15.0        13.0          15.0         12.8        22.0        10.3          12.0          6.5
                     =========    ========    ==========    ========    =========    ========    ==========     =======


Competition

     We operate in a highly competitive environment. Competition is particularly
intense with respect to the acquisition of desirable undeveloped natural gas and
crude oil properties.  The principal  competitive  factors in the acquisition of
such undeveloped natural gas and crude oil properties include the staff and data
necessary  to  identify,  investigate  and  purchase  such  properties,  and the
financial resources necessary to acquire and develop such properties. We compete
with major and  independent  natural gas and crude oil companies for  properties
and the  equipment  and labor  required to develop and operate such  properties.
Many of these  competitors  have  financial  and other  resources  substantially
greater than ours.

     The principal  resources  necessary for the  exploration  and production of
natural gas and crude oil are  leasehold  prospects  under which natural gas and
crude oil reserves may be  discovered,  drilling  rigs and related  equipment to
explore for such reserves and  knowledgeable  personnel to conduct all phases of
natural gas and crude oil  operations.  We must compete for such  resources with
both  major  natural  gas and crude oil  companies  and  independent  operators.
Although we believe our current  operating and financial  resources are adequate
to preclude any significant disruption of our operations in the immediate future
we cannot assure you that such materials and resources will be available to us.

     We face  significant  competition  for  obtaining  additional  natural  gas
supplies for gathering and processing  operations,  for marketing NGLs,  residue
gas,  helium,  condensate  and  sulfur,  and for  transporting  natural  gas and
liquids.  Our principal  competitors  include major integrated oil companies and
their  marketing  affiliates  and  national  and local gas  gatherers,  brokers,
marketers and distributors of varying sizes, financial resources and experience.
Certain  competitors,  such as major natural gas and crude oil  companies,  have
capital resources and control supplies of natural gas substantially greater than
ours.  Smaller  local  distributors  may enjoy a  marketing  advantage  in their
immediate service areas.

     We compete against other  companies in our natural gas processing  business
both  for  supplies  of  natural  gas and for  customers  to  which  we sell our
products. Competition for natural gas supplies is based primarily on location of
natural gas gathering  facilities  and natural gas gathering  plants,  operating
efficiency  and  reliability  and  ability  to obtain a  satisfactory  price for
products  recovered.  Competition  for customers is based primarily on price and
delivery capabilities.


                                       79

Regulation of Natural Gas and Crude Oil Activities

     The exploration, production and transportation of all types of hydrocarbons
are subject to significant governmental regulations. Our operations are affected
from time to time in varying  degrees by  political  developments  and  Federal,
state, provincial and local laws and regulations. In particular, natural gas and
crude oil  production  operations  and economics  are, or in the past have been,
affected by industry  specific  price  controls,  taxes,  conservation,  safety,
environmental,  and other laws relating to the petroleum industry, by changes in
such laws and by constantly changing administrative regulations.

     Price  Regulations.  In  the  past,  maximum  selling  prices  for  certain
categories of crude oil,  natural gas,  condensate and NGLs in the United States
were subject to significant  Federal  regulation.  At the present time, however,
all sales of our crude oil,  natural gas,  condensate  and NGLs  produced in the
United States under private  contracts  may be sold at market  prices.  Congress
could,  however,  reenact price  controls in the future.  If controls that limit
prices to below  market  rates are  instituted,  our revenue  would be adversely
affected.

     Natural gas and crude oil exported  from Canada is subject to regulation by
the National  Energy Board ("NEB") and the  government of Canada.  Exporters are
free to negotiate prices and other terms with  purchasers,  provided that export
contracts  in  excess  of two  years  must  continue  to meet  certain  criteria
prescribed by the NEB and the  government  of Canada.  Natural gas and crude oil
exports for a term of less than two years must be made pursuant to an NEB order,
or, in the case of exports for a longer duration, pursuant to an NEB license and
Governor in Council approval.

     The provincial  governments of Alberta,  British  Columbia and Saskatchewan
also regulate the volume of natural gas that may be removed from these provinces
for  consumption  elsewhere  based  on such  factors  as  reserve  availability,
transportation arrangements and marketing considerations.

     The North  American  Free Trade  Agreement.  On January 1, 1994,  the North
American Free Trade  Agreement  ("NAFTA")  among the  governments  of the United
States, Canada and Mexico became effective.  In the context of energy resources,
Canada remains free to determine  whether  exports to the U.S. or Mexico will be
allowed provided that any export  restrictions do not: (i) reduce the proportion
of energy resources exported relative to the total supply of the energy resource
(based upon the proportion  prevailing in the most recent 36 month period); (ii)
impose an export price higher than the domestic  price;  or (iii) disrupt normal
channels of supply.  All three  countries are prohibited  from imposing  minimum
export or import price requirements.

     NAFTA contemplates the reduction of Mexican  restrictive trade practices in
the energy sector and prohibits  discriminatory  border  restrictions and export
taxes.  The agreement  also  contemplates  clearer  disciplines on regulators to
ensure fair  implementation of any regulatory changes and to minimize disruption
of  contractual  arrangements,  which is  important  for  Canadian  natural  gas
exports.  The Texas Railroad  Commission has recently become the lead agency for
Texas for coordinating  permits  governing Texas to Mexico cross border pipeline
projects.  The availability of selling natural gas into Mexico may substantially
impact the interstate natural gas market on all producers in the coming years.

     United  States  Natural  Gas  Regulation.  Historically,  the  natural  gas
industry as a whole has been more heavily  regulated than the crude oil or other
liquid   hydrocarbons   market.   Most  regulations  focused  on  transportation
practices.   Currently,  the  Federal  Energy  Regulatory  Commission  ("FERC"),
requires  each  interstate  pipeline  to,  among other  things,  "unbundle"  its
traditional  bundled sales services and create and make available on an open and
nondiscriminatory   basis  numerous  constituent  services  (such  as  gathering
services, storage services, firm and interruptible  transportation services, and
standby sales and natural gas balancing services), and to adopt a new ratemaking
methodology to determine appropriate rates for those services. To the extent the
pipeline  company or its sales affiliate  markets natural gas as a merchant,  it
does so  pursuant to private  contracts  in direct  competition  with all of the
sellers,  such as us; however,  pipeline  companies and their affiliates are not
required  to remain  "merchants"  of  natural  gas,  and most of the  interstate
pipeline  companies  have  become   "transporters   only,"  although  many  have
affiliated marketers.

     Transportation  pipeline  availability  and shipping cost are major factors
affecting the  production and sale of natural gas. Our physical sales of natural
gas are  affected  by the  actual  availability,  terms  and  cost  of  pipeline


                                       80


transportation.  The price and terms for access onto the pipeline transportation
systems remain subject to extensive Federal  regulation.  Although FERC does not
directly  regulate our production and marketing  activities,  it does affect how
buyers  and  sellers  gain  access  to and use of the  necessary  transportation
facilities and how we and our competitors  sell natural gas in the  marketplace.
FERC continues to review and modify its regulations regarding the transportation
of natural  gas.  For  example,  FERC has  recently  begun a broad review of its
natural gas transportation regulations, including how its regulations operate in
conjunction with state proposals for natural gas marketing  restructuring and in
the increasingly  competitive marketplace for all post-wellhead services related
to natural gas.

     In  recent  years  FERC  also has  pursued  a number  of  important  policy
initiatives which could significantly affect the marketing of natural gas in the
United States.  Most of these initiatives are intended to enhance competition in
natural gas markets.  FERC rules  encouraging  "spin  downs," or the breakout of
unregulated  gathering activities from regulated  transportation  services,  may
have the adverse  effect of increasing the cost of doing business on some in the
industry,  including us, as a result of the geographic monopolization of certain
facilities by their new, unregulated owners. As to all of FERC initiatives,  the
ongoing,  or,  in some  instances,  preliminary  and  evolving  nature  makes it
impossible  at this time to  predict  their  ultimate  impact  on our  business.
However,  we do not  believe  that  any  FERC  initiatives  will  affect  us any
differently  than  other  natural  gas  producers  and  marketers  with which we
compete.

     FERC  decisions  involving  onshore  facilities  are more  liberal in their
reliance upon traditional  tests for determining what facilities are "gathering"
and therefore exempt from federal regulatory  control.  In many instances,  what
was  in  the  past  classified  as  "transmission"  may  now  be  classified  as
"gathering."  We ship  certain of our natural gas through  gathering  facilities
owned by  others,  including  interstate  pipelines,  under  existing  long term
contractual  arrangements.  Although  FERC  decisions  create the  potential for
increasing  the  cost of  shipping  our  natural  gas on third  party  gathering
facilities,  our shipping  activities have not been materially affected by these
decisions.

     In summary, all of FERC activities related to the transportation of natural
gas result in improved  opportunities  to market our  physical  production  to a
variety of buyers and market places, while at the same time increasing access to
pipeline   transportation  and  delivery  services.   Additional  proposals  and
proceedings  that might affect the natural gas industry in the United States are
considered from time to time by Congress,  FERC, state regulatory bodies and the
courts.  We cannot predict when or if any such proposals might become  effective
or their  effect,  if any,  on our  operations.  The  natural  gas and crude oil
industry  historically  has  been  very  heavily  regulated;  thus  there  is no
assurance that the less stringent  regulatory  approach recently pursued by FERC
and Congress will continue indefinitely into the future.

     State  and  Other  Regulation.  All of the  jurisdictions  in  which we own
producing  natural  gas and  crude  oil  properties  have  statutory  provisions
regulating  the  exploration  for and  production  of natural gas and crude oil.
These  include  provisions  requiring  permits  for the  drilling  of wells  and
maintaining  bonding  requirements  in  order  to drill  or  operate  wells  and
provisions  relating to the location of wells, the method of drilling and casing
wells,  the  surface  use and  restoration  of  properties  upon which wells are
drilled and the  plugging  and  abandoning  of wells.  Our  operations  are also
subject  to  various  conservation  laws  and  regulations.  These  include  the
regulation  of the size of drilling and spacing  units or proration  units on an
acreage basis and the density of wells which may be drilled and the  unitization
or pooling of natural gas and crude oil properties.  In this regard, some states
and provinces  allow the forced  pooling or  integration of tracts to facilitate
exploration  while other states and provinces rely on voluntary pooling of lands
and leases.  In  addition,  state and  provincial  conservation  laws  establish
maximum  rates of  production  from  natural gas and crude oil wells,  generally
prohibit the venting or flaring of natural gas and impose  certain  requirements
regarding the ratability of production. Some states, such as Texas and Oklahoma,
have, in recent years,  reviewed and  substantially  revised methods  previously
used to make monthly determinations of allowable rates of production from fields
and individual wells. The effect of all of these conservation  regulations is to
limit the speed,  timing and amounts of natural gas and crude oil we can produce
from our wells, and to limit the number of wells or the location at which we can
drill.

     State and provincial  regulation of gathering facilities generally includes
various safety,  environmental,  and in some  circumstances,  non-discriminatory
take requirements,  but does not generally entail rate regulation. In the United
States,  natural gas gathering has received greater regulatory  scrutiny at both
the  state  and  Federal  levels  in  the  wake  of  the   interstate   pipeline
restructuring  under FERC Order 636. For example,  the Texas Railroad Commission


                                       81


enacted a Natural Gas  Transportation  Standards  and Code of Conduct to provide
regulatory  support for the State's  more active  review of rates,  services and
practices  associated with the gathering and transportation of natural gas by an
entity  that  provides  such  services to others for a fee, in order to prohibit
such entities from unduly discriminating in favor of their affiliates.

     For those  operations  on U.S.  Federal or Indian oil and gas leases,  such
operations must comply with numerous regulatory restrictions,  including various
non-discrimination  statutes,  and certain of such  operations must be conducted
pursuant to certain  on-site  security  regulations  and other permits issued by
various  Federal  agencies.  In  addition,  in the United  States,  the Minerals
Management Service ("MMS") prescribes or severely limits the types of costs that
are  deductible  transportation  costs for  purposes  of  royalty  valuation  of
production sold off the lease. In particular,  MMS prohibits  deduction of costs
associated with marketer fees, cash out and other pipeline imbalance  penalties,
or long-term  storage  fees.  Further,  the MMS has been engaged in a process of
promulgating  new rules and  procedures for  determining  the value of crude oil
produced from Federal lands for purposes of  calculating  royalties  owed to the
government.  The natural gas and crude oil  industry as a whole has resisted the
proposed  rules under an  assumption  that royalty  burdens  will  substantially
increase.  We cannot predict what, if any,  effect any new rule will have on our
operations.

     Canadian Royalty Matters. In addition to Canadian federal regulation,  each
province has  legislation and  regulations  that govern land tenure,  royalties,
production rates, environmental protection and other matters. The royalty regime
is a  significant  factor  in the  profitability  of crude oil and  natural  gas
production.  Royalties  payable on production  from lands other than Crown lands
are determined by negotiations  between the mineral owner and the lessee.  Crown
royalties are determined by governmental regulation and are generally calculated
as a percentage of the value of the gross production,  and the rate of royalties
payable  generally  depends  in  part  on  prescribed  preference  prices,  well
productivity,  geographical  location,  field  discovery  date  and the type and
quality of the petroleum product produced.

     From time to time the  governments  of Alberta  and British  Columbia,  the
provinces  where  almost  all  of  Grey  Wolf's  production  is  located,   have
established  incentive  programs  which have included  royalty rate  reductions,
royalty  holidays and tax credits for the purpose of  encouraging  crude oil and
natural  gas  exploration  or  enhanced  planning  projects.  All of Grey Wolf's
production is from oil and gas rights which have been granted by the Provinces.

     The  Province of Alberta  requires  the payment from lessees of oil and gas
rights of annual rental payments as well as royalty  payments.  Regulations made
pursuant to the Mines and Minerals Act (Alberta) provide various  incentives for
exploring and developing crude oil reserves in Alberta.  Crude oil produced from
horizontal  extensions  commenced  at  least  five  years  after  the  well  was
originally  spudded may qualify for a royalty  reduction.  An 8,000 cubic meters
exemption  is available  to  production  from a well that has not produced for a
12-month  period prior to January 31, 1993 or 24 months  following such date. In
addition,  crude oil  production  from  eligible  new field and new pool wildcat
wells and deeper pool test wells spudded or deepened  after  September 30, 1992,
is entitled to a 12-month  royalty  exemption  (to a maximum of CDN $1 million).
Crude oil produced from low productivity wells,  enhanced recovery schemes (such
as  injection  wells)  and  experimental  projects  is also  subject  to royalty
reductions.

     The  Alberta  government  classifies  conventional  crude  oil  into  three
categories,  being Old Oil, New Oil and Third Tier Oil.  Each has a base royalty
rate of 10%.  The rate  caps on the  categories  are 25% for oil from  crude oil
pools discovered after September 30, 1992, being the Third Tier Oil, 30% for oil
from pools or pool extensions discovered after April 1, 1974, from wells drilled
or deepened after October 31, 1991 or from  reactivated  wells and which are not
Third Tier Oil, and 35% for Old Oil.

     Effective  January 1, 1994,  the  calculation  and  payment of natural  gas
royalties  became subject to a simplified  process.  The royalty reserved to the
Crown, subject to various incentives,  is between 15% or 30%, in the case of new
natural gas, and between 15% and 35%, in the case of old natural gas,  depending
upon a prescribed or corporate  average  reference  price.  Natural gas produced
from qualifying exploratory gas wells spudded or deepened after July 1, 1985 and
before  June 1, 1988 are  eligible  for a royalty  exemption  for a period of 12
months,  or such  later  time that the value of the  exempted  royalty  quantity
equals a  prescribed  maximum  amount.  Natural  gas  produced  from  qualifying


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intervals  in eligible  natural  gas wells  spudded or deepened to a depth below
2,500 meters is also subject to a royalty exemption, the amount of which depends
on the depth of the well.

     In  Alberta,  a producer  of crude oil or natural gas is entitled to credit
against the royalties  payable to the Crown by virtue of the Alberta Royalty Tax
Credit ("ARTC") program. The ARTC program is based on a price-sensitive formula,
and the ARTC rate  currently  varies  between 75% for prices for crude oil at or
below  CDN $100 per  cubic  meter  and 35% for  prices  above CDN $210 per cubic
meter.  The ARTC rate is  currently  applied to a maximum of CDN $2.0 million of
Alberta  Crown  royalties  payable  for each  producer  or  associated  group of
producers. Crown royalties on production from producing properties acquired from
corporations claiming maximum entitlement to ARTC will generally not be eligible
for ARTC. The rate is  established  quarterly  based on average "par price",  as
determined  by the  Alberta  Department  of Energy  for the  previous  quarterly
period.

     Producers  of  crude  oil and  natural  gas in  British  Columbia  are also
required to pay annual rental  payments in respect of Crown leases and royalties
and freehold  production  taxes in respect of crude oil and natural gas produced
from Crown and freehold lands  respectively.  British  Columbia also  classifies
conventional  crude oil into the three  categories of Old Oil, New Oil and Third
Tier Oil. The amount payable as a royalty in respect of crude oil depends on the
vintage of the crude oil (whether it was produced from a pool discovered  before
or after  October 31, 1975) or a pool in which no well was  completed on June 1,
1998),  the quantity of crude oil produced in a month and the value of the crude
oil.  Crude oil produced from a discovery well may be exempt from the payment of
a  royalty  for the first 36 months of  production  to a maximum  production  of
11,450 m3. The royalty  payable on natural gas is  determined by a sliding scale
based on a  classification  of the gas based on whether it is  conservation  gas
(gas  associated  with marketed oil  production)  and by drilling and land lease
date and on a reference price which is the greater of the amount obtained by the
producer and at prescribed minimum price. Conservation gas has a minimum royalty
of 8%. The  royalty  rate ranges  from  between 9% and 27% for wells  drilled on
lands issued after May 31, 1998 and before January 1, 2003 and completed  within
5 years of the date the lands  were  issued  and  between  12% and 27% for wells
spudded  after May 31, 1998 on lands where  rights had been issued as of May 31,
1998.

     Environmental  Matters.  Our  operations  are subject to numerous  Federal,
state,  provincial and local laws and  regulations  controlling  the generation,
use,  storage,  and  discharge of materials  into the  environment  or otherwise
relating to the protection of the  environment.  These laws and  regulations may
require the acquisition of a permit or other  authorization  before construction
or drilling  commences;  restrict the types,  quantities,  and concentrations of
various  substances that can be released into the environment in connection with
drilling,  production, and natural gas processing activities;  suspend, limit or
prohibit  construction,  drilling and other  activities  in certain  lands lying
within  wilderness,  wetlands,  and  other  protected  areas;  require  remedial
measures to mitigate  pollution from historical and on-going  operations such as
use of pits and plugging of abandoned wells;  restrict injection of liquids into
subsurface  strata  that may  contaminate  groundwater;  and impose  substantial
liabilities for pollution resulting from our operations.  Environmental  permits
required for our  operations  may be subject to  revocation,  modification,  and
renewal  by  issuing  authorities.  Governmental  authorities  have the power to
enforce  compliance  with their  regulations  and permits,  and  violations  are
subject to injunction,  civil fines, and even criminal penalties. Our management
believes that we are in substantial  compliance with current  environmental laws
and  regulations,  and that we will not be  required  to make  material  capital
expenditures  to comply with existing  laws.  Nevertheless,  changes in existing
environmental  laws and  regulations  or  interpretations  thereof  could have a
significant  impact on us as well as the natural  gas and crude oil  industry in
general,  and thus we are unable to predict  the  ultimate  cost and  effects of
future changes in environmental laws and regulations.

     In  the  United   States,   the   Comprehensive   Environmental   Response,
Compensation  and  Liability  Act  ("CERCLA"),  also known as  "Superfund,"  and
comparable state statutes impose strict, joint, and several liability on certain
classes of persons who are  considered to have  contributed  to the release of a
"hazardous  substance" into the environment.  These persons include the owner or
operator of a disposal site or sites where a release occurred and companies that
generated,  disposed or arranged  for the disposal of the  hazardous  substances
released  at  the  site.   Under  CERCLA  such  persons  or  companies   may  be
retroactively  liable for the costs of cleaning up the hazardous substances that
have been released into the  environment  and for damages to natural  resources,
and it is common for  neighboring  land owners and other  third  parties to file
claims for personal  injury,  property  damage,  and recovery of response  costs
allegedly caused by the hazardous substances released into the environment.  The
Resource  Conservation  and Recovery Act ("RCRA") and comparable  state statutes
govern the  disposal  of "solid  waste"  and  "hazardous  waste"  and  authorize
imposition of  substantial  civil and criminal  penalties for failing to prevent
surface  and  subsurface  pollution,  as  well  as to  control  the  generation,


                                       83


transportation,  treatment, storage and disposal of hazardous waste generated by
natural  gas and crude oil  operations.  Although  CERCLA  currently  contains a
"petroleum  exclusion" from the definition of "hazardous  substance," state laws
affecting our  operations  impose  cleanup  liability  relating to petroleum and
petroleum related products,  including crude oil cleanups. In addition, although
RCRA regulations  currently  classify certain oilfield wastes which are uniquely
associated  with  field  operations  as   "non-hazardous,"   such   exploration,
development  and  production  wastes  could be  reclassified  by  regulation  as
hazardous  wastes  thereby  administratively  making such wastes subject to more
stringent handling and disposal requirements.

     We currently own or lease,  and have in the past owned or leased,  numerous
properties that for many years have been used for the exploration and production
of natural gas and crude oil. Although we utilized  standard industry  operating
and disposal  practices at the time,  hydrocarbons or other wastes may have been
disposed of or released on or under the  properties  we owned or leased or on or
under  other  locations  where  such  wastes  have been taken for  disposal.  In
addition,  many of these  properties  have been  operated by third parties whose
treatment and disposal or release of  hydrocarbons or other wastes was not under
our control.  These properties and the wastes disposed thereon may be subject to
CERCLA,  RCRA,  and analogous  state laws.  Our  operations are also impacted by
regulations  governing the disposal of naturally occurring radioactive materials
("NORM").  We must comply with the Clean Air Act and  comparable  state statutes
which  prohibit the  emissions of air  contaminants,  although a majority of our
activities are exempted under a standard exemption.  Moreover,  owners,  lessees
and  operators  of  natural  gas and crude oil  properties  are also  subject to
increasing  civil  liability  brought by surface  owners and adjoining  property
owners.  Such claims are  predicated on the damage to or  contamination  of land
resources  occasioned  by drilling and  production  operations  and the products
derived  therefrom,  and are  usually  causes  of  action  based on  negligence,
trespass, nuisance, strict liability and fraud.

     United States Federal regulations also require certain owners and operators
of facilities  that store or otherwise  handle crude oil, such as us, to prepare
and  implement  spill  prevention,  control and  countermeasure  plans and spill
response plans relating to possible  discharge of crude oil into surface waters.
The Federal Oil Pollution Act ("OPA") contains numerous requirements relating to
prevention of, reporting of, and response to crude oil spills into waters of the
United  States.  For  facilities  that may affect state waters,  OPA requires an
operator to  demonstrate  $10 million in  financial  responsibility.  State laws
mandate crude oil cleanup programs with respect to contaminated soil.

     Grey  Wolf's  Canadian   operations  are  also  subject  to   environmental
regulation pursuant to local, provincial and federal legislation which generally
require  operations  to be conducted in a safe and  environmentally  responsible
manner.  Canadian  environmental   legislation  provides  for  restrictions  and
prohibitions  relating to the  discharge of air, soil and water  pollutants  and
other substances  produced in association with certain crude oil and natural gas
industry  operations,  and  environmental  protection  requirements,   including
certain  conditions  of  approval  and  laws  relating  to  storage,   handling,
transportation and disposal of materials or substances which may have an adverse
effect on the environment.  Environmental legislation can affect the location of
wells and  facilities  and the extent to which  exploration  and  development is
permitted.  In addition,  legislation requires that well and facilities sites be
abandoned and reclaimed to the satisfaction of provincial authorities.  A breach
of such  legislation  may  result  in the  imposition  of fines or  issuance  of
clean-up orders.

     Certain  federal  environmental  laws that may affect Grey Wolf include the
Canadian  Environmental  Assessment  Act which  ensures  that the  environmental
effects of projects receive careful  consideration  prior to licenses or permits
being issued, to ensure that projects that are to be carried out in Canada or on
federal lands do not cause significant adverse environmental effects outside the
jurisdictions  in which they are  carried  out,  and to ensure  that there is an
opportunity for public  participation in the environmental  assessment  process;
the  Canadian   Environmental   Protection   Act  ("CEPA")  which  is  the  most
comprehensive  federal environmental statute in Canada, and which controls toxic
substances  (broadly  defined),  includes standards relating to the discharge of
air,  soil and water  pollutants,  provides  for broad  enforcement  powers  and
remedies and imposes significant  penalties for violations;  the National Energy
Board  Act which can  impose  certain  environmental  protection  conditions  on
approvals issued under the Act; the Fisheries Act which prohibits the depositing
of a  deleterious  substance of any type in water  frequented  by fish or in any
place under any condition  where such  deleterious  substance may enter any such
water and provides for significant  penalties;  the Navigable Waters  Protection
Act which  requires  any work which is built in,  on,  over,  under,  through or
across any navigable water to be approved by the Minister of Transportation, and


                                       84


which  attracts  severe  penalties  and remedies for  non-compliance,  including
removal of the work.

     In  Alberta,  environmental  compliance  has been  governed  by the Alberta
Environmental  Protection and Enhancement Act ("AEPEA") since September 1, 1993.
In addition to consolidating a variety of environmental statutes, the AEPEA also
imposes certain new environmental  responsibilities on crude oil and natural gas
operators in Alberta. The AEPEA sets out environmental  standards and compliance
for  releases,  clean-up  and  reporting.  The Act provides for a broad range of
liabilities, enforcement actions and penalties.

     We are not  currently  involved  in any  administrative,  judicial or legal
proceedings  arising  under  domestic  or  foreign  Federal,   state,  or  local
environmental protection laws and regulations,  or under Federal or state common
law,  which would have a material  adverse  effect on our financial  position or
results of operations. Moreover, we maintain insurance against costs of clean-up
operations,  but we are not fully  insured  against  all such  risks.  A serious
incident of pollution may result in the suspension or cessation of operations in
the affected area.

     We believe that we have  obtained and are in  compliance  with all material
environmental permits, authorizations and approvals.

     All of our oil and gas wells will require proper  plugging and  abandonment
when they are no longer producing.  We post bonds with most regulatory  agencies
to ensure compliance with our plugging responsibility.  Plugging and abandonment
operations  and  associated  reclamation  of the  surface  production  site  are
important components of our environmental management system. We plan accordingly
for the ultimate disposition of properties that are no longer producing.

Title to Properties

     As is customary in the natural gas and crude oil  industry,  we make only a
cursory review of title to  undeveloped  natural gas and crude oil leases at the
time we acquire them. However,  before drilling commences, we require a thorough
title search to be  conducted,  and any  material  defects in title are remedied
prior to the time actual drilling of a well begins. To the extent title opinions
or other investigations reflect title defects, we, rather than the seller of the
undeveloped  property,  are typically  obligated to cure any title defect at our
expense.  If we were unable to remedy or cure any title  defect of a nature such
that it would not be prudent to commence drilling operations on the property, we
could suffer a loss of our entire investment in the property. We believe that we
have good title to our natural gas and crude oil  properties,  some of which are
subject to immaterial encumbrances,  easements and restrictions. The natural gas
and crude oil properties we own are also typically  subject to royalty and other
similar non-cost bearing interests customary in the industry.  We do not believe
that any of these  encumbrances or burdens will materially  affect our ownership
or use of our properties.

Employees

     As of September 30, 2004, Abraxas had 48 full-time  employees in the United
States,  including 3 executive officers,  3 non-executive  officers, 1 petroleum
engineer,  1  geologist,  6 managers,  1 landman,  12  secretarial  and clerical
personnel and 21 field personnel. Additionally, Abraxas retains contract pumpers
on  a  month-to-month   basis.   Abraxas  retains  independent   geological  and
engineering  consultants  from time to time on a limited  basis and  expects  to
continue to do so in the future.

     As of September 30, 2004, Grey Wolf had 13 full-time employees, including 3
executive  officers,  1  non-executive   officer,  2  petroleum   engineers,   2
geologists, 1 geophysicist, and 4 technical and clerical personnel.

Office Facilities

     Our executive and administrative offices are located at 500 North Loop 1604
East,  Suite 100, San Antonio,  Texas 78232.  We also have an office in Midland,
Texas.  These  offices,  consisting of  approximately  12,650 square feet in San
Antonio  and 570  square  feet in  Midland,  are leased  until  March 2006 at an
aggregate base rate of $20,943 per month.

                                       85


     Grey Wolf  leases  7,350  square feet of office  space in Calgary,  Alberta
pursuant to a lease, which expires in April, 2008.

Other Properties

     We own 10 acres of land, an office building,  workshop, warehouse and house
in Sinton,  Texas,  2.8 acres of land,  an office  building and 600 acres of fee
land in Scurry County,  Texas and 160 acres of land in Coke County,  Texas.  All
three properties are used for the storage of tubulars and production  equipment.
We also own 19  vehicles  which  are used in the  field by  employees.  We own 2
workover rigs, which are used for servicing our wells.

Litigation


     In  2001,  the  Company  and a  limited  partnership,  of  which  Wamsutter
Holdings,  Inc.  is the general  partner  (the  "Partnership"),  were named in a
lawsuit  filed in U.S.  District  Court in the  District of  Wyoming.  The claim
asserted  breach of  contract,  fraud  and  negligent  misrepresentation  by the
Company  and the  Partnership  related  to the  responsibility  for year 2000 ad
valorem  taxes on crude oil and natural gas  properties  sold by Abraxas and the
Partnership.  In February 2002, a summary  judgment was granted to the plaintiff
in this matter and a final  judgment in the amount of $1.3  million was entered.
The Company and the Partnership  appealed the District  Court's  judgment and on
November 3, 2004,  the U.S.  Court of Appeals for the 10th Circuit  affirmed the
District Court's  decision.  On December 14, 2004, the U.S. Court of Appeals for
the 10th  Circuit  eneteed a  mandate  for the  District  Court of  enforce  the
judgement.  As of December 27, 2004 the final judgement amount was approximately
$1.55 million (which includes  accrued and unpaid interest since February 2002).
The Company has  decided  not to pursue  further  appeals and intends to pay its
portion of the final judgement,  approximately $1 million, for which the Company
had previously established a reserve in the amount of $845,000.


     Additionally,  from time to time,  the Company is  involved  in  litigation
relating  to  claims  arising  out of its  operations  in the  normal  course of
business.  At  September  30,  2004,  the  Company  was not engaged in any legal
proceedings  that are  expected,  individually  or in the  aggregate,  to have a
material adverse effect on the Company.






                                       86

                                   MANAGEMENT

Directors and Executive Officers

     Set forth below are the names,  ages, years of service and positions of the
executive officers and directors of Abraxas. The term of the Class I director of
Abraxas expires in 2006, the term of the Class II directors  expires in 2005 and
the term of the Class III  directors  expires in 2007  (other  than Mr.  Phelps,
whose term expires in 2006).




Name and Municipality of Residence             Age    Office                                        Class


                                                                                                  
Robert L. G. Watson,                            54    Chairman of the Board, President and Chief     III
San Antonio, Texas                                    Executive Officer


Chris E. Williford,                             53    Executive Vice President, Chief Financial       --
San Antonio, Texas                                    Officer and Treasurer

Robert W. Carington, Jr.,                       43    Executive Vice President                        --
San Antonio, Texas

Craig S. Bartlett, Jr.,                         71    Director                                        II
Montclair, New Jersey

Franklin A. Burke,                              70    Director                                         I
Doyleston, Pennsylvania

Harold D. Carter,                               65    Director                                       III
Dallas, Texas

Ralph F. Cox,                                   72    Director                                        II
Ft. Worth, Texas


Barry J. Galt,                                  71    Director                                       III
Houston, Texas


Dennis E. Logue                                 60    Director                                        II
Norman, Oklahoma


James C. Phelps,                                82    Director                                       III
San Antonio, Texas


Joseph A. Wagda,                                61    Director                                        II
Danville, California


     Robert L. G. Watson has served as Chairman of the Board,  President,  Chief
Executive Officer and a director of Abraxas since 1977. From May 1996 to January
2003,  Mr.  Watson  also  served as Chairman of the Board and a director of Grey
Wolf Exploration Inc., which Abraxas sold in January 2003 and we refer to as Old
Grey Wolf.  Since  January  2003,  he has served as  Chairman of the Board and a
director of Grey Wolf. In November 1996, Mr. Watson was elected  Chairman of the
Board,  President and as a director of Canadian Abraxas,  a former  wholly-owned
Canadian  subsidiary  of  Abraxas.  Prior to  joining  Abraxas,  Mr.  Watson was
employed  in various  petroleum  engineering  positions  with  Tesoro  Petroleum
Corporation,  a natural gas and crude oil  exploration  and production  company,
from 1972 through 1977, and DeGolyer and MacNaughton,  an independent  petroleum
engineering  firm,  from 1970 to 1972. Mr. Watson received a Bachelor of Science
degree in Mechanical  Engineering from Southern Methodist University in 1972 and
a Master of Business  Administration  degree from the University of Texas at San
Antonio in 1974.

     Chris  E.  Williford  was  elected  Vice  President,  Treasurer  and  Chief
Financial  Officer of Abraxas in January 1993,  and as Executive  Vice President
and a director  of Abraxas in May 1993.  In November  1996,  Mr.  Williford  was
elected Vice President and Assistant  Secretary of Canadian Abraxas. In December
1999, Mr. Williford resigned as a director of Abraxas. Prior to joining Abraxas,
Mr.   Williford  was  Chief  Financial   Officer  of  American   Natural  Energy
Corporation,  a natural gas and crude oil  exploration  and production  company,
from July 1989 to  December  1992 and  President  of Clark  Resources  Corp.,  a
natural gas and crude oil exploration and production company,  from January 1987


                                       87


to May 1989.  Mr.  Williford  received a Bachelor of Science  degree in Business
Administration from Pittsburgh State University in 1973.

     Robert W.  Carington,  Jr.  was  elected  Executive  Vice  President  and a
director of Abraxas in July 1998. In December 1999, Mr. Carington  resigned as a
director of Abraxas.  Prior to joining  Abraxas,  Mr.  Carington  was a Managing
Director with Jefferies & Company,  Inc.  Prior to joining  Jefferies & Company,
Inc. in January  1993,  Mr.  Carington  was a Vice  President  at Howard,  Weil,
Labouisse,   Friedrichs,   Inc.  Prior  to  joining  Howard,  Weil,   Labouisse,
Friedrichs, Inc., Mr. Carington was a petroleum engineer with Unocal Corporation
from 1983 to 1990.  Mr.  Carington  received a Bachelor of Science in Mechanical
Engineering   from  Rice   University   in  1983  and  a  Masters  of   Business
Administration from the University of Houston in 1990.

     Craig S. Bartlett Jr., a director of Abraxas since  December 1999, has over
forty  years of  commercial  banking  experience,  the most  recent  being  with
National  Westminster  Bank  USA,  rising  to the  position  of  Executive  Vice
President,  Senior Lending Officer and Chairman of the Credit Policy  Committee.
Mr.  Bartlett  currently  serves  on the  board of NVR,  Inc.  and is  active in
securities  arbitration.  Mr. Bartlett attended Princeton University,  and has a
certificate in Advanced Management from Pennsylvania State University.

     Franklin A. Burke,  a director  of Abraxas  since June 1992,  has served as
President and Treasurer of Venture  Securities  Corporation since 1971, where he
is in charge of research and  portfolio  management.  He has also been a general
partner and director of Burke,  Lawton,  Brewer & Burke, a securities  brokerage
firm, since 1964, where he is responsible for research and portfolio management.
Mr.  Burke also  serves as a director of Suburban  Community  Bank in  Chalfont,
Pennsylvania.  Mr. Burke  received a Bachelor of Science  degree in Finance from
Kansas State University in 1955, a Master's degree in Finance from University of
Colorado  in 1960 and  studied at the  graduate  level at the  London  School of
Economics from 1962 to 1963.

     Harold D. Carter has served as a director of Abraxas  since  October  2003.
Mr. Carter has more than 40 years experience in the oil and gas industry and has
been an  independent  consultant  since 1990.  Prior to  consulting,  Mr. Carter
served as Executive  Vice  President of Pacific  Enterprises  Oil Company (USA).
Before that,  Mr. Carter was  associated  for 20 years with Sabine  Corporation,
ultimately  serving as President and Chief Operating  Officer from 1986 to 1989.
Mr. Carter  consults for Associated  Energy  Managers,  Inc. with respect to its
Energy Income Fund, L.P. and is a director of Brigham Exploration  Company,  and
Energy Partners,  Ltd., both publicly traded companies,  and Longview Production
Company,  a private  company.  Mr. Carter was a director of Abraxas from 1996 to
1999 and served as an advisory director from 1999 to September 2003.

     Ralph F. Cox, a director of Abraxas since  December 1999, has over 45 years
of oil and gas industry experience,  over thirty of which was with Arco. Mr. Cox
retired from Arco in 1985 after having become Vice Chairman. Mr. Cox then joined
what was known as Union Pacific  Resources  prior to its acquisition by Anadarko
Petroleum  in July  2000,  retiring  in 1989 as  President  and Chief  Operating
Officer. Mr. Cox then joined Greenhill Petroleum  Corporation as President until
leaving in 1994 to pursue his consulting  business.  Mr. Cox has in the past and
continues  to serve on many  boards  including  CH2M  Hill  Companies,  and is a
trustee for the Fidelity group of funds. Mr. Cox earned Petroleum and Mechanical
Engineering  degrees from Texas A&M  University  with advanced  studies at Emory
University.

     Barry J. Galt, a director of Abraxas since  October  2003,  has served as a
director  of  Ocean  Energy,  Inc.  since  his  retirement  in  1999  until  the
acquisition  of Ocean by Devon Energy  Corporation  in April 2003.  He served as
Chairman  and  Chief  Executive  Officer  of  Seagull  Energy  Corporation,  the
predecessor  to Ocean,  from 1983 through  1998 and as Vice  Chairman of Seagull
from January 1999 until May 1999.  Prior to his employment by Seagull,  Mr. Galt
acted as President and Chief Operating  Officer of The Williams  Companies.  Mr.
Galt has also served as a director of Trinity  Industries,  Inc.  since 1989,  a
director of StanCorp  Financial Group,  Inc. since 1989 and a director of Dynegy
Inc. since September 2002.

     Dennis E. Logue,  a director of Abraxas  since April 2003, is Dean and Fred
E. Brown Chair at the Michael F. Price College of business at the  University of
Oklahoma.  Prior to  joining  Price  College  in 2001,  he was the  Steven  Roth
Professor at the Amos Tuck School at Dartmouth  Collage  where he had been since
1974.  He is  currently  a  director  of Sallie  Mae  (GSE)  and  Waddell & Reed
Financial,  Inc.  He is  also  on the  editorial  boards  of  several  scholarly
journals, including the Journal of Banking and Finance, the Journal of Portfolio


                                       88


Management,  and the Journal of Management Strategy  Education.  Mr. Logue holds
degrees from Fordham College, Rutgers, and Cornell University.

     James C. Phelps,  a director of Abraxas  since  December  1983,  has been a
consultant to natural gas and crude oil  exploration  and  production  companies
such as Panhandle Producing Company and Tesoro Petroleum Corporation since April
1981.  Mr.  Phelps  served as a director of Old Grey Wolf from  January  1996 to
January 2003.  From April 1995 to May 1996, Mr. Phelps served as Chairman of the
Board and Chief Executive Officer of Old Grey Wolf, and from January 1996 to May
1996,  he served as  President  of Old Grey Wolf.  From March 1983 to  September
1984, he served as President of Osborn Heirs  Company,  a privately  owned crude
oil  exploration  and  production  company based in San Antonio.  Mr. Phelps was
President and Chief Operating Officer of Tesoro Petroleum  Corporation from 1971
to 1981  and  prior to that was  Senior  Vice  President  and  Assistant  to the
President of Continental  Oil Company.  He received a Bachelor of Science degree
in  Industrial  Engineering  and  a  Master  of  Science  degree  in  Industrial
Engineering from Oklahoma State University.

     Joseph A.  Wagda,  a director  of Abraxas  since  December  1999,  has been
involved in a variety of business  activities  over a  twenty-nine  year career.
From 2000 to the  present,  Mr.  Wagda has been Chief  Executive  Officer  and a
director of  BrightStar  Information  Technology  Group,  Inc.,  an  information
technology  company,  and was named Chairman in 2001. He also is an attorney and
president of Altamont Capital Management,  Inc., where he was involved from 1997
to 2001 in a number  of  investment  projects  as an  investor  and  consultant,
including  leadership  roles  as a  member  of  Campus  in 1999 to 2000 and as a
managing member of AltaNet Partners,  LLC from 2000.  Previously,  Mr. Wagda was
President  and Chief  Executive  Officer of American  Heritage  Group,  Inc.,  a
modular home builder, and a Senior Managing Director and co-founder of the Price
Waterhouse corporate finance practice.  He also served with the finance staff of
Chevron  Corporation and in the general  counsel's office at Ford Motor Company.
Mr. Wagda received an undergraduate  degree from Fordham  College,  a Masters of
Business Administration,  with distinction,  from the Johnson Graduate School of
Management, Cornell University, and a JD, with honors, from Rutgers University.



                                       89




                             EXECUTIVE COMPENSATION

Compensation Summary

     The  following  table sets forth a summary of  compensation  for the fiscal
years  ended  December  31,  2001,  2002 and 2003 paid by Abraxas to Robert L.G.
Watson,  Abraxas' Chairman of the Board,  President and Chief Executive Officer,
Chris E. Williford,  Abraxas' Executive Vice President,  Chief Financial Officer
and Treasurer,  Robert W. Carington, Jr., Abraxas' Executive Vice President, Lee
T. Billingsley, Abraxas' Vice President--Exploration, and to William H. Wallace,
Abraxas' Vice President--Operations.



                           Summary Compensation Table

                                                                                               Long Term
                                                                                              Compensation
                                                                                                Awards -
                                                                                               Securities
                                                                                               Underlying
      Name and Principal Position           Year        Salary($)        Bonus($)             Options (#)
                                           ------       ---------       ----------            ------------
                                                     Annual Compensation
                                           ---------------------------------------
                                                                                           
Robert L. G. Watson,                        2001           $259,615        $27,388                  60,000
   Chairman of the Board,                   2002           $271,442        $24,592                  90,000
   President and Chief Executive            2003           $291,750       $200,200    (1)                0
   Officer
Chris E. Williford,                         2001           $155,769        $16,433                  20,000
   Executive Vice President,                2002           $163,653        $14,848                  43,000
   Chief Financial Officer and Treasurer    2003           $175,615       $120,400    (2)                0
Robert W. Carington, Jr.,                   2001           $207,629        $21,910                  20,000
   Executive Vice President                 2002           $215,577        $19,488                  55,000
                                            2003           $225,961       $154,000    (3)                0
Lee T. Billingsley                          2001           $134,077        $10,331                  15,000
   Vice President--                         2002           $156,885         $9,792                  22,000
   Exploration                              2003           $168,346        $42,023    (4)                0
William H. Wallace,                         2001           $131,577        $10,331                  15,000
   Vice President--                         2002           $156,885         $9,792                  22,000
   Operations                               2003           $168,346        $42,023    (4)                0
-------------------


     (1) Of this amount, $177,719 will be paid in cash and $22,481 in restricted
         stock.*

     (2) Of this amount, $101,051 will be paid in cash and $19,349 in restricted
         stock.*

     (3) Of this amount, $121,211 will be paid in cash and $32,789 in restricted
         stock.*

     (4) Of this amount,  $32,123 will be paid in cash and $9,900 in  restricted
         stock.*

     *   The  number of shares of stock  was  determined  based  upon a price of
         $2.69 per share,  which was the closing price of the  Company's  common
         stock on the AMEX on April 15, 2004.

Grants of Stock  Options and Stock  Appreciation  Rights  During the Fiscal Year
Ended December 31, 2003

     Pursuant to the Abraxas  Petroleum  Corporation 1984 Incentive Stock Option
Plan (the "ISO Plan"),  the Abraxas  Petroleum  Corporation 1993 Key Contributor
Stock Option Plan (the "1993 Plan"), and the Abraxas Petroleum  Corporation 1994
Long Term  Incentive  Plan (the  "LTIP"),  Abraxas  grants to its  employees and
officers  (including  its  directors  who are also  employees)  incentive  stock
options and  non-qualified  stock options.  The ISO Plan, the 1993 Plan, and the
LTIP are  administered  by the  Compensation  Committee  which,  based  upon the
recommendation of the Chief Executive  Officer,  determines the number of shares
subject to each option.

                                       90


Option Grants in Fiscal Year 2003

     No options  were  granted to  Messers.  Watson,  Williford,  Carington  and
Wallace or Dr. Billingsley during 2003.

Aggregated Option Exercises in Fiscal 2003 and Fiscal Year End Option Values

     The table below contains certain information  concerning exercises of stock
options  during the fiscal year ended  December  31,  2003,  by Messrs.  Watson,
Williford,  Carington  and Wallace and Dr.  Billingsley  and the fiscal year end
value of unexercised options held by Messrs.  Watson,  Williford,  Carington and
Wallace and Dr. Billingsley.



                         Option Exercises in Fiscal Year

                                 Shares        Value      Number of Unexercised Options  Value of Unexercised Options
                              Acquired By     Realized       on December 31, 2003(#)       on December 31, 2003 ($)
Name                          Exercise(#)       ($)       Exercisable/Unexercisable(1)     Exercisable/Unexercisable
------------------            -----------       ---       ----------------------------     -------------------------
                                                                                         
Robert L. G. Watson              2,019           0               592,167/134,358                 337,535/76,584
Chris E. Williford              20,000           0                185,750/52,250                 105,878/29,783
Robert W. Carington, Jr.           0             0                373,750/61,250                 213,038/34,913
Lee T. Billingsley                 0             0                101,000/39,000                  57,570/22,230
William H. Wallace                 0             0                 63,500/39,000                  36,195/22,230


Employment Agreements

     Abraxas has entered into employment agreements with each of Messrs. Watson,
Williford, Carington and Wallace and with Dr. Billingsley pursuant to which each
of Messrs.  Watson,  Williford,  Carington and Wallace and Dr.  Billingsley will
receive  compensation  as determined  from time to time by the board in its sole
discretion.

     The employment agreements for Messrs. Watson,  Williford, and Carington are
scheduled to terminate on December 21, 2004, and shall be automatically extended
for  additional  one-year terms unless Abraxas gives the officer 120 days notice
prior to the  expiration of the original  term or any  extension  thereof of its
intention  not to renew the  employment  agreement.  If,  during the term of the
employment  agreements  for each of such officers,  the officer's  employment is
terminated by Abraxas other than for cause or  disability,  by the officer other
than by reason of such  officer's  death or retirement,  or by the officer,  for
"good reason" (as defined in each officer's  respective  employment  agreement),
then such  officer  will be entitled to receive a lump sum payment  equal to the
greater of (a) his annual base salary for the last full year during which he was
employed by Abraxas or (b) his annual base salary for the  remainder of the term
of each of their respective employment agreements.

     If a change of control occurs during the term of the  employment  agreement
for Mr. Watson, Mr. Williford or Mr. Carington, and if subsequent to such change
of control,  such  officer's  employment is terminated by Abraxas other than for
cause or disability,  by reason of the officer's  death or retirement or by such
officer,  for good reason,  then such officer will be entitled to the following,
as applicable:

         Mr. Watson:


                  (1) if such  termination  occurs prior to the end of the first
                  year of the initial term of his employment  agreement,  a lump
                  sum payment equal to five times his annual base salary;

                  (2) if such termination occurs after the end of the first year
                  of the initial term of his  employment  agreement but prior to
                  the  end  of  the  second  year  of the  initial  term  of his
                  employment  agreement,  a lump sum payment equal to four times
                  his annual base salary;

                  (3) if such  termination  occurs  after the end of the  second
                  year of the initial term of his employment agreement but prior
                  to the  end of the  third  year  of the  initial  term  of his
                  employment agreement,  a lump sum payment equal to three times
                  his annual base salary; and

                                       91


                  (4) if such termination occurs after the end of the third year
                  of the  initial  term of his  employment  agreement a lump sum
                  payment equal to 2.99 times his annual base salary.

         Mr. Williford or Mr. Carington:


                  (1) if such  termination  occurs prior to the end of the first
                  year  of  the  initial  term  of  the   officer's   employment
                  agreement,  a  lump  sum  payment  equal  to  four  times  the
                  officer's annual base salary;

                  (2) if such termination occurs after the end of the first year
                  of the initial term of the officer's  employment agreement but
                  prior to the end of the second year of the initial term of the
                  employment agreement,  a lump sum payment equal to three times
                  the officer's annual base salary; and

                  (3) if such  termination  occurs  after the end of the  second
                  year  of  the  initial  term  of  the   officer's   employment
                  agreement,  a  lump  sum  payment  equal  to  2.99  times  the
                  officer's annual base salary.

     Abraxas has entered into  employment  agreements  with Mr.  Wallace and Dr.
Billingsley  pursuant  to which each of Mr.  Wallace  and Dr.  Billingsley  will
receive  compensation  as determined  from time to time by the board in its sole
discretion.  The  employment  agreements,  originally  scheduled to terminate on
December 31, 1998 for Dr.  Billingsley  and  December 31, 2000 for Mr.  Wallace,
were automatically  extended and will terminate on December 31, 2004, and may be
automatically extended for an additional year if by December 1 of the prior year
neither  Abraxas  nor Mr.  Wallace or Dr.  Billingsley,  as the case may be, has
given notice to the contrary. Except in the event of a change in control, at all
times during the term of the employment  agreements,  each of Mr.  Wallace's and
Dr. Billingsley's employment is at will and may be terminated by Abraxas for any
reason without notice or cause. If a change in control occurs during the term of
the employment  agreement or any extension  thereof,  the expiration date of Mr.
Wallace's and Dr. Billingsley's  employment agreement is automatically  extended
to a date no earlier  than three  years  following  the  effective  date of such
change in control.  If,  following a change in control,  either Mr. Wallace's or
Dr.  Billingsley's  employment is terminated other than for Cause (as defined in
each of the  employment  agreements)  or  Disability  (as defined in each of the
Employment Agreements), by reason of Mr. Wallace's or Dr. Billingsley's death or
retirement or by Mr.  Wallace or Dr.  Billingsley,  as the case may be, for Good
Reason (as defined in each of the  employment  agreements),  then the terminated
officer will be entitled to receive a lump sum payment  equal to three times his
annual base salary.

     If any lump sum payment to Messrs. Watson, Williford, Carington, Wallace or
Dr.  Billingsley  would  individually or together with any other amounts paid or
payable  constitute an "excess parachute  payment" within the meaning of Section
280G  of  the  Internal  Revenue  Code  of  1986,  as  amended,  and  applicable
regulations  there  under,  the  amounts  to be paid will be  increased  so that
Messrs. Watson, Williford,  Carington,  Wallace or Dr. Billingsley,  as the case
may be, will be entitled to receive the amount of  compensation  provided in his
contract after payment of the tax imposed by Section 280G.

Compensation of Directors

     Stock Options. In 1999, each of Messrs.  Bartlett,  Cox and Wagda were each
granted  options to purchase  75,000 shares of common stock at an exercise price
of $0.98 per share.  In April 2003,  Mr.  Burke was granted  options to purchase
45,000  shares of common stock at an exercise  price of $0.68 and Mr. Phelps was
granted  options to purchase  43,000  shares at an exercise  price of $0.68.  In
September  2003,  Mr.  Carter was granted  options to purchase  45,000 shares of
common  stock and Mr. Galt was  granted  options to  purchase  75,000  shares of
common stock each at an exercise price of $1.01.

     Other  Compensation.  During 2003, each director who was not an employee of
Abraxas or its affiliates, received an annual fee of $8,000 plus $1,000 for each
board meeting attended and $500 for each committee meeting  attended.  Aggregate
fees paid to  directors in 2003 were  $149,400.  Except for the  foregoing,  the
directors of Abraxas  received no other  compensation for services as directors,
except for reimbursement of travel expenses to attend board meetings.



                                       92


                        DESCRIPTION OF THE EXCHANGE NOTES

General

     Abraxas  issued the  outstanding  notes and will issue the  exchange  notes
under an indenture  among Abraxas,  its  subsidiaries  named in the indenture as
initial subsidiary  guarantors and U.S. Bank National  Association,  as trustee.
The terms of the notes  include  those  expressly set forth in the indenture and
those made part of the  indenture  by reference  to the Trust  Indenture  Act of
1939. The intercreditor agreement and other collateral documents described under
"--Security"  and  "Intercreditor  Agreement"  define the terms of the  security
interests securing the notes and the note guarantees.

     The following  description is an overview of the material provisions of the
notes,  the  indenture  and the  intercreditor  agreement  and other  collateral
documents and it does not contain all of the  information  that may be important
to you. Since the following  description does not purport to be complete,  it is
qualified  in its  entirety  by  reference  to all of the  provisions  of  those
documents,  including  the  definitions  of  certain  terms,  and to  the  Trust
Indenture Act of 1939,  and we urge you to carefully  read the indenture and the
intercreditor  agreement  and other  collateral  documents  and the  information
contained in this prospectus before you decide to invest in the notes.

     You will find the  definitions  of certain  capitalized  terms used in this
"Description of the Exchange Notes" under "--Certain Definitions." Certain other
defined terms used in this  "Description  of the Exchange Notes" but not defined
under  "--Certain  Definitions"  have  the  meanings  assigned  to  them  in the
indenture. In this "Description of the Exchange Notes,"

     o   references to  "interest"  include any  additional or default  interest
         payable at the time in  question,  the term  "Abraxas"  refers  only to
         Abraxas Petroleum  Corporation and does not include any of its existing
         or future subsidiaries;

     o   the term  "Grey  Wolf"  refers to Grey Wolf  Exploration  Inc.  and its
         future subsidiaries;

     o   references  to "we," "our" and "us" refer to Abraxas  and its  existing
         and future restricted subsidiaries, which excludes Grey Wolf; and

     o   references to the Revolving  Credit  Facility,  the Bridge Loan and the
         Grey  Wolf  Term  Loan  refer  to our new $15  million  senior  secured
         revolving credit  facility,  our new $25 million second lien increasing
         rate bridge loan and Grey Wolf's new $35 million  senior  secured  term
         loan,  respectively,  described in this prospectus under  "Management's
         Discussion   and  Analysis  of  Financial   Condition  and  Results  of
         Operations--Long-Term Indebtedness."

Brief Description of the Notes and the Subsidiary  Guarantees;  Ranking and Lien
Priority

         The Notes

         The Notes are:

     o   general obligations of Abraxas;

     o   unconditionally  Guaranteed,  on a senior  secured  basis in accordance
         with the provisions of the Intercreditor  Agreement, by (1) all current
         Subsidiaries of Abraxas,  other than Grey Wolf (so long as Grey Wolf is
         neither a  Restricted  Subsidiary  nor a Guarantor  of any of our other
         Indebtedness), (2) all future Restricted Subsidiaries and (3) any other
         Affiliate of Abraxas that Guarantees any of our other Indebtedness (see
         "--Subsidiary Guarantees of Notes");

     o   secured, together with the Revolving Credit Facility Obligations,  by a
         shared first priority perfected security interest (subject to Permitted
         Prior Liens) in all material  real and personal  property and assets of
         Abraxas and its Restricted Subsidiaries, including, without limitation,


                                       93


         (1)  substantially  all of our natural gas and crude oil properties and
         (2) all of the Capital Stock (or in the case of a Foreign  Unrestricted
         Subsidiary,  up to 65% of the outstanding Capital Stock) in any company
         or  other  entity,  including,  without  limitation,  in  each  of  our
         Subsidiaries  other  than Grey Wolf,  that is owned by Abraxas  and the
         Restricted Subsidiaries, as more fully described under "--Security" and
         "Intercreditor Agreement;"

     o   rank senior in right of payment to all existing and future Subordinated
         Indebtedness of Abraxas, including, without limitation, the Bridge Loan
         Obligations; and

     o   rank effectively  senior in right of payment to all existing and future
         unsecured  Indebtedness  of  Abraxas  to the extent of the value of the
         Collateral available to the holders of the Notes.

     The provisions of the  Intercreditor  Agreement provide for Abraxas to make
payments in respect of the Secured  Obligations to the  Collateral  Agent during
the  existence  of an Event of  Default,  or an  "event  of  default"  under the
Revolving  Credit  Facility or the Bridge Loan, of which notice thereof has been
given  to the  parties  to the  Intercreditor  Agreement  by  the  Trustee,  the
Revolving Credit Facility Administrative Agent or the Bridge Loan Administrative
Agent.  The  Collateral  Agent will be required to apply such amounts during the
existence of such an Event of Default (or such an "event of default"),  together
with amounts  received from the Subsidiary  Guarantors and any proceeds from any
disposition of the Collateral,

     o   if a  minimum  collateral  coverage  ratio  equal  to three  times  the
         outstanding  Revolving Credit Facility  Obligations is then met, (i) to
         the  payment of  interest on the Notes only if and when all accrued and
         unpaid interest on the Revolving  Credit Facility  Obligations has been
         paid and (ii) to the payment of principal of the Notes only if and when
         the  outstanding  principal of the Revolving  Credit  Facility has been
         repaid; or

     o   if such  minimum  collateral  coverage  ratio is not then  met,  to the
         payment of interest on and  principal of the Notes only if and when all
         outstanding  interest on and principal of the Revolving Credit Facility
         have   been   paid.   See   "Intercreditor    Agreement--Priority    of
         Distributions."

         The Subsidiary Guarantees

     The Notes are Guaranteed by each current Subsidiary of Abraxas,  other than
Grey  Wolf  (so long as Grey  Wolf is  neither  a  Restricted  Subsidiary  nor a
Guarantor of any of our other  Indebtedness).  The Notes will also be Guaranteed
by all future  Restricted  Subsidiaries  and any other Affiliate of Abraxas that
Guarantees  any of our  other  Indebtedness.  See  "--Subsidiary  Guarantees  of
Notes." Each such Subsidiary Guarantee:

     o   is a general obligation of the respective Subsidiary Guarantor;

     o   is  secured,   together  with  the  respective  Subsidiary  Guarantor's
         Guarantee of the Revolving  Credit  Facility  Obligations,  by a shared
         first priority  perfected security interest (subject to Permitted Prior
         Liens) in all of such Subsidiary Guarantor's material real and personal
         property and assets, including,  without limitation,  (1) substantially
         all of its  natural  gas and  crude oil  properties  and (2) all of the
         Capital Stock (or in the case of a Foreign Unrestricted Subsidiary,  up
         to 65% of the  outstanding  Capital  Stock)  in any  company  or  other
         entity,  including,  without  limitation,  in each  Subsidiary  of such
         Subsidiary Guarantor,  that is owned by such Subsidiary  Guarantor,  as
         more fully described under "--Security" and "Intercreditor Agreement;"

     o   ranks   senior  in  right  of  payment  to  all   existing  and  future
         Subordinated  Indebtedness  of  the  respective  Subsidiary  Guarantor,
         including,  without  limitation,  its  Guarantee  of  the  Bridge  Loan
         Obligations; and

     o   ranks effectively senior in right of payment to all existing and future
         unsecured  Indebtedness of the respective  Subsidiary  Guarantor to the
         extent of the value of the  Collateral  available to the holders of the
         Notes.

                                       94


     The provisions of the  Intercreditor  Agreement  provide for the Subsidiary
Guarantors  to make  payments  in  respect  of the  Secured  Obligations  to the
Collateral  Agent during the  existence of an Event of Default,  or an "event of
default" under the Revolving Credit Facility or the Bridge Loan, of which notice
thereof  has been given to the  parties to the  Intercreditor  Agreement  by the
Trustee,  the Revolving Credit Facility  Administrative Agent or the Bridge Loan
Administrative  Agent.  The  Collateral  Agent  will be  required  to apply such
amounts  during the  existence of such an Event of Default (or such an "event of
default"), together with amounts received from Abraxas and any proceeds from the
disposition of any Collateral,

     o   if a  minimum  collateral  coverage  ratio  equal  to three  times  the
         outstanding  Revolving Credit Facility  Obligations is then met, (i) to
         the  payment of  interest on the Notes only if and when all accrued and
         unpaid interest on the Revolving  Credit Facility  Obligations has been
         paid and (ii) to the payment of principal of the Notes only if and when
         the  outstanding  principal of the Revolving  Credit  Facility has been
         repaid; or

     o   if such  minimum  collateral  coverage  ratio is not then  met,  to the
         payment of interest on and  principal of the Notes only if and when all
         outstanding  interest on and principal of the Revolving Credit Facility
         have   been   paid.   See   "Intercreditor    Agreement--Priority    of
         Distributions."

     Each Subsidiary of Abraxas on October 28, 2004,  other than Grey Wolf, is a
Subsidiary Guarantor and a Restricted Subsidiary.  However, Abraxas is permitted
to designate one or more of its Subsidiaries (whether or not any such Subsidiary
was a Subsidiary of Abraxas on October 28, 2004) as an  Unrestricted  Subsidiary
if certain  conditions  described in the definition of  Unrestricted  Subsidiary
under "--Certain Definitions" are satisfied.  Unrestricted  Subsidiaries are not
subject to many of the  restrictive  covenants  in the  Indenture,  and  neither
Guarantee  the  Notes  (unless  such   Unrestricted   Subsidiary  is  also  then
Guaranteeing any of our other Indebtedness) nor grant any Lien in their property
or assets to secure the repayment of the Notes.

     Grey Wolf is currently designated as an Unrestricted  Subsidiary and is not
permitted  to  become a  Restricted  Subsidiary  until 91 days  after all of the
Bridge Loan  Obligations  are repaid in full and the Bridge Loan is  terminated.
Unless Grey Wolf subsequently becomes a Restricted  Subsidiary or Guarantees any
of our other  Indebtedness,  Grey Wolf is not  required  to become a  Subsidiary
Guarantor.

Principal, Maturity and Interest

     The Notes:

     o   are limited in aggregate principal amount to $125.0 million;

     o   mature on December 1, 2009;

     o   were  issued in  denominations  of $1,000  and  integral  multiples  of
         $1,000; and

     o   are represented by one or more registered  notes in global form, but in
         certain limited circumstances may be represented by notes in definitive
         form (see "Book Entry; Delivery and Form").

     Interest on the Notes:

     o   accrues at a per annum  floating  rate of  Six-Month  LIBOR plus 7.50%,
         with an initial interest rate of 9.72% per annum;

     o   resets  semiannually on June 1 and December 1 of each year,  commencing
         on June 1, 2005;

     o   is payable  semiannually  in  arrears on June 1 and  December 1 of each
         year,  commencing on June 1, 2005;  provided,  that, if any such day is
         not a  Business  Day,  such  interest  payment  date  will be the  next
         succeeding Business Day;

                                       95


     o   is  payable  to the  holders  of  record  on the 15th day of the  month
         immediately  preceding the month in which the related  interest payment
         date occurs;

     o   accrues from and including  the most recent date on which  interest has
         been paid or, if no interest has been paid, from and including the date
         of  issuance,  until but  excluding  the date upon which the  principal
         thereof is paid or duly provided for in accordance  with the Indenture;
         and

     o   is computed on the basis of a 360-day year.

     The  interest  rate  on  the  Notes  is  subject  to  increase  in  certain
circumstances   if  Abraxas  and  the  Subsidiary   Guarantors  do  not  file  a
registration  statement  relating to a registered  exchange offer for the Notes,
or, in lieu thereof,  a resale shelf  registration  statement for the Notes,  if
such  registration  statement is not declared  effective on a timely basis or if
certain other  conditions  are not  satisfied,  all as further  described  under
"Exchange and Registration Rights Agreement."

     All  percentages  resulting  from  any  calculation  on the  Notes  will be
rounded,  if necessary,  to the nearest one  hundred-thousandth  of a percentage
point with five  one-millionths  of a percentage  point  rounded  upward  (e.g.,
9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)),  and all U.S.
dollar amounts used in or resulting  from such  calculation on the Notes will be
rounded to the nearest cent (with one-half cent being rounded upward).

     Abraxas will pay  principal  of, and premium,  if any, and interest on, the
Notes, and the Notes will be transferable, at the office or agency designated by
Abraxas within the City and State of New York. In addition,  in the event a Note
is not in book-entry  form,  Abraxas may pay interest,  at its option,  by check
mailed to the registered  holder of such Note at its  registered  address as set
forth in the Note  Register.  No service charge will be made for any transfer or
exchange of Notes,  but  Abraxas or the  Trustee  may  require  payment of a sum
sufficient to cover any tax or other governmental  charge that may be payable in
connection with such transfer or exchange.

Security

     The  payment  of  the  Note  Obligations,  the  Revolving  Credit  Facility
Obligations  and the Bridge Loan  Obligations,  when due (whether on an interest
payment date, at maturity, by acceleration,  repurchase, redemption or otherwise
and whether by Abraxas  pursuant to the Notes,  the Revolving Credit Facility or
the Bridge Loan or by any Guarantor  pursuant to a Guarantee  thereof),  and the
performance of all other obligations of Abraxas, the Restricted Subsidiaries and
the  Subsidiary  Guarantors,  are  secured  as  provided  in  the  Intercreditor
Agreement and other Collateral Documents.

     Notwithstanding  the time,  order or method of attachment of the Collateral
Agent's Liens upon any  Collateral,  the time or order of filing or recording of
financing  statements or other  documents  filed or recorded to perfect any Lien
upon  any  Collateral,  the  time of  taking  possession  or  control  over  any
Collateral or the rules for  determining  priority under the Uniform  Commercial
Code or any other law governing  relative  priorities of secured  creditors,  as
among the Secured Parties,  the holders of the Note  Obligations,  together with
the holders of the Revolving Credit Facility Obligations, will be entitled to be
paid first out of the proceeds, if any, of the Collateral,  subject to Permitted
Liens and subject to and in accordance with the provisions of the  Intercreditor
Agreement as described under "Intercreditor Agreement."

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     Collateral Agent

     Pursuant to the Intercreditor Agreement,  Abraxas and the Trustee, together
with the  Revolving  Credit  Facility  Administrative  Agent and the Bridge Loan
Administrative  Agent, have appointed U.S. Bank National Association to serve as
the Collateral Agent for the benefit of the holders of the Secured  Obligations,
including the Notes,  from time to time. The  Intercreditor  Agreement  provides
that the Collateral Agent may not be the same institution  serving as either the
Revolving Credit Facility Administrative Agent or the Bridge Loan Administrative
Agent. 

     The Intercreditor  Agreement  provides that the Collateral Agent is subject
to such  directions as may be given to it by the Control Party from time to time
as required or permitted by the Indenture, the Revolving Credit Facility and the
Bridge Loan, as applicable.  The relative  rights with respect to control of the
Collateral Agent are specified in the Intercreditor  Agreement and are described
under  "Intercreditor  Agreement."  Except as directed by the Control Party, the
Collateral  Agent will not be obligated to act upon  directions  purported to be
delivered to it by any other Person,  to foreclose upon or otherwise enforce any
Lien or to take any other  action  whatsoever  with  regard to any or all of the
Collateral  Documents,  the  Liens  created  thereby  or  the  Collateral.   See
"Intercreditor Agreement."

     Collateral; After-Acquired Property

     In  accordance  with  the  Intercreditor  Agreement  and  other  Collateral
Documents,  the Note  Obligations,  together with the Revolving  Credit Facility
Obligations,  are secured by a shared first priority perfected security interest
(to the extent attainable by filing,  recordation or possession,  and subject to
Permitted Prior Liens),  and the Bridge Loan  Obligations is secured by a second
priority  perfected  security  interest  (to the  extent  attainable  by filing,
recordation or possession, and subject to Permitted Liens), in all material real
and  personal  property and assets of Abraxas and its  Restricted  Subsidiaries,
including, without limitation,

     o   all natural gas and crude oil  properties of Abraxas and the Restricted
         Subsidiaries  (other than any such properties which,  together with any
         other such properties not securing the Secured  Obligations,  do not at
         any time have either an  aggregate  PV-10 or an  aggregate  fair market
         acreage value exceeding  $250,000),  and all additions and improvements
         thereto and replacements thereof;

     o   all assets  deposited  or  required  to be  deposited  in a  Collateral
         Account;

     o   all of the  Capital  Stock in any company or other  entity,  including,
         without  limitation,  in each of our existing  and future  Subsidiaries
         other  than Grey  Wolf,  that is owned by  Abraxas  and the  Restricted
         Subsidiaries;  provided,  that,  in no event  will more than 65% of the
         outstanding  Capital  Stock of any Foreign  Unrestricted  Subsidiary be
         required to be pledged as security for the Secured Obligations; and

     o   all proceeds of the foregoing.

     The Bridge Loan  Obligations (but not the Note Obligations or the Revolving
Credit  Facility  Obligations)  are also secured by a first  priority  perfected
security  interest in all of the Capital Stock of Grey Wolf owned by Abraxas and
its Subsidiaries.

     Neither the Notes nor the Subsidiary Guarantees is secured by a Lien on any
property  or  asset  of Grey  Wolf  (so  long as Grey  Wolf is not a  Restricted
Subsidiary).  The Indenture also permits Abraxas and the Restricted Subsidiaries
to create Permitted Liens.

     The Indenture,  the Intercreditor  Agreement and other Collateral Documents
require  that  Abraxas  and  each of the  Restricted  Subsidiaries  grant to the
Collateral Agent a shared first priority perfected security interest (subject to
Permitted Prior Liens) in all  After-Acquired  Property of the kinds included in
the  Collateral for the benefit of the holders of the Note  Obligations  and the
holders of the  Revolving  Credit  Facility  Obligations  and a second  priority


                                       97


perfected   security   interest  (subject  to  Permitted  Prior  Liens)  in  all
After-Acquired  Property of the kinds included in the Collateral for the benefit
of the  holders  of the  Bridge  Loan  Obligations.  In  addition,  each  future
Restricted  Subsidiary,  if any,  will be required to similarly  grant  security
interests in its properties and assets of the kinds included in the Collateral.

     If Abraxas or any  Restricted  Subsidiary at any time acquires or otherwise
owns any property or asset of the kind  included in the  Collateral  that is not
subject to a valid and enforceable  first priority  perfected  security interest
(subject to Permitted Prior Liens) in favor of the Collateral  Agent as security
for the Note Obligations,  then Abraxas will be required to, or will be required
to cause that Restricted Subsidiary to, as soon as practicable, but in any event
within 15 days with  respect  to clauses  (1) and (2) below,  and within 30 days
with respect to clauses (3) and (4) below, of the earlier of such acquisition or
of the day an officer of Abraxas or a  Restricted  Subsidiary  has  knowledge or
should have  reasonably  known of any such  deficiency  with respect to any such
property or asset:

                  (1) execute and  deliver to the  Collateral  Agent one or more
         joinder agreements to the applicable Collateral Documents and any other
         security agreement,  pledge agreement,  stock power or other instrument
         requested  by  the  Collateral   Agent,  each  in  form  and  substance
         reasonably  satisfactory to the Collateral  Agent,  required to grant a
         security  interest in such Collateral in favor of the Collateral  Agent
         for the benefit of the holders of the Note Obligations;

                  (2)  deliver to the  Collateral  Agent and the  Trustee one or
         more  opinions of counsel  reasonably  satisfactory  to the  Collateral
         Agent and the Trustee  with  respect to the matters set forth in clause
         (1) above;

                  (3) cause the Liens granted in each Collateral  Document to be
         duly perfected first priority security  interests (subject to Permitted
         Prior Liens) in favor of the  Collateral  Agent,  including by pledging
         any Capital Stock  constituting  such  Collateral as  appropriate,  and
         cause each other Lien upon such  Collateral to be (a) released,  unless
         it is a Permitted Prior Lien, or (b) subordinated, whether by agreement
         or operation of law, to the Collateral Agent's Liens for the benefit of
         holders of the Note  Obligations  if it is a  Permitted  Lien but not a
         Permitted Prior Lien; and

                  (4)  deliver to the  Collateral  Agent and the  Trustee one or
         more  opinions of counsel  reasonably  satisfactory  to the  Collateral
         Agent and the Trustee with respect to lien perfection matters set forth
         in clause (3) above.

     The Indenture permits the release of Collateral without the substitution of
additional Collateral under circumstances described under "--Possession, Use and
Release  of  Collateral,"   "--Disposition   of  Collateral   Without  Release,"
"--Repurchase  at the Option of Holders  Upon the  Occurrence  of Certain  Asset
Sales" and  "--Certain  Covenants--Limitation  on Asset Sales."  Collateral of a
Subsidiary  Guarantor will also be released as security for the Note Obligations
upon the release of such  Subsidiary  Guarantee  under  circumstances  described
under "--Subsidiary Guarantee of the Notes," unless such Subsidiary Guarantor is
thereafter a Restricted Subsidiary.

     Enforcement and Foreclosure

     If a Default or Event of Default occurs under the  Indenture,  the Trustee,
on behalf of the  holders of the Notes,  in  addition  to any rights or remedies
available  to it under the  Indenture,  will be entitled to take such actions as
the Trustee deems  advisable to protect and enforce its rights in the Collateral
for  the  holders  of  the  Note  Obligations,  including,  without  limitation,
instituting  foreclosure proceedings in accordance with applicable law. However,
the  rights  and  remedies  available  to the  Trustee  under the  Indenture  or
otherwise,  and the actions  permitted to be taken by it under the  Indenture or
otherwise,  are limited by the  provisions  of the  Intercreditor  Agreement and
other Collateral  Documents.  See "Risk Factors--Risks  Related to the Notes--In
certain  circumstances,  lenders under  Abraxas'  bridge loan may be entitled to
direct certain asset sales and control  certain rights and remedies with respect
to the collateral pledged to secure the notes and the subsidiary guarantees" and
"Intercreditor Agreement."

     Subject to our ability to dispose of Collateral  and cause Liens thereon to
be  released  in  accordance  with  the  Indenture,   under  the  terms  of  the
Intercreditor  Agreement and other Collateral Documents (see "--Possession,  Use


                                       98


and Release of Collateral" and  "--Disposition of Collateral  Without Release"),
the Collateral  Agent (upon the written  instructions of the Control Party) will
determine  the  circumstances  under  and  manner  in  which to  dispose  of the
Collateral,  including,  without  limitation,  the  determination  of whether to
release  all or any  portion  of the  Collateral  from the Liens  created by the
Collateral  Documents  and whether to foreclose on the  Collateral  following an
Event of Default. See "Intercreditor Agreement."

     The rights of the  Collateral  Agent to repossess and dispose of Collateral
could be  significantly  impaired  by  restrictions  under  bankruptcy  or other
applicable laws. See "Risk Factors--Risks  Related to the Notes--Bankruptcy laws
may limit your  ability to realize  value from the  collateral"  and  "--Certain
Bankruptcy  Limitations." In addition, the Collateral Agent may need to evaluate
the impact of  potential  liabilities  before  determining  to  foreclose on the
Collateral.  For  example,  a lender  that  purchases  real  property  through a
foreclosure  of its security  interest in that real  property may be held liable
under  environmental  laws for the costs of remediating or preventing release or
threatened  release of hazardous  substances  at the secured  property.  In this
regard, the Collateral Agent may decline to foreclose on the secured property or
exercise remedies otherwise available if it does not receive  indemnification to
its  satisfaction  from the holders of the  Secured  Obligations.  Finally,  the
Collateral  Agent's  ability to  foreclose  on the  Collateral  on behalf of the
holders of the Notes may be subject to lack of perfection,  the consent of third
parties  (including the holders of the other Secured  Obligations),  prior Liens
and practical problems associated with the realization of the Collateral Agent's
Lien on the Collateral. See "Intercreditor Agreement."

     Priority of Distributions After an Event of Default

     Subject  to the terms of the  Intercreditor  Agreement,  upon  notice of an
Event of Default (or an "event of default"  under  either the  Revolving  Credit
Facility  or the Bridge  Loan) and for so long as that Event of Default (or that
"event of  default")  exists,  all funds  received  by the  Collateral  Agent in
respect  of  the  Secured  Obligations  will  be  distributed  promptly  by  the
Collateral  Agent  in the  order  of  priority  described  under  "Intercreditor
Agreement--Priority of Distributions."

     Abraxas  cannot  assure  you that  proceeds  of any sale of the  Collateral
pursuant to the  Indenture  and the related  Collateral  Documents  following an
Event of Default will be sufficient to satisfy amounts due under the Notes.  The
amounts  realizable by the Collateral  Agent in respect of the Collateral in the
event of a  foreclosure  or  liquidation  will depend  upon market and  economic
conditions at such time, the availability of buyers,  certain existing Liens and
similar factors. In addition, the Collateral Agent will not have any Lien on any
of the  properties  or  assets  of Grey  Wolf  (so  long  as Grey  Wolf is not a
Restricted  Subsidiary).  See "Risk  Factors--Risks  Related  to the  Notes--The
collateral  pledged to secure the notes may be inadequate to satisfy all amounts
due and owing to the  holders of our notes." If the  proceeds of the  Collateral
are not  sufficient  to repay all amounts  due on the Notes,  the holders of the
Notes (to the extent not repaid from the proceeds of the sale of the Collateral)
will have only an  unsecured  claim  against the  remaining  assets,  if any, of
Abraxas and the Subsidiary Guarantors.

     Possession, Use and Release of Collateral

     Subject to and in accordance with the terms of the Intercreditor  Agreement
and  other  Collateral  Documents,  so  long  as the  Collateral  Agent  has not
exercised its rights with respect to the  Collateral  during the existence of an
Event of Default,  Abraxas  and the  Restricted  Subsidiaries  have the right to
remain in possession and retain exclusive control of the Collateral,  to operate
the  Collateral,  to alter or repair the Collateral  and to collect,  invest and
dispose of any income therefrom.

     Abraxas and the Restricted  Subsidiaries have the right to obtain a release
of items of  Collateral  (including  property  and assets  owned by a Restricted
Subsidiary of which the Capital Stock is being sold in compliance with the terms
of the  Indenture  and  which  following  such  sale  will  not be a  Restricted
Subsidiary),  other than certain Trust Monies, that are subject to an Asset Sale
or other disposition permitted by the terms of the Indenture (see "--Disposition
of  Collateral  Without  Release").  See  "Risk  Factors--Risks  Related  to the
Notes--The  terms of the notes  permit,  without  the  consent of holders of the
notes or the trustee  under the  indenture,  releases of  collateral  pledged to
secure the notes in certain  circumstances." In such event, the Collateral Agent
will release such Collateral from the Lien of the relevant  Collateral  Document
and reconvey such Collateral to Abraxas or the applicable Restricted Subsidiary,
as the case may be, so long as such release  complies  with the Trust  Indenture
Act  and is  not  otherwise  restricted  by the  Intercreditor  Agreement,  upon


                                       99


delivery by Abraxas to the Collateral Agent, with a copy to the Trustee,  of the
following:

                  (1) a notice from Abraxas  requesting the release of specified
Collateral, which notice:

                           (a) specifically  describes the Collateral  requested
         to be released;

                           (b)   specifies   the  fair  market   value  of  such
         Collateral  (which,  in  the  case  of a sale  of  Capital  Stock  of a
         Restricted  Subsidiary  resulting  in it no longer  being a  Restricted
         Subsidiary,  means the fair market value of such Capital Stock) as of a
         date within 60 days of such notice (as  determined in good faith by the
         Board of  Directors  of Abraxas  and  evidenced  by a Board  Resolution
         delivered  to the  Collateral  Agent and the  Trustee  or,  solely with
         respect to  Collateral  in an amount not  exceeding  $1.0  million,  as
         determined in good faith by the chief executive  officer of Abraxas and
         evidenced by an Officers' Certificate delivered to the Collateral Agent
         and the Trustee);

                           (c) states (i) that the  consideration to be received
         in  respect of such  Collateral  is at least  equal to the fair  market
         value of such Collateral (which, in the case of a sale of Capital Stock
         of a Restricted Subsidiary resulting in it no longer being a Restricted
         Subsidiary,  means the fair market value of such Capital Stock) or (ii)
         with  respect to an  interest  in Farmout  Property to be conveyed to a
         farmee  under a Farmout  Agreement,  that such  Farmout  Agreement is a
         Permitted Farmout Agreement;

                           (d) states that the release of such  Collateral  will
         not  materially  and  adversely  impair  the  value  of  the  remaining
         Collateral,  taken as a whole, or interfere with the Collateral Agent's
         ability to realize such value and will not impair the  maintenance  and
         operation of the remaining Collateral, taken as a whole;

                           (e) confirms that the sale or other  disposition  of,
         or an  agreement  to sell  or  otherwise  dispose  of,  the  Collateral
         requested to be released is a bona fide sale or other  disposition to a
         Person that is not an  Affiliate  of Abraxas or, in the event that such
         sale or  other  disposition  is to a  Person  that is an  Affiliate  of
         Abraxas,  confirming  that  such sale or other  disposition  is made in
         compliance    with   the   covenant    described    under    "--Certain
         Covenants--Limitation on Transactions with Affiliates;"

                           (f) certifies  that the sale or other  disposition of
         the  Collateral  requested to be released  complies  with the terms and
         conditions of the Indenture and the  Intercreditor  Agreement and other
         Collateral  Documents,  including,  without  limitation,  the  covenant
         described  under  "--Repurchase  at the  Option  of  Holders  Upon  the
         Occurrence of Certain Asset Sales" or "--Certain Covenants--Limitations
         on Asset Sales" if such sale or other disposition  constitutes an Asset
         Sale; and

                           (g) in the  event  there is to be a  substitution  of
         property  for  such  Collateral  subject  to the  Asset  Sale or  other
         disposition,  specifies the property intended to be substituted for the
         Collateral  to be sold or otherwise  disposed of and that such property
         will be subject to the Liens under the Collateral Documents;

                  (2) an Officers' Certificate stating that:

                           (a)  such  sale  or  other  disposition  covers  only
         Collateral  requested  to be  released or other  property  which is not
         Collateral;

                           (b) all Net Cash  Proceeds,  if any, from the sale or
         other disposition of any of such Collateral will be applied pursuant to
         the  provisions of the Indenture  and the  Intercreditor  Agreement and
         other  Collateral  Documents  in  respect  of  Asset  Sales  and  other
         dispositions of Collateral to the extent applicable thereto;

                           (c) there is no Default  or Event of Default  (and no
         "default" or "event of default" under the Revolving  Credit Facility or
         the Bridge Loan) in effect on the date thereof;

                                      100


                           (d) the release of such Collateral will not result in
         a Default or Event of Default (or a "default"  or an "event of default"
         under the Revolving Credit Facility or the Bridge Loan);

                           (e) the release complies with the Trust Indenture
         Act; and

                           (f) all conditions precedent in the Indenture and the
         Intercreditor  Agreement and other Collateral Documents relating to the
         release in question have been complied with;

                  (3) if the fair market value of such Collateral to be released
         (which,  in the  case  of a  sale  of  Capital  Stock  of a  Restricted
         Subsidiary  resulting in it no longer  being a  Restricted  Subsidiary,
         means the fair market value of such Capital Stock) exceeds $1.0 million
         (as  specified in the notice to be provided  pursuant to clause  (1)(b)
         above),  an  opinion  of  counsel,  in form  and  substance  reasonably
         satisfactory to the Collateral Agent and the Trustee, stating that such
         release is permitted under and complies with the terms of the Indenture
         and the Intercreditor  Agreement and other Collateral Documents and all
         conditions  precedent  thereunder  to such release  have been  complied
         with;

                  (4) if the fair market value of such Collateral to be released
         (which,  in the  case  of a  sale  of  Capital  Stock  of a  Restricted
         Subsidiary  resulting in it no longer  being a  Restricted  Subsidiary,
         means the fair market value of such Capital Stock) exceeds $5.0 million
         (as  specified in the notice to be provided  pursuant to clause  (1)(b)
         above),  an opinion or appraisal with respect to the  determination  of
         such  fair  market  value  issued  by  an  independent   accounting  or
         investment  banking firm which is  nationally  recognized in the United
         States, or a reputable  independent  appraisal or petroleum engineering
         firm which is reasonably  satisfactory to the Collateral  Agent and the
         Trustee, as appropriate under the circumstances;

                  (5) if  such  Collateral  to be  released  is an  interest  in
         Farmout  Property to be conveyed to a farmee under a Permitted  Farmout
         Agreement,  such Officers' Certificates and Board Resolutions,  if any,
         required by the  definitions  of Farmout  Property  Value and Permitted
         Farmout Agreement (see "--Certain Definitions"); and

                  (6) all documentation  required by the Trust Indenture Act, if
         any, prior to the release of the Collateral requested to be released by
         the  Collateral  Agent  and,  in  the  event  that  there  is  to  be a
         substitution  of  property  for  such  Collateral,   all  documentation
         necessary  to effect the  substitution  of such new  Collateral  and to
         subject such new  Collateral to valid and  enforceable  first  priority
         perfected security interests (subject to Permitted Prior Liens) granted
         by the relevant Collateral Documents.

The Indenture and the  Intercreditor  Agreement and other  Collateral  Documents
also provide that:

                  (1) Abraxas and the Restricted  Subsidiaries will be entitled,
         subject to compliance with the conditions set forth therein,  to obtain
         the  release  of  Collateral  that has been  taken by  eminent  domain,
         condemnation or in similar circumstances; and

                  (2) Abraxas and the Restricted  Subsidiaries  will be entitled
         to obtain a release of the Collateral:

                           (a) with  respect to the  Revolving  Credit  Facility
         only,  upon  payment  in  full of all  amounts  outstanding  under  the
         Revolving  Credit  Facility  and all other  Revolving  Credit  Facility
         Obligations and the termination of the Revolving Credit Facility;

                           (b) with respect to the Notes only,  (i) upon payment
         in  full of the  Notes  and  all  other  Note  Obligations,  (ii)  upon
         satisfaction   and  discharge  of  the  Indenture  as  described  under
         "--Satisfaction  and  Discharge"  or (iii) upon a Legal  Defeasance  or
         Covenant Defeasance as described under "--Legal Defeasance and Covenant
         Defeasance;"

                           (c)  with  respect  to the  Bridge  Loan  only,  upon
         payment  in  full  of  the  Bridge  Loan  and  all  other  Bridge  Loan
         Obligations; and

                                      101


                           (d) in whole, upon satisfying each of clauses (a),
(b) and (c) of this paragraph.

     Disposition of Collateral Without Release

     Notwithstanding  the  provisions of the  Intercreditor  Agreement and other
Collateral   Documents   described  under   "Possession,   Use  and  Release  of
Collateral,"  so long as no Event of Default  under the  Indenture (or "event of
default" under each of the Revolving Credit Facility and the Bridge Loan) exists
or no Default or Event of Default under the Indenture (or "default" or "event of
default" under each of the Revolving  Credit Facility and the Bridge Loan) would
result  therefrom,  and so  long as  such  transaction  would  not  violate  the
Intercreditor  Agreement  and  other  Collateral  Documents,   Abraxas  and  the
Restricted  Subsidiaries may, to the extent permitted by applicable law, without
any  release  or  consent  by the  Collateral  Agent,  conduct  ordinary  course
activities with respect to their properties,  including the following activities
so long as they are  undertaken  in the  ordinary  course  of  business,  do not
constitute Asset Sales and otherwise comply with the terms of the Indenture, the
Intercreditor  Agreement and other Collateral  Documents and the Trust Indenture
Act: (1) disposing of equipment and other assets included in the Collateral that
has become worn out, defective or obsolete or not used or useful in the business
of Abraxas or any Restricted  Subsidiary and which is, to the extent required by
the Intercreditor Agreement or other Collateral Documents,  replaced by property
of  substantially  equivalent or greater value which becomes subject to the Lien
of any of the  Collateral  Documents;  (2) selling,  leasing or  abandoning  any
undeveloped  oil and gas property  subject to the Lien of any of the  Collateral
Documents  or any other oil and gas  property  subject to the Lien of any of the
Collateral  Documents that is not capable of production in economic  quantities;
(3) terminating, canceling, amending or otherwise modifying any contract subject
to the Lien of any of the Collateral  Documents;  (4)  surrendering or modifying
any license or permit  subject to the Lien of any of the  Collateral  Documents;
(5) altering,  repairing,  replacing,  changing the location and position of and
adding to the structures,  equipment, fixtures and appurtenances on any property
subject  to  the  Lien  of  any  of the  Collateral  Documents;  or (6)  selling
hydrocarbons or other mineral products for value.

     Abraxas is obligated to deliver to the Collateral Agent, within 30 calendar
days following the end of each six-month  period  beginning on December 1, 2004,
an Officers'  Certificate to the effect that all releases and withdrawals during
the  preceding  six-month  period with respect to which no release or consent of
the Collateral Agent was obtained were in the ordinary course of the business of
Abraxas and the Restricted Subsidiaries and were permitted by the Indenture, the
Intercreditor  Agreement and other  Collateral  Documents or the Trust Indenture
Act.

     Certain Bankruptcy Limitations

     Bankruptcy law could prevent the  Collateral  Agent from  repossessing  and
disposing,  or otherwise  exercising remedies in respect, of the Collateral upon
the  occurrence  of an Event of Default if a  bankruptcy  proceeding  were to be
commenced  by or against  Abraxas or its  Subsidiaries  prior to the  Collateral
Agent  having  repossessed  and  disposed,  or otherwise  exercised  remedies in
respect,  of the Collateral.  Under the Bankruptcy Code, a secured creditor such
as the  Collateral  Agent is prohibited  from  repossessing  its security from a
debtor in a bankruptcy case, or from disposing of security repossessed from such
debtor, without bankruptcy court approval. Moreover, the Bankruptcy Code permits
the debtor to continue to retain and use collateral even though the debtor is in
default under the applicable debt  instruments;  provided that the debtor may be
required to provide the secured creditor with "adequate protection." The meaning
of the term "adequate  protection" may vary according to the circumstances,  but
it is  intended  in  general  to  protect  the value of the  secured  creditor's
interest in the  collateral.  The court may find  "adequate  protection"  if the
debtor  pays cash or grants  additional  security,  if and at such  times as the
court in its  discretion  determines,  for any  diminution  in the  value of the
collateral  during the pendency of the bankruptcy case. In view of the lack of a
precise definition of "adequate  protection" and the broad discretionary  powers
of a  bankruptcy  court,  it is  impossible  to predict how long  payments  with
respect to the Secured Obligations could be delayed following  commencement of a
bankruptcy case, whether or when the Collateral Agent could repossess or dispose
of  the  Collateral  or  whether  or to  what  extent  holders  of  the  Secured
Obligations  would be  compensated  for any delay in payment or loss of value of
the  Collateral  through the  requirement  of "adequate  protection."  See "Risk
Factors--Risks  Related to the Notes--Bankruptcy  laws may limit your ability to
realize value from the collateral."


                                      102

Subsidiary Guarantees of Notes

     Each Subsidiary of Abraxas as of October 28, 2004, other than Grey Wolf (so
long as Grey Wolf is neither a Restricted  Subsidiary  nor a Guarantor of any of
our  other  Indebtedness),  has  unconditionally  Guaranteed  for so  long as it
remains a Restricted  Subsidiary  or Guarantees  any of our other  Indebtedness,
jointly  and  severally,  on  a  senior  secured  basis,  the  full  and  prompt
performance of Abraxas' obligations under the Indenture and the Notes, including
the payment of principal of, and premium and interest on, the Notes.  Any future
Restricted  Subsidiary and any other  Affiliate of Abraxas,  including,  without
limitation,  any  future  Subsidiary  of  Abraxas  (whether  it is a  Restricted
Subsidiary or an  Unrestricted  Subsidiary),  that  Guarantees  any of our other
Indebtedness  will also be required to enter into a  Subsidiary  Guaranty of the
Notes as described below in this "--Subsidiary Guarantees of Notes."

     The Subsidiary Guarantee of each Subsidiary Guarantor:

     o   is  secured,   together  with  the  respective  Subsidiary  Guarantor's
         Guarantee of the Revolving  Credit  Facility  Obligations,  by a shared
         first priority  security interest (subject to Permitted Prior Liens) in
         all of  such  Subsidiary  Guarantor's  material  property  and  assets,
         including, without limitation, (1) substantially all of its natural gas
         and crude oil  properties  and (2) all of the Capital  Stock (or in the
         case of a Foreign Unrestricted Subsidiary, up to 65% of the outstanding
         Capital  Stock) in any  company  or other  entity,  including,  without
         limitation,  in each Subsidiary of such Subsidiary  Guarantor,  that is
         owned by such  Subsidiary  Guarantor,  as more  fully  described  under
         "--Security" and "Intercreditor Agreement;"

     o   ranks   senior  in  right  of  payment  to  all   existing  and  future
         Subordinated  Indebtedness  of  the  respective  Subsidiary  Guarantor,
         including,  without  limitation,  its  Guarantee  of  the  Bridge  Loan
         Obligations; and

     o   ranks effectively senior in right of payment to all existing and future
         unsecured  Indebtedness of the respective  Subsidiary  Guarantor to the
         extent of the value of the  Collateral  available to the holders of the
         Notes.

     The provisions of the  Intercreditor  Agreement  provide for the Subsidiary
Guarantors  to make  payments  in  respect  of the  Secured  Obligations  to the
Collateral  Agent during the  existence of an Event of Default,  or an "event of
default" under the Revolving Credit Facility or the Bridge Loan, of which notice
thereof  has been given to the  parties to the  Intercreditor  Agreement  by the
Trustee,  the Revolving Credit Facility  Administrative Agent or the Bridge Loan
Administrative  Agent.  The  Collateral  Agent is required to apply such amounts
during  the  existence  of such an  Event  of  Default  (or  such an  "event  of
default"), together with amounts received from Abraxas and any proceeds from the
disposition of any Collateral,

     o   if a  minimum  collateral  coverage  ratio  equal  to three  times  the
         outstanding  Revolving Credit Facility  Obligations is then met, (i) to
         the  payment of  interest on the Notes only if and when all accrued and
         unpaid interest on the Revolving  Credit Facility  Obligations has been
         paid and (ii) to the payment of principal of the Notes only if and when
         the  outstanding  principal of the Revolving  Credit  Facility has been
         repaid; or

     o   if such  minimum  collateral  coverage  ratio is not then  met,  to the
         payment of interest on and  principal of the Notes only if and when all
         outstanding  interest on and principal of the Revolving Credit Facility
         have   been   paid.   See   "Intercreditor    Agreement--Priority    of
         Distributions."

     A Default or Event of Default  will entitle the Trustee to  accelerate  the
obligations of the Subsidiary  Guarantors under the Subsidiary Guarantees in the
same manner and to the same extent as Abraxas'  obligations  under the Indenture
and the Notes may be accelerated, subject to and in accordance with the terms of
the Intercreditor  Agreement.  The obligations of each Subsidiary  Guarantor are
limited  to the  maximum  amount  as will,  after  giving  effect  to all  other
contingent and fixed  liabilities of such Subsidiary  Guarantor and after giving
effect  to any  collection  from or  payments  made by or on behalf of any other
Subsidiary  Guarantor  in respect of the  obligations  of such other  Subsidiary


                                      103


Guarantor  under  its  Subsidiary  Guarantee  or  pursuant  to its  contribution
obligations  under the Indenture,  result in the  obligations of such Subsidiary
Guarantor  under  the  Subsidiary   Guarantee  not   constituting  a  fraudulent
conveyance  or  fraudulent  transfer  under  Federal  or state  law.  See  "Risk
Factors--Risks  Related to the Notes--The  subsidiary guarantees could be voided
if they  constitute  fraudulent  transfers  under the bankruptcy code or similar
state  laws,  which would  prevent the holders of the notes from  relying on the
subsidiary  guarantors to satisfy our payment obligations under the notes." Each
Subsidiary  Guarantor  that makes a payment or  distribution  under a Subsidiary
Guarantee  will  be  entitled  to a  contribution  from  each  other  Subsidiary
Guarantor  in a pro  rata  amount  based  on the  Adjusted  Net  Assets  of each
Subsidiary Guarantor.

     Claims of creditors of any of our non-guarantor Subsidiaries,  such as Grey
Wolf and any future  Subsidiary  that is not a Subsidiary  Guarantor,  generally
have  priority  with respect to the assets and  earnings of those  non-guarantor
Subsidiaries  over the claims of the creditors of Abraxas,  including holders of
the Notes. Accordingly,  the Notes are structurally subordinated to creditors of
our  non-guarantor  Subsidiaries,  which  generally  includes  trade  creditors,
secured  creditors and creditors  holding  Indebtedness  (including  Guarantees)
issued by such non-guarantor Subsidiaries.

     Each Subsidiary  Guarantor may consolidate  with, or merge into, or sell or
otherwise  dispose of all or substantially  all of its properties and assets to,
Abraxas  or  to  another  Subsidiary  Guarantor  without  limitation,  and  each
Subsidiary  Guarantor  may  consolidate  with,  or  merge  into,  or sell all or
substantially  all of its  properties and assets to, a Person other than Abraxas
or another  Subsidiary  Guarantor (whether or not Affiliated with the Subsidiary
Guarantor),  provided that any such transaction must comply with the covenant in
the Indenture described under "--Merger, Consolidation or Sale of Assets."

     Upon the sale or other disposition (by merger or otherwise) of a Subsidiary
Guarantor (or of all or  substantially  all of its  properties  and assets) to a
Person  other than  Abraxas or another  Subsidiary  Guarantor  and pursuant to a
transaction that is otherwise in compliance with the Indenture,  such Subsidiary
Guarantor will be deemed released from its Subsidiary  Guarantee and the related
obligations set forth in the Indenture.  However, any such termination will only
be permitted to the extent that all  obligations  of such  Subsidiary  Guarantor
under all of its  Guarantees  (if any) of other  Indebtedness  of Abraxas or any
other  Restricted  Subsidiary,  and under  all  Liens  that  secure  such  other
Indebtedness of Abraxas or any other Restricted Subsidiary,  also terminate upon
such  sale or  other  disposition  of such  Subsidiary  Guarantor  (or of all or
substantially all of its properties and assets).  Each Subsidiary Guarantor that
is designated as an Unrestricted Subsidiary after the Closing Date in accordance
with the Indenture  will be released from its  Subsidiary  Guarantee and related
obligations set forth in the Indenture for so long as it remains an Unrestricted
Subsidiary and does not Guarantee any of our other Indebtedness.

     The  Indenture   provides  that  if  Abraxas  or  any  of  its   Restricted
Subsidiaries acquires or creates another Subsidiary after the Closing Date, then
that  newly  acquired  or  created  Subsidiary  will be  required  to  become  a
Subsidiary Guarantor,  unless it is designated as an Unrestricted  Subsidiary in
accordance  with the terms of the  Indenture  (and does not Guarantee any of our
other  Indebtedness),  and unless it is so  designated  it will be  required  to
contemporaneously with such acquisition or creation:

     o   execute  and  deliver to the Trustee a  supplemental  indenture  to the
         Indenture,  a joinder agreement to the Intercreditor  Agreement and, if
         the  Registration  Rights  Agreement  is  then  in  effect,  a  joinder
         agreement  to the  Registration  Rights  Agreement,  each in  form  and
         substance  reasonably  satisfactory to the Trustee and, with respect to
         the  joinder  agreement  to the  Intercreditor  Agreement,  also to the
         Collateral  Agent,  which provide that such  Subsidiary  shall become a
         Subsidiary   Guarantor   under  the   Indenture  and  a  party  to  the
         Intercreditor   Agreement  and  the  Registration   Rights   Agreement,
         respectively; and

     o   deliver  an  opinion  of  counsel,  in form  and  substance  reasonably
         satisfactory to the Trustee and, with respect to the joinder  agreement
         to the  Intercreditor  Agreement,  also to the Collateral Agent, to the
         effect that such supplemental  indenture and joinder  agreement(s) have
         been duly  authorized,  executed and delivered by such  Subsidiary  and
         constitute legal, valid and binding obligations of such Subsidiary.

                                      104


The foregoing requirements of this paragraph will also apply to any Unrestricted
Subsidiary  if (and at such time) it either  becomes a Restricted  Subsidiary or
Guarantees any of our other  Indebtedness  (whether or not it is a Subsidiary of
Abraxas on the Closing Date).

Optional Redemption

     Except  as  described  in  the  following  paragraph,  the  Notes  are  not
redeemable  at our option  prior to April 29,  2007.  Thereafter,  the Notes are
subject to  redemption at the option of Abraxas,  in whole or in part,  upon not
less than 30 nor more than 60 days' notice,  at the redemption prices (expressed
as  percentages  of  principal  amount) set forth below plus  accrued and unpaid
interest to the applicable redemption date:

              Year                                                Percentage
              ----                                                ----------
              From April 29, 2007 to April 28, 2008.............    104.00%
              From April 29, 2008 to April 28, 2009.............    102.00%
              After April 28, 2009..............................    100.00%

     At any time prior to April 29, 2007, Abraxas may, at its option and subject
to the restrictions and other provisions  relating thereto, if any, contained in
the Revolving  Credit  Facility (see  "Management's  Discussion  and Analysis of
Financial Condition and Results of Operations--Long-Term  Indebtedness--Abraxas'
New $15 Million Senior Secured Revolving Credit  Facility"),  on any one or more
occasions  redeem up to 35% of the original  aggregate  principal  amount of the
Notes (i.e.,  $43,750,000)  with the Net Cash Proceeds of one or more  Qualified
Equity Offerings at a redemption price equal to the product of (x) the principal
amount of the Notes being so redeemed and (y) a redemption  price factor of 1.00
plus the per annum  interest  rate on the Notes  (expressed as a decimal) on the
applicable  redemption  date, plus accrued and unpaid interest to the applicable
redemption date, provided, that,

     (1) at least 65% of the original  aggregate  principal  amount of the Notes
(i.e., $81,250,000) remains outstanding after each such redemption; and

     (2) any such  redemption  occurs  within 90 days  after the  closing of the
Equity Offering to which such Net Cash Proceeds relate.

     If less than all the Notes are to be  redeemed  at any time,  selection  of
Notes for redemption  will be made by the Trustee on a pro rata basis,  provided
that no Notes of $1,000 or less will be redeemed in part.  Notices of redemption
will be mailed by first  class mail at least 30 but not more than 60 days before
the  redemption  date to each holder of Notes to be  redeemed at its  registered
address.  If any Note is to be redeemed in part only,  the notice of  redemption
that relates to such Note will state the portion of the principal amount thereof
to be redeemed.  A new Note in principal amount equal to the unredeemed  portion
thereof will be issued in the name of the holder  thereof upon  surrender of the
original Note. On and after the redemption  date,  interest will cease to accrue
on Notes or  portions  thereof  called for  redemption  as long as  Abraxas  has
deposited  with  the  Paying  Agent  funds  in  satisfaction  of the  applicable
redemption price.

         If a redemption date is on or after a regular record date and on or
before the related Interest Payment Date, the accrued and unpaid interest and
premium, if any, on each Note being redeemed will be paid to the person in whose
name such Note is registered at the close of business on such regular record
date, and no other interest or premium will be payable to any other Person who
may become a holder of such Note after such time.

                                      105


Repurchase at the Option of Holders Upon the Occurrence of Certain Asset Sales

     The Bridge  Loan  provides  that if there are any Bridge  Loan  Obligations
outstanding after June 28, 2006, then, at any time thereafter and for so long as
the Bridge Loan Obligations remain outstanding and there is not then an Event of
Default,  the Bridge  Loan  Administrative  Agent will have the right to require
Abraxas and the Restricted Subsidiaries to consummate one or more Asset Sales in
accordance  with the terms  described  in this  "--Repurchase  at the  Option of
Holders Upon the  Occurrence of Certain Asset Sales" (and without  regard to the
covenant in the Indenture  described under "--Certain  Covenants--Limitation  on
Asset Sales").

     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations--Long-Term  Indebtedness--Abraxas'  New $25 Million Second
Lien  Increasing Rate Bridge Loan" for a description of the rights of the Bridge
Loan  Administrative  Agent,  and the  obligations of Abraxas and the Restricted
Subsidiaries, with respect to any Asset Sale required by the terms of the Bridge
Loan. The Indenture also provides that Abraxas will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, consummate any such Asset Sale
unless:

                  (1) the Bridge Loan Obligations are then outstanding and there
         is not then an Event of Default;

                  (2) Abraxas or such Restricted Subsidiary, as the case may be,
         receives  aggregate  consideration  at the time of such  Asset  Sale at
         least  equal to the fair  market  value of the assets or Capital  Stock
         sold or otherwise disposed of pursuant to the Asset Sale (as determined
         in good faith by the Board of Directors  of Abraxas and  evidenced by a
         Board  Resolution  delivered to the Trustee or,  solely with respect to
         Asset Sales in an amount not exceeding  $1.0 million,  as determined in
         good faith by the chief  executive  officer of Abraxas and evidenced by
         an Officers' Certificate delivered to the Trustee);

                  (3) at least 80% of the  consideration  received by Abraxas or
         the Restricted Subsidiary, as the case may be, in respect of such Asset
         Sale (as  determined in good faith by the Board of Directors of Abraxas
         and evidenced by a Board Resolution delivered to the Trustee or, solely
         with respect to Asset Sales in an amount not exceeding $1.0 million, as
         determined in good faith by the chief executive  officer of Abraxas and
         evidenced  by  an  Officers'  Certificate  delivered  to  the  Trustee)
         consists of cash or Cash Equivalents;

                  (4) in the case of a Sale of Collateral,  the Collateral Agent
         is immediately  granted a perfected  first priority  security  interest
         (subject to Permitted  Prior Liens) in the Net Cash  Proceeds and other
         consideration   therefor   received   by  Abraxas  or  the   Restricted
         Subsidiary,  as the case may be,  as  additional  Collateral  under the
         Collateral  Documents  to secure the Secured  Obligations,  and, in the
         case of Net Cash  Proceeds,  such Net Cash  Proceeds  must,  except  as
         otherwise  provided in the Intercreditor  Agreement,  be deposited into
         the Bridge Loan Asset Sale Proceeds Account,  all on terms and pursuant
         to arrangements  reasonably satisfactory to the Collateral Agent in its
         reasonable  determination (which may include, at the Collateral Agent's
         reasonable  request,   customary   Officers'   Certificates  and  legal
         opinions),   and  the  Intercreditor  Agreement  and  other  Collateral
         Documents include release provisions  requiring the Collateral Agent to
         release  deposits  in the Bridge  Loan Asset Sale  Proceeds  Account as
         necessary to permit  Abraxas or its  Restricted  Subsidiaries  to apply
         such Net Cash  Proceeds  in the  manner  described  below,  unless  the
         Collateral Agent has received written notice that a Default or Event of
         Default has occurred and is continuing;

                  (5) if  the  Board  of  Directors  of  Abraxas  determines  in
         accordance  with either  clause (2) or (3) of this  paragraph  that the
         fair market value of the assets or Capital  Stock,  as the case may be,
         to be sold or  otherwise  disposed of pursuant to the Asset Sale or the
         fair  market  value of the  aggregate  consideration  to be received by
         Abraxas and the  Restricted  Subsidiaries  in respect of the Asset Sale
         exceeds  $5.0  million,  Abraxas  delivers to the Trustee an opinion or
         appraisal with respect to such  determination  issued by an independent
         accounting or investment banking firm which is nationally recognized in
         the United States,  or a reputable  independent  appraisal or petroleum
         engineering  firm which is reasonably  satisfactory to the Trustee,  as
         appropriate under the circumstances; and

                                      106


                  (6) Abraxas  delivers to the Trustee an Officers'  Certificate
         certifying  that such Asset Sale is required by, and complies with, the
         Bridge Loan and complies with the preceding  clauses (1), (2), (3), (4)
         and (5) of this paragraph.

     The Net Cash Proceeds from each such Asset Sale (other than with respect to
any  Capital  Stock of Grey  Wolf,  which will be  exclusively  applied to repay
outstanding  Bridge  Loan  Obligations)  will  be  applied  by  Abraxas  and the
Restricted Subsidiaries in the following order, to the extent available:

     o   first, to pay any interest then due and payable on the Revolving Credit
         Facility;
         
     o   second, to pay any interest then due and payable on the Notes;
         
     o   third, to pay any accrued and unpaid  interest on the Revolving  Credit
         Facility that was not paid under clause "first" of this paragraph;

     o   fourth,  to pay  any  outstanding  principal  of the  Revolving  Credit
         Facility;
         
     o   fifth,  if the remaining  aggregate  amount of such Net Cash  Proceeds,
         together  with any Net Cash  Proceeds  in the  Bridge  Loan  Asset Sale
         Proceeds  Account from a previous Asset Sale  consummated in accordance
         with the provisions  described in this  "--Repurchase  at the Option of
         Holders  Upon the  Occurrence  of Certain  Asset  Sales,"  exceeds $5.0
         million,  the  entire  amount in the Bridge  Loan  Asset Sale  Proceeds
         Account is to be used to make a Net  Proceeds  Offer to purchase  Notes
         from all  holders of the Notes as if such Net Cash  Proceeds  remaining
         after any payment made pursuant to clause "first," "second," "third" or
         "fourth"  of this  paragraph,  and any other Net Cash  Proceeds  in the
         Bridge  Loan Asset Sale  Proceeds  Account,  are Excess  Proceeds  (see
         "--Certain Covenants--Limitation on Asset Sales"); and

     o   sixth,  after the  payment of all amounts  required  by a Net  Proceeds
         Offer made in  accordance  with clause  "fifth" of this  paragraph,  to
         repay all outstanding Bridge Loan Obligations.

Any Net Cash Proceeds  remaining in the Bridge Loan Asset Sale Proceeds  Account
after clause "fourth" of this paragraph,  but prior to the application of clause
"fifth" of this  paragraph,  will be  required to be retained in the Bridge Loan
Asset Sale  Proceeds  Account  until so applied in  accordance  with such clause
"fifth" (unless either (i) all of the Bridge Loan  Obligations have been paid in
full,  whereupon  such remaining Net Cash Proceeds will be applied in the manner
described  under  "--Certain  Covenants--Limitation  on Asset  Sales" or (ii) an
Event of Default  exists,  whereupon  such  remaining  Net Cash Proceeds will be
applied in the  manner  provided  for in the  Intercreditor  Agreement).  To the
extent there  exists any excess Net Cash  Proceeds in the Bridge Loan Asset Sale
Proceeds Account  following  application of Net Cash Proceeds in accordance with
this clause  "sixth" of this  paragraph,  such excess Net Cash  Proceeds will be
treated as Net Cash  Proceeds from an Asset Sale in the manner  described  under
"--Certain Covenants--Limitation on Asset Sales."

     The  lenders'  commitment  under  the  Revolving  Credit  Facility  will be
permanently  reduced by the amount of any Indebtedness repaid pursuant to clause
"fourth" of the foregoing paragraph.

Acquisition of Notes by Abraxas and its Affiliates

     The  Indenture  provides  that at any time  Abraxas  acquires a  beneficial
interest  in any Note,  whether by  redemption  (see  "--Optional  Redemption"),
through the open market, by private sale or otherwise (see  "--Repurchase at the
Option of Holders Upon the Occurrence of Certain Asset Sales" and  "--Repurchase
at the Option of Holders Upon a Change of Control"), such Note will be cancelled
without any further action and the outstanding aggregate principal amount of the
Notes  will be reduced  by the  principal  amount of such  cancelled  Note.  The
Indenture also provides that in determining  whether the holders of the required
principal  amount of Notes have concurred in any  direction,  waiver or consent,
Notes owned by Abraxas or any of its Affiliates will be considered as though not
outstanding,  except that for the  purposes of  determining  whether the Trustee
will be  protected  in relying on any such  direction,  waiver or consent,  only


                                      107


Notes that a responsible officer of the Trustee actually knows are so owned will
be so disregarded.

Sinking Fund

     Abraxas is not required to make sinking fund  payments  with respect to the
Notes.

Repurchase at the Option of Holders Upon a Change of Control

     Upon the occurrence of a Change of Control,  each holder of Notes will have
the right to require  Abraxas to repurchase  all or any part (equal to $1,000 or
an integral  multiple  thereof)  of such  holder's  Notes  pursuant to the offer
described  below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the  aggregate  principal  amount  thereof  plus  accrued  and unpaid
interest (the "Change of Control  Purchase  Price") to the date of purchase (the
"Change  of  Control  Payment  Date").  Within 30 days  following  any Change of
Control, Abraxas will mail or cause to be mailed a notice to each holder, with a
copy to the Trustee,  describing the transaction or transactions that constitute
the  Change  of  Control  and  offering  to  repurchase  Notes  pursuant  to the
procedures required by the Indenture and described in such notice. The Change of
Control  Payment Date is required to be a Business Day not less than 30 days nor
more than 60 days  after such  notice is mailed.  Abraxas  will be  required  to
comply with the  requirements of Rule 14e-1 under the Exchange Act and any other
securities  laws  and  regulations  thereunder  to  the  extent  such  laws  and
regulations  are applicable in connection  with the repurchase of the Notes as a
result  of a  Change  of  Control.  To the  extent  that the  provisions  of any
securities  laws or  regulations  conflict with the  provisions  relating to the
Change of Control Offer, Abraxas will comply with the applicable securities laws
and  regulations  and  will  not be  deemed  to have  breached  its  obligations
described in this prospectus by virtue thereof.

     On the Change of Control Payment Date, Abraxas will, to the extent lawful:

     o   accept for  payment  all Notes or portions  thereof  properly  tendered
         pursuant to the Change of Control Offer;

     o   deposit  with the Paying Agent an amount equal to the Change of Control
         Purchase Price in respect of all Notes or portions thereof so accepted;
         and

     o   deliver or cause to be  delivered  to the Trustee the Notes so accepted
         together with an Officers'  Certificate stating the aggregate principal
         amount of Notes or portions thereof being purchased by Abraxas.

     The Paying Agent will promptly mail to each holder of Notes so accepted the
Change  of  Control  Payment  for such  Notes,  and the  Trustee  will  promptly
authenticate  and mail (or cause to be transferred by book entry) to each holder
a new Note equal in  principal  amount to any  unpurchased  portion of the Notes
surrendered,  if any. However,  each such new Note must be in a principal amount
of $1,000 or an integral  multiple  thereof.  Abraxas will publicly announce the
results of the Change of Control  Offer on or as soon as  practicable  after the
Change of Control Payment Date.

     Except  as  described  above  with  respect  to a Change  of  Control,  the
Indenture  does not contain  provisions  that permit the holders of the Notes to
require that Abraxas  repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.

     Other than for restrictions contained in the Intercreditor  Agreement,  the
Revolving  Credit  Facility and the Bridge Loan,  Abraxas will not, and will not
permit  any  Restricted   Subsidiary  to,  create  any  restriction  that  would
materially  impair the  ability of Abraxas to make a Change of Control  Offer to
purchase  the Notes,  or if such Change of Control  Offer is made to pay for the
Notes tendered for purchase.  If a Change of Control Offer is made, there can be
no assurance that Abraxas will have available funds sufficient to pay the Change
of Control  Purchase  Price for all of the Notes that might be  delivered by the
holders of Notes  seeking to accept the Change of Control  Offer.  The Revolving
Credit  Facility,  the  Bridge  Loan and the Grey Wolf Term  Loan  provide  that
certain change of control  events with respect to us would  constitute a default
thereunder (see "Management's Discussion and Analysis of Financial Condition and


                                      108


Results of Operations--Long-Term  Indebtedness").  Any future credit facility or
other  agreement  relating to  Indebtedness  to which Abraxas or a Subsidiary of
Abraxas becomes a party may contain similar restrictions and provisions.  In the
event a Change of Control occurs at a time when we are contractually  prohibited
from purchasing  Notes, we could seek the consent of our lenders to the purchase
of Notes or  could  attempt  to  refinance  the  borrowings  that  contain  such
prohibition.  If we do not obtain  such a consent or repay such  borrowings,  we
will remain  contractually  prohibited from purchasing  Notes. In such case, our
failure to purchase  tendered  Notes would  constitute an Event of Default under
the  Indenture  that would,  in turn,  constitute a default  under the Revolving
Credit Facility and the Bridge Loan and may also, in turn,  constitute a default
under  any  credit   facility  or  other  agreement  to  which  Abraxas  or  its
Subsidiaries   become  a  party.  See  "Risk   Factors--Risks   Related  to  the
Notes--Abraxas  may  not be  able to  repurchase  the  notes  upon a  change  of
control."

     The  definition  of Change of Control  includes  an event by which  Abraxas
sells,  assigns,  conveys,  transfers or leases all or substantially  all of its
properties  and assets to any Person but does not  include  such events that are
permitted as described under  "--Merger,  Consolidation  or Sale of Assets;" the
phrase "all or  substantially  all" is subject to applicable legal precedent and
as a result in the  future  there may be  uncertainty  as to whether a Change of
Control has occurred.

     Abraxas is not required to make a Change of Control  Offer upon a Change of
Control  if a third  party  (i)  makes an offer to the  holders  of the Notes to
purchase the Notes at the same or a higher purchase price, at the same times and
otherwise in substantial compliance with the requirements applicable to a Change
of Control Offer made by Abraxas and (ii)  purchases all Notes validly  tendered
and not withdrawn under such offer.

Certain Covenants

     Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock

     The  Indenture  provides  that Abraxas will not, and will not permit any of
its Restricted  Subsidiaries to, Incur any Indebtedness  (including any Acquired
Indebtedness),  other than  Permitted  Indebtedness,  or issue any  Disqualified
Stock,  unless (1) at the time of such event and after giving effect thereto and
the receipt and  application  of the funds  therefrom,  the  Consolidated  Fixed
Charge  Coverage Ratio for the four full fiscal quarters  immediately  preceding
such event, taken as one period, would have been at least equal to 3.00 to 1.00,
determined on a pro forma basis  (including a pro forma  application  of the net
proceeds  therefrom) as if such additional  Indebtedness  had been incurred,  or
such Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period, (2) no Default or Event of Default shall have occurred
and be continuing at the time such Indebtedness is incurred or such Disqualified
Stock is  issued  or would  occur as a  consequence  of the  incurrence  of such
Indebtedness or the issuance of such Disqualified  Stock and (3) with respect to
any  such  Restricted  Subsidiary,  it is then a  Subsidiary  Guarantor  and its
Subsidiary  Guarantee then constitutes a legal,  valid and binding obligation of
such Subsidiary Guarantor.

     Other than to the extent provided in the Intercreditor  Agreement,  neither
Abraxas nor any Restricted  Subsidiary is permitted to Incur any Indebtedness or
other  obligation,  including  Permitted  Indebtedness,  that  is  contractually
subordinated in right of payment or security (other than Permitted Liens) to any
other  Indebtedness  of Abraxas or that  Restricted  Subsidiary,  as applicable,
unless such Indebtedness is also expressly  contractually  subordinated in right
of  payment  and  security  (other  than  Permitted  Liens)  to the Notes or the
Subsidiary  Guarantee  of  that  Restricted   Subsidiary,   as  applicable,   on
substantially  identical  terms;  provided,  however,  that no  Indebtedness  of
Abraxas  or  any  Restricted  Subsidiary  will  be  deemed  to be  contractually
subordinated  in right of  payment  or  security  to any other  Indebtedness  of
Abraxas or that Restricted  Subsidiary solely by virtue of being unsecured,  and
the  provisions of this  paragraph  will not prohibit  tranches of  Indebtedness
under the Revolving  Credit  Facility  being  subordinated  to other tranches of
Indebtedness thereunder.

     Limitation on Asset Sales

     The  Indenture  provides  that  Abraxas  will not,  and will not permit any
Restricted  Subsidiary  to,  directly or  indirectly,  consummate any Asset Sale
unless:

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         (1) Abraxas or such Restricted Subsidiary, as the case may be, receives
     aggregate  consideration  at the time of such Asset Sale at least  equal to
     the fair  market  value of the  assets or Capital  Stock sold or  otherwise
     disposed of pursuant to the Asset Sale (as  determined in good faith by the
     Board of Directors of Abraxas and evidenced by a Board Resolution delivered
     to the  Trustee  or,  solely  with  respect to Asset Sales in an amount not
     exceeding $1.0 million,  as determined in good faith by the chief executive
     officer of Abraxas and evidenced by an Officers'  Certificate  delivered to
     the Trustee);

         (2) at least 80% of the fair market value of the consideration received
     by Abraxas or the Restricted Subsidiary,  as the case may be, in respect of
     such Asset Sale (as  determined  in good faith by the Board of Directors of
     Abraxas and  evidenced by a Board  Resolution  delivered to the Trustee or,
     solely with respect to Asset Sales in an amount not exceeding $1.0 million,
     as determined in good faith by the chief  executive  officer of Abraxas and
     evidenced by an Officers' Certificate delivered to the Trustee) consists of
     cash,  Cash  Equivalents or properties  used in the Oil and Gas Business of
     Abraxas or its Restricted Subsidiaries;

         (3) in the  case of a Sale  of  Collateral,  the  Collateral  Agent  is
     immediately  granted a perfected first priority  security interest (subject
     to Permitted Prior Liens) in the Net Cash Proceeds and other  consideration
     therefor received by Abraxas or the Restricted Subsidiary,  as the case may
     be, as additional  Collateral under the Collateral  Documents to secure the
     Secured Obligations,  and, in the case of Net Cash Proceeds,  such Net Cash
     Proceeds must, except as otherwise provided in the Intercreditor Agreement,
     be deposited into an Asset Sale Proceeds Account, all on terms and pursuant
     to  arrangements  reasonably  satisfactory  to the Collateral  Agent in its
     reasonable  determination  (which may include,  at the  Collateral  Agent's
     reasonable request,  customary Officers'  Certificates and legal opinions),
     and the  Intercreditor  Agreement and other  Collateral  Documents  include
     release provisions requiring the Collateral Agent to release deposits in an
     Asset  Sale  Proceeds  Account  as  necessary  to  permit  Abraxas  or  its
     Restricted  Subsidiaries  to apply  such Net Cash  Proceeds  in the  manner
     described  below,  unless the Collateral  Agent has received written notice
     that a Default or Event of Default has occurred and is continuing;

         (4) if the Board of Directors of Abraxas  determines in accordance with
     either  clause (1) or (2) of this  paragraph  that the fair market value of
     the assets or Capital  Stock,  as the case may be, to be sold or  otherwise
     disposed  of  pursuant  to the Asset Sale or the fair  market  value of the
     aggregate  consideration  to be  received  by  Abraxas  and the  Restricted
     Subsidiaries  in respect of the Asset Sale  exceeds $5.0  million,  Abraxas
     delivers  to the  Trustee  an  opinion or  appraisal  with  respect to such
     determination  issued by an  independent  accounting or investment  banking
     firm which is nationally  recognized in the United  States,  or a reputable
     independent  appraisal or petroleum  engineering  firm which is  reasonably
     satisfactory to the Trustee, as appropriate under the circumstances; and

         (5) Abraxas delivers to the Trustee an Officers' Certificate certifying
     that such Asset Sale complies with the preceding  clauses (1), (2), (3) and
     (4) of this paragraph;

provided,  that (a) any Asset Sale pursuant to a condemnation,  appropriation or
other similar taking, including by deed in lieu of condemnation,  or pursuant to
the foreclosure or other  enforcement of a Lien incurred not in violation of the
covenant  described  under  "--Limitations  on Liens" or exercise by the related
lienholder  of rights with respect  thereto,  including by deed or assignment in
lieu of foreclosure, will not be required to satisfy the conditions set forth in
clauses  (1),  (2) and (4) of this  paragraph  (and  the  Officers'  Certificate
described in clause (5) of this  paragraph will not be required to certify as to
compliance with such clauses (1), (2) and (4)) and (b) any Asset Sale undertaken
by  Abraxas or a  Restricted  Subsidiary  at the  direction  of the Bridge  Loan
Administrative   Agent  in  accordance   with  the  covenant   described   under
"--Repurchase  at the Option of Holders  Upon the  Occurrence  of Certain  Asset
Sales" will not be required to satisfy any of the conditions of this  paragraph,
but will instead be required to fulfill the conditions of such covenant.

     The amount  (without  duplication)  of any  Unsubordinated  Indebtedness of
Abraxas or any Restricted Subsidiary that is expressly assumed by the transferee
in an  Asset  Sale  and  with  respect  to  which  Abraxas  or  such  Restricted
Subsidiary,  as the case may be, is unconditionally  discharged by the holder of
such  Unsubordinated  Indebtedness,  shall be deemed to be Cash  Equivalents for
purposes of clause (2) above and shall also be deemed to  constitute a repayment


                                      110


of, and a permanent reduction in, the amount of such Unsubordinated Indebtedness
for purposes of the following paragraph.

     If Abraxas or any  Restricted  Subsidiary  consummates an Asset Sale (other
than  (i)  any  Asset  Sale  undertaken  at the  direction  of the  Bridge  Loan
Administrative   Agent  in  accordance   with  the  covenant   described   under
"--Repurchase  at the Option of Holders  Upon the  Occurrence  of Certain  Asset
Sales" or (ii) any Asset Sale with respect to Capital Stock of Grey Wolf, which,
so  long as any of the  Bridge  Loan  Obligations  remain  outstanding,  will be
exclusively  applied to repay such outstanding Bridge Loan Obligations  pursuant
to the terms of the Bridge Loan) or there is any Event of Loss,  Abraxas or such
Restricted Subsidiary may at its option either:

         (1) no more than 365 days after such Asset Sale, or date upon which any
     Net Loss  Proceeds are received by Abraxas or a  Restricted  Subsidiary  in
     respect of such Event of Loss,  as the case may be, apply all or any of the
     Net Cash Proceeds or Net Loss  Proceeds,  respectively,  therefrom to repay
     Indebtedness  outstanding  under the  Revolving  Credit  Facility (but not,
     unless either  Abraxas  elects or as described in the following  paragraph,
     permanently reduce the lenders'  commitment  thereunder);  provided,  that,
     Abraxas  will be  required  to  deliver  an  Officer's  Certificate  to the
     Trustee,  within 45 days after the end of any  fiscal  quarter in which any
     such Net Cash  Proceeds or Net Loss  Proceeds  are so applied,  stating for
     each such  application  the amount of  Indebtedness  repaid and the date of
     such repayment;

         (2) no more than 365 days before or after such Asset Sale, or date upon
     which  any Net Loss  Proceeds  are  received  by  Abraxas  or a  Restricted
     Subsidiary in respect of such Event of Loss, as the case may be, use all or
     any  part of the Net Cash  Proceeds  or Net  Loss  Proceeds,  respectively,
     therefrom to make capital  expenditures or acquire  properties that will be
     used in the Oil and Gas Business of Abraxas or its Restricted Subsidiaries,
     provided,  however,  that,  if any  such  capital  expenditure  is  made or
     property is  acquired  prior to the  occurrence  of such Asset Sale or date
     upon which such Net Loss  Proceeds are so received,  to the extent  amounts
     were drawn under the Revolving Credit Facility to pay for such acquisition,
     contemporaneously  with the  consummation  of the Asset  Sale or receipt of
     such Net Loss Proceeds, as the case may be, Abraxas will be required to use
     the Net Cash  Proceeds of such Asset Sale or the Net Loss  Proceeds of such
     Event of Loss,  as the case may be,  to  repay  (but  not,  unless  Abraxas
     elects,  permanently reduce) the Revolving Credit Facility to the extent of
     the amount so borrowed; or

         (3) no more than 365 days after such Asset Sale, or date upon which any
     Net Loss  Proceeds are received by Abraxas or a  Restricted  Subsidiary  in
     respect of such Event of Loss, as the case may be, and at such time when no
     Bridge  Loan  Obligations  are  outstanding  and  there  is a ratio  of our
     consolidated  PV-10 to Consolidated  Indebtedness of at least 1.25 to 1.00,
     use  all or any  part  of the  Net  Cash  Proceeds  or Net  Loss  Proceeds,
     respectively, therefrom to, on one Interest Payment Date (but not more than
     one Interest  Payment Date),  pay interest on the Notes up to the amount of
     the semi-annual interest scheduled to be paid on such Interest Payment Date
     (without  regard to any  overdue or default  interest  that may owing as of
     such Interest Payment Date).

Notwithstanding the foregoing,  the Net Cash Proceeds received by Abraxas or any
Restricted  Subsidiary in respect of any  disposition by it of any Capital Stock
of Grey Wolf, whether or not such disposition constitutes an Asset Sale, will be
required  to  be  applied  first  to  the  repayment  of  any  Obligations  then
outstanding  under the Bridge  Loan and then,  if any Net Cash  Proceeds  remain
after such  application,  such excess Net Cash Proceeds (to the extent resulting
from an Asset Sale) will be subject to the terms  described  in this  paragraph.
The  amount of such Net Cash  Proceeds  and Net Loss  Proceeds  not  applied  or
invested as  provided  in this  paragraph  (after the period  specified  in this
paragraph) will constitute "Excess Proceeds."

     The  Revolving  Credit  Facility  provides that if the Net Proceeds from an
Asset Sale or the Net Loss  Proceeds  from an Event of Loss are applied to repay
Indebtedness  outstanding under the Revolving Credit Facility in accordance with
clause  (1) of the  immediately  preceding  paragraph  and  the  amount  of such
Indebtedness  is not,  within 365 days of such  application,  redrawn  under the
Revolving  Credit Facility to make capital  expenditures  or acquire  properties
that  will be used in the Oil and Gas  Business  of  Abraxas  or its  Restricted
Subsidiaries (as certified in an Officers'  Certificate delivered to the Trustee
prior  to the end of such  365 day  period),  then,  at the end of such  365 day
period,  the lenders'  commitment  under the Revolving  Credit  Facility will be
permanently reduced on a dollar-for-dollar  basis by the amount of such Net Cash
Proceeds  or Net Loss  Proceeds,  as the case may be,  which were not so redrawn


                                      111


under the  Revolving  Credit  Facility if the  aggregate  amount of the Net Cash
Proceeds from all other previous Asset Sales, together with the aggregate amount
of all Net Loss  Proceeds  from all other  previous  Events of Loss,  which were
similarly  applied in accordance  with clause (1) of the  immediately  preceding
paragraph and not so redrawn under the Revolving Credit Facility within 365 days
of such  application  equals or exceeds $10 million.  If as a result of any such
reduction in the lenders'  commitment  under the Revolving Credit Facility there
is then any  Indebtedness  outstanding  thereunder in excess of such commitment,
the amount of such excess  Indebtedness will become  immediately due and payable
under the Revolving Credit Facility.

     When the  aggregate  amount  of Excess  Proceeds  equals  or  exceeds  $5.0
million, Abraxas will be required to make an offer to purchase, from all holders
of the  Notes,  an  aggregate  principal  amount of Notes  equal to such  Excess
Proceeds as follows:

     o   Abraxas  will make an offer to purchase (a "Net  Proceeds  Offer") from
         all holders of the Notes,  in accordance  with the procedures set forth
         in the Indenture, the maximum principal amount (expressed as a multiple
         of $1,000) of Notes that may be purchased using an amount (the "Payment
         Amount")  equal to such Excess  Proceeds  (subject to  proration in the
         event such Payment Amount is less than the aggregate  Offered Price (as
         defined in the next bullet point) of all Notes tendered);

     o   the  offer  price for the Notes  will be  payable  in cash in an amount
         equal to 100% of the aggregate  principal  amount of the Notes tendered
         pursuant to a Net Proceeds  Offer,  plus accrued and unpaid interest to
         the date such Net Proceeds Offer is consummated (the "Offered  Price"),
         in accordance  with the procedures  set forth in the Indenture.  If the
         aggregate  Offered Price of Notes validly tendered and not withdrawn by
         holders thereof exceeds the Payment Amount,  Notes to be purchased will
         be selected on a pro rata basis (with  adjustments  as  appropriate  so
         that only Notes in denominations of $1,000 or multiples thereof will be
         purchased). To the extent that the aggregate Offered Price of the Notes
         tendered  pursuant  to a Net  Proceeds  Offer is less than the  Payment
         Amount relating  thereto (such  shortfall  constituting a "Net Proceeds
         Deficiency"),  Abraxas  may use  such  Net  Proceeds  Deficiency,  or a
         portion  thereof,  for  general  corporate  purposes,  subject  to  the
         limitations of the covenant described under "--Limitation on Restricted
         Payments;" and

     o   upon  completion  of such Net  Proceeds  Offer,  the  amount  of Excess
         Proceeds will be reset to zero.

     Except for the Intercreditor  Agreement,  the Revolving Credit Facility and
the Bridge Loan, Abraxas will not, and will not permit any Restricted Subsidiary
to, enter into or suffer to exist any agreement that would place any restriction
of any kind (other than pursuant to law or  regulation)  on the right of Abraxas
to make a Net Proceeds  Offer  following any Asset Sale.  Abraxas is required to
comply with the  requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder,  if applicable, in the event that an
Asset Sale occurs and Abraxas is required to purchase Notes as described  above.
To the extent that the provisions of any securities laws or regulations conflict
with the provisions relating to the Net Proceeds Offer, Abraxas will comply with
the applicable  securities  laws and  regulations and will not be deemed to have
breached its obligations described above by virtue thereof.

     Limitation on Sale-Leaseback Transactions

     Abraxas will not, and will not permit any  Restricted  Subsidiary to, enter
into any Sale-Leaseback  Transaction  involving any of its assets or properties,
whether now owned or hereafter acquired, unless

         (1) Abraxas or such Restricted Subsidiary, as the case may be, would be
     entitled to (a) Incur  Indebtedness in an amount equal to the  Attributable
     Indebtedness relating to such Sale-Leaseback Transaction in compliance with
     the covenant  described under  "--Limitation  on Incurrence of Indebtedness
     and Issuance of Disqualified Stock" and (b) create a Lien on the properties
     and assets  that are the  subject  of such  Sale-Leaseback  Transaction  to
     secure such Attributable  Indebtedness  pursuant to the covenant  described
     under "--Limitation on Liens;"

                                      112


         (2) the gross proceeds of such Sale-Leaseback  Transaction are at least
     equal to the fair market  value of the  properties  and assets that are the
     subject of such Sale-Leaseback  Transaction (as determined in good faith by
     the Board of  Directors  of Abraxas  and  evidenced  by a Board  Resolution
     delivered  to the  Trustee  or,  solely  with  respect to a  Sale-Leaseback
     Transaction  in an amount not exceeding  $1.0  million,  determined in good
     faith by the  chief  executive  officer  of  Abraxas  and  evidenced  by an
     Officers' Certificate delivered to the Trustee);

         (3) if the fair market value of the  properties  and assets  subject to
     such Sale-Leaseback Transaction is determined in accordance with clause (2)
     above to be in excess of $5.0 million,  Abraxas  delivers to the Trustee an
     opinion  or  appraisal  with  respect  to such  determination  issued by an
     independent  accounting  or  investment  banking  firm which is  nationally
     recognized in the United States,  or a reputable  independent  appraisal or
     petroleum engineering firm which is reasonably satisfactory to the Trustee,
     as appropriate under the circumstances; and

         (4) the transfer of such  properties and assets in such  Sale-Leaseback
     Transaction is permitted by, and Abraxas or such Restricted Subsidiary,  as
     the case may be, applies the proceeds of such Sale-Leaseback Transaction in
     compliance  with,  the  covenant  described  under  "--Limitation  on Asset
     Sales."

         Limitation on Restricted Payments

         (1) The  Indenture  provides that Abraxas will not, and will not permit
     any Restricted  Subsidiary to,  directly or indirectly,  take the following
     actions:

                  (a) declare or pay any  dividend or make any other  payment or
         distribution   (including,   without   limitation,   any   payment   or
         distribution in connection with any merger or  consolidation  involving
         Abraxas or any  Restricted  Subsidiary) on account of the Capital Stock
         of Abraxas or any  Restricted  Subsidiary  or to the direct or indirect
         holders of Capital  Stock of Abraxas or any  Restricted  Subsidiary  in
         their  capacity  as  such,  in  each  case,  other  than  dividends  or
         distributions  (i) payable solely in shares of Qualified  Capital Stock
         of Abraxas  or, if all of the Bridge  Loan  Obligations  have then been
         repaid  in full,  in  shares  of  Capital  Stock  of Grey  Wolf or (ii)
         declared or paid to Abraxas or any Restricted Subsidiary;

                  (b) purchase,  redeem or otherwise acquire or retire for value
         (including,  without  limitation,  in  connection  with any  merger  or
         consolidation  involving  Abraxas  or any  Restricted  Subsidiary)  any
         Capital  Stock of  Abraxas or any  Affiliate  thereof  (other  than any
         Wholly-owned  Restricted  Subsidiary)  in a  transaction  that does not
         constitute a Permitted Investment;

                  (c) make any payment to purchase, redeem, defease or otherwise
         acquire or retire for value any Subordinated  Indebtedness,  except (i)
         for payment of principal and interest at its Stated Maturity,  (ii) out
         of a Net Proceeds  Deficiency  following a Net  Proceeds  Offer made in
         accordance  with the covenant  described under  "--Limitation  on Asset
         Sales,"  (iii) upon a Change of Control to the extent  (and only to the
         extent)  required by the  indenture or other  agreement  or  instrument
         pursuant to which such Subordinated  Indebtedness was issued,  provided
         that Abraxas is then in compliance  with the covenant  described  under
         "Repurchase  at Option of Holder Upon Change of  Control,"  or (iv) for
         the repayment of the Bridge Loan  Obligations  in  accordance  with the
         provisions  of the  Indenture,  the Bridge  Loan and the  Intercreditor
         Agreement (including,  without limitation,  with proceeds from the sale
         by Abraxas, any Restricted Subsidiary or Grey Wolf of existing or newly
         issued  shares of  Capital  Stock of Grey Wolf or from any other  Asset
         Sale) (see  "--Repurchase  at the Option of Holders Upon the Occurrence
         of Certain  Asset  Sales,"  "--Certain  Covenants--Limitation  on Asset
         Sales" and "Management's Discussion and Analysis of Financial Condition
         and  Results of  Operations--Long-Term  Indebtedness--Abraxas'  New $25
         Million Second Lien Increasing Rate Bridge Loan");

                  (d) make any Investment (other than any Permitted Investment);

                                      113

                  (such payments or other actions described in (but not excluded
                  from) clauses (a) through (d) are collectively referred to as
                  "Restricted Payments"), unless at the time of and after giving
                  effect to the proposed Restricted Payment:

                                    (i) no  Default  or Event of  Default  shall
                           have  occurred  and be  continuing  (or would  result
                           therefrom);

                                    (ii) Abraxas could Incur $1.00 of additional
                           Indebtedness  (excluding  Permitted  Indebtedness) in
                           compliance   with  the   covenant   described   under
                           "--Limitation   on  Incurrence  of  Indebtedness  and
                           Issuance of Disqualified Stock;" and

                                    (iii) such Restricted Payment, together with
                           the aggregate amount of all other Restricted Payments
                           declared  or made after the Closing  Date,  shall not
                           exceed   the  sum   (without   duplication)   of  the
                           following:

                                            (A)   50%   of   the   sum   of  (1)
                                    Consolidated  Net Income  plus (2)  non-cash
                                    asset impairment charges determined pursuant
                                    to GAAP  (excluding any such non-cash charge
                                    to the extent that it  represents an accrual
                                    of or  reserve  for  cash  expenses  in  any
                                    future  period),  in each  case,  earned  or
                                    accrued during the period  beginning on July
                                    1,  2004 and  ending  on the last day of the
                                    last fiscal  quarter of Abraxas ending prior
                                    to the  date  of  such  proposed  Restricted
                                    Payment   for   which   internal   financial
                                    statements   are  available   (or,  if  such
                                    aggregate Consolidated Net Income shall be a
                                    loss, minus 100% of such loss), plus

                                            (B) 100% of the aggregate net cash
                                    proceeds received after the Closing Date by
                                    Abraxas as equity contributions to Abraxas
                                    from a holder of the Capital Stock of
                                    Abraxas, plus

                                            (C) 100% of the  aggregate  net cash
                                    proceeds  received after the Closing Date by
                                    Abraxas  from the  issuance  or sale  (other
                                    than to any of its Restricted  Subsidiaries)
                                    of  shares  of  Qualified  Capital  Stock of
                                    Abraxas,  including any options, warrants or
                                    rights to purchase  such shares of Qualified
                                    Capital Stock of Abraxas (but  excluding any
                                    debt security that is  convertible  into, or
                                    exchangeable for, Qualified Capital Stock of
                                    Abraxas), plus

                                            (D) 100% of the  aggregate  net cash
                                    proceeds  received after the Closing Date by
                                    Abraxas   (other   than   from  any  of  its
                                    Restricted  Subsidiaries)  upon the exercise
                                    of  any  options,   warrants  or  rights  to
                                    purchase  shares of Qualified  Capital Stock
                                    of Abraxas, plus

                                            (E) 100% of the  aggregate  net cash
                                    proceeds  received after the Closing Date by
                                    Abraxas  from the  issuance  or sale  (other
                                    than to any of its Restricted  Subsidiaries)
                                    of debt securities or shares of Disqualified
                                    Stock  that  have  been  converted  into  or
                                    exchanged  for  Qualified  Capital  Stock of
                                    Abraxas,  together  with the  aggregate  net
                                    cash received by Abraxas at the time of such
                                    conversion or exchange, plus

                                            (F) an  amount  equal  to the sum of
                                    (1) the aggregate amount returned in cash or
                                    Cash   Equivalents   to   Abraxas   or   its
                                    Restricted  Subsidiaries  on or with respect
                                    to  any  Investment  (other  than  Permitted
                                    Investments)   made   by   Abraxas   or  its
                                    Restricted  Subsidiaries  subsequent  to the
                                    Closing Date in any Person  whether  through
                                    payments of interest, dividends,  repayments
                                    of loans or advances,  or other transfers or
                                    distributions of property,  in an amount not
                                    to exceed the book value of such  Investment
                                    previously  made in  such  Person  that  was
                                    treated as Restricted Payments,  (2) the net
                                      114


                                    cash  proceeds  received  by  Abraxas or its
                                    Restricted Subsidiaries from the disposition
                                    of all or any  portion  of  such  Investment
                                    (other than to a  Subsidiary  of Abraxas) in
                                    an amount  not to exceed  the book  value of
                                    such  Investment  previously  made  in  such
                                    Person  that  was   treated  as   Restricted
                                    Payments and (3) upon the designation of any
                                    Unrestricted   Subsidiary  as  a  Restricted
                                    Subsidiary,  in an amount  not to exceed the
                                    lesser  of  (x)  the  book   value  of  such
                                    Investment    previously    made   in   such
                                    Unrestricted  Subsidiary that was treated as
                                    Restricted  Payments and (y) the fair market
                                    value of such  Unrestricted  Subsidiary and,
                                    in  each  case  of this  clause  (3),  after
                                    deducting    any    Indebtedness    of   the
                                    Unrestricted  Subsidiary so designated (and,
                                    with  respect  to  clauses  (x) and (y),  as
                                    determined  in good  faith  by the  Board of
                                    Directors of Abraxas as evidenced by a Board
                                    Resolution delivered to the Trustee,  unless
                                    determined   in  good  faith  by  the  chief
                                    executive  officer  of Abraxas to not exceed
                                    $1.0  million and  evidenced by an Officers'
                                    Certificate  delivered to the Trustee,  and,
                                    if so  determined  to be in  excess  of $5.0
                                    million,  based upon an opinion or appraisal
                                    issued  by  an  independent   accounting  or
                                    investment  banking firm which is nationally
                                    recognized  in  the  United  States,   or  a
                                    reputable independent appraisal or petroleum
                                    engineering   firm   which   is   reasonably
                                    satisfactory to the Trustee,  as appropriate
                                    under the circumstances), only to the extent
                                    that  the sum of  clauses  (1),  (2) and (3)
                                    above does not exceed the  aggregate  amount
                                    of all such  Investments  made subsequent to
                                    the Closing Date.

         (2)  Notwithstanding  paragraph (1) above,  Abraxas and its  Restricted
     Subsidiaries may take the following actions or make the following  payments
     (so long as in the case of  clauses  (b),  (c),  (d),  (e) and (g) below no
     Default or Event of Default  shall have occurred and be continuing or occur
     as a consequence of the actions or payments described below):

                           (a) pay any dividend on any Capital  Stock of Abraxas
                  or any Restricted  Subsidiary within 60 days after the date of
                  declaration   thereof,   if  at  such  declaration  date  such
                  declaration  complied  with the  provisions  of paragraph  (1)
                  above  (and such  payment  will be deemed to have been paid on
                  such  date of  declaration  for  purposes  of any  calculation
                  required by the provisions of paragraph (1) above);

                           (b) repurchase,  redeem, retire, defease or otherwise
                  acquire any shares of any class of Capital Stock of Abraxas or
                  any  Restricted  Subsidiary,  in  exchange  for, or out of the
                  aggregate  net cash  proceeds of, a  substantially  concurrent
                  issue and sale  (other  than to a  Restricted  Subsidiary)  of
                  shares of Qualified Capital Stock of Abraxas;

                           (c) repurchase,  redeem,  repay, defease or otherwise
                  acquire or retire for value any  Subordinated  Indebtedness in
                  exchange  for, or out of the aggregate net cash proceeds of, a
                  substantially  concurrent  issue  and  sale  (other  than to a
                  Restricted  Subsidiary)  of (i)  shares of  Qualified  Capital
                  Stock of Abraxas or (ii) Refinancing Indebtedness;

                           (d)  repurchases  by  Abraxas  of  options to acquire
                  Capital Stock from one or more former officers,  directors and
                  employees  of  Abraxas or any of its  Subsidiaries  (or any of
                  their authorized  representatives) upon the death,  disability
                  or termination of employment or  directorship,  as applicable,
                  provided  that the amount paid by Abraxas  with respect to all
                  such purchases  (other than any purchase for which payment was
                  made in Qualified Capital Stock of Abraxas) from and after the
                  Closing Date does not exceed  $500,000 in the aggregate for so
                  long as any Note  remains  outstanding  and  provided  further
                  that,  in the case of such  options to acquire  Capital  Stock
                  (other than any such option  being  purchased  with  Qualified
                  Capital  Stock of  Abraxas),  the market  price of the Capital
                  Stock for which such options are  exercisable  is at least 40%
                  lower than the exercise price of such options;

                           (e) the repurchase or redemption of any  Indebtedness
                  in the  event  of a  change  of  control  in  accordance  with
                  provisions similar to the covenant described under "Repurchase


                                      115


                  at the Option of Holders Upon a Change of Control;"  provided,
                  that, prior to or simultaneously with such repurchase, Abraxas
                  has made the  Change  of  Control  Offer as  provided  in such
                  covenant with respect to the Notes and has purchased all Notes
                  validly tendered for payment in connection with such Change of
                  Control Offer;

                           (f) as described under "Use of Proceeds," (i) defease
                  or otherwise  acquire all of the outstanding 2003 Notes on the
                  Closing Date and (ii) redeem all of the outstanding 2003 Notes
                  on a date  that is no later  than 60 days  after  the  Closing
                  Date, and pay related fees and expenses, with all the proceeds
                  from the issuance of the Notes; and

                           (g) other Restricted  Payments in an aggregate amount
                  not to exceed $500,000 since the Closing Date.

     The  actions  described  in  clause  (a) of  this  paragraph  (2)  will  be
Restricted  Payments that will be permitted to be taken in accordance  with this
paragraph (2) but which will reduce the amount that would otherwise be available
for  Restricted  Payments  under  clause  (d)(iii) of  paragraph  (1) above when
declared (but not also when  subsequently paid pursuant to such clause (a)). The
actions described in clauses (c), (d), (e) and (g) of this paragraph (2) will be
Restricted  Payments that will be permitted to be taken in accordance  with this
paragraph  (2) but which will,  except with respect to exchanges  referred to in
such  clause  (c),  reduce the amount  that would  otherwise  be  available  for
Restricted  Payments under clause  (d)(iii) of paragraph (1) above.  The actions
described in clause (b) of this  paragraph (2), and clause (f) of this paragraph
(2) to the extent the actions described in such clause (f) constitute Restricted
Payments,  will be  Restricted  Payments  that will be  permitted to be taken in
accordance  with this  paragraph  (2) and will not reduce the amount  that would
otherwise  be  available  for  Restricted  Payments  under  clause  (d)(iii)  of
paragraph (1) above.

     The amount of all Restricted  Payments,  other than cash,  will be the fair
market value on the date of the  Restricted  Payment of the assets or securities
proposed to be transferred or issued by Abraxas or such  Restricted  Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or  securities  that are required to be so valued is to be determined
in good faith by the Board of  Directors  of Abraxas  prior to the making of the
respective  Restricted Payment and evidenced by a Board Resolution  delivered to
the Trustee (or,  solely with respect to assets and  securities in an amount not
exceeding  $1.0  million,  as  determined  in good faith by the chief  executive
officer of Abraxas and  evidenced by an Officers'  Certificate  delivered to the
Trustee). If the fair market value so determined exceeds $5.0 million, the Board
of Directors'  determination  must be based upon an opinion or appraisal  issued
prior to the  making of the  respective  Restricted  Payment  by an  independent
accounting  or  investment  banking firm which is  nationally  recognized in the
United States,  or a reputable  independent  appraisal or petroleum  engineering
firm which is reasonably  satisfactory to the Trustee,  as appropriate under the
circumstances.  Not  later  than (i) the date  upon  which we make a  Restricted
Payment in excess of $1.0 million or upon which the last Restricted Payment of a
series of related Restricted Payments exceeding $1.0 million in the aggregate is
made by us or (ii) 45 days after the end of any fiscal  quarter in which we make
Restricted  Payments in excess of $1.0 million in the aggregate  (excluding  any
Restricted  Payment  for which an  Officers'  Certificate  has  previously  been
delivered  to the  Trustee  as  contemplated  by clause  (i)),  Abraxas  will be
required to deliver to the Trustee an  Officers'  Certificate  stating that each
such  Restricted  Payment is (or was) permitted and setting forth the basis upon
which the required calculations were computed,  together with a copy of any such
required Board Resolution and/or fairness opinion or appraisal.

     Limitation on Transactions with Affilia tes

     The  Indenture  provides  that Abraxas will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly,  enter into or suffer to
exist any  transaction  or series of related  transactions  (including,  without
limitation,  the  sale,  purchase,  exchange  or lease of  assets,  property  or
services)  with any  Affiliate  of Abraxas  (other than  Abraxas or a Restricted
Subsidiary) unless:

         (1) such transaction or series of related transactions is on terms that
     are no less favorable to Abraxas or such Restricted Subsidiary, as the case
     may be, than would be available in a comparable transaction in arm's length
     dealings  with a  Person  that  is not an  Affiliate  of  Abraxas  or  such
     Restricted Subsidiary;

                                      116


         (2) with  respect to a  transaction  or series of related  transactions
     involving payments in excess of $500,000 in the aggregate, Abraxas delivers
     an Officers' Certificate to the Trustee certifying that such transaction or
     series of related transactions complies with clause (1) above;

         (3) without limiting clause (2) above, with respect to a transaction or
     series of related transactions involving payments in excess of $1.0 million
     in the aggregate,  such transaction or series of related transactions shall
     have  been  approved  by the Board of  Directors  of  Abraxas  and at least
     two-thirds  of the  independent  directors  of the  Board of  Directors  of
     Abraxas then in office and evidenced by a Board Resolution delivered to the
     Trustee; and

         (4)  without  limiting  clause  (2) or (3)  above,  with  respect  to a
     transaction or series of related  transactions  involving  payments of $5.0
     million  or more in the  aggregate,  Abraxas  shall have  delivered  to the
     Trustee the written  opinion of an  independent  accounting  or  investment
     banking firm which is  nationally  recognized  in the United  States,  or a
     reputable  independent  appraisal  or petroleum  engineering  firm which is
     reasonably   satisfactory  to  the  Trustee,   as  appropriate   under  the
     circumstances,  that such transaction or series of related  transactions is
     fair,  from a  financial  point  of view,  to  Abraxas  or such  Restricted
     Subsidiary;

provided, however, that the foregoing restriction does not apply to:

         (a) transactions exclusively between or among Abraxas and/or any of its
     Restricted Subsidiaries;

         (b) transactions  consummated pursuant to any agreement existing on the
     Closing Date (other than the corporate  services  agreement between Abraxas
     and Grey  Wolf),  including  any  amendment  to, or  replacement  of,  such
     existing  agreement to the extent such amendment or replacement is not more
     disadvantageous  to the holders of the Notes in any  material  respect than
     such existing agreement as in effect on the Closing Date;

         (c) for so long as Grey Wolf is a Subsidiary  of Abraxas,  transactions
     consummated  pursuant to the corporate  services  agreement between Abraxas
     and Grey  Wolf,  including  any  amendment  to,  or  replacement  of,  such
     agreement  to  the  extent  such  amendment  or  replacement  is  not  more
     disadvantageous  to the holders of the Notes in any  material  respect than
     such agreement as in effect on the Closing Date;

         (d) the payment of reasonable  and customary  regular fees to directors
     of Abraxas or any of its Restricted  Subsidiaries  who are not employees of
     Abraxas or any  Affiliate  thereof as determined in good faith by the Board
     of Directors of Abraxas;

         (e) payments made under the terms of employment agreements and employee
     compensation  and other benefit  arrangements  of Abraxas or any Restricted
     Subsidiary in the ordinary course of business;

         (f)  indemnities of officers and directors of Abraxas or any Subsidiary
     thereof consistent with such Person's charter,  bylaws or other constituent
     documents and applicable statutory provisions;

         (g)  Restricted  Payments  and  Permitted  Investments,  in each  case,
     permitted  by  the  provisions  of  the  Indenture  (see  "--Limitation  on
     Restricted Payments");

         (h) any  Guarantee or  assumption  by Abraxas or any of its  Restricted
     Subsidiaries   of   Indebtedness  of  Abraxas  or  any  of  its  Restricted
     Subsidiaries Incurred in accordance with the terms of the Indenture; or

         (i) the issuance of Qualified Capital Stock of Abraxas.

                                      117


     Limitation on Liens

     The  Indenture  provides  that  Abraxas  will not,  and will not permit any
Restricted  Subsidiary to,  directly or  indirectly,  create,  incur,  assume or
suffer to exist, or become  effective,  any Lien of any kind whatsoever,  except
for Permitted Liens, upon any of their respective assets or properties,  whether
owned prior to or  acquired  after the  Closing  Date,  or any income or profits
therefrom to secure any Indebtedness.

     Limitation  on  Guarantees  of  Indebtedness  by  Subsidiaries   and  other
     Affiliates

     The  Indenture  provides  that  Abraxas will not permit any  Subsidiary  of
Abraxas  that is not a  Subsidiary  Guarantor  to  Guarantee  the payment of any
Indebtedness  of Abraxas  or the  Restricted  Subsidiaries  other than the Notes
unless:

                  (1) such Subsidiary  simultaneously  (a) executes and delivers
         to the Trustee a  supplemental  indenture to the Indenture  and, if the
         Registration Rights Agreement is then in effect, a joinder agreement to
         the  Registration   Rights  Agreement,   each  in  form  and  substance
         reasonably  satisfactory to the Trustee,  providing for such Subsidiary
         to become a Subsidiary Guarantor under the Indenture and a party to the
         Registration  Rights  Agreement  and (b)  delivers  to the  Trustee  an
         opinion of counsel,  in form and substance  reasonably  satisfactory to
         the Trustee, to the effect that such supplemental indenture and joinder
         agreement  have been duly  authorized,  executed and  delivered by such
         Subsidiary and constitute legal, valid and binding  obligations of such
         Subsidiary;

                  (2)  if  such  Subsidiary  is  a  Restricted  Subsidiary,  all
         properties and assets of the kind constituting Collateral then owned by
         such  Subsidiary  shall be  subject to a valid,  enforceable  perfected
         first priority  security interest (subject to Permitted Prior Liens) in
         favor of the Collateral Agent as security for the Note Obligations; and

                  (3) such Subsidiary waives and agrees not to claim or take the
         benefit  or  advantage  of, in any  manner  whatsoever,  any  rights of
         reimbursement,  indemnity or  subrogation  or any other rights  against
         Abraxas or any Restricted Subsidiary as a result of any payment by such
         Subsidiary  under  its  Subsidiary  Guarantee  until  such  time as the
         obligations Guaranteed thereby are paid in full;

provided  that  this  paragraph  is  not  applicable  to  any  Guarantee  by any
Subsidiary  of  Abraxas  that (a)  existed  at the  time  such  Person  became a
Subsidiary  of  Abraxas  and (b) was not  Incurred  in  connection  with,  or in
contemplation  of, such Person becoming a Subsidiary of Abraxas.  Any Subsidiary
Guarantee  entered into by a Subsidiary of Abraxas will be deemed  released upon
the release or discharge of each Guarantee that resulted in the creation of such
Subsidiary  Guarantee  of the Notes,  except a  discharge  or release by or as a
result of payment under any such Guarantee.

     The  Indenture  also provides that Abraxas will not permit any of its other
Affiliates  to  Guarantee  the  payment  of any  Indebtedness  of Abraxas or the
Restricted Subsidiaries other than the Notes unless:

     (1) such Affiliate  simultaneously (a) executes and delivers to the Trustee
a  supplemental  indenture  to the  Indenture  and, if the  Registration  Rights
Agreement  is then in effect,  a joinder  agreement to the  Registration  Rights
Agreement,  each in form and substance  reasonably  satisfactory to the Trustee,
providing  for such  Affiliate  to become a  guarantor  of the  Notes  under the
Indenture and a party to the  Registration  Rights  Agreement and (b) deliver to
the Trustee an opinion of counsel, in form and substance reasonably satisfactory
to the  Trustee,  to the effect  that such  supplemental  indenture  and joinder
agreement  have been duly  authorized,  executed and delivered by such Affiliate
and constitute legal, valid and binding obligation of such Affiliate; and

     (2) such  Affiliate  waives and agrees not to claim or take the  benefit or
advantage of, in any manner whatsoever,  any rights of reimbursement,  indemnity
or subrogation or any other rights against Abraxas or any Restricted  Subsidiary
as a result of any payment by such Affiliate under its Guarantee until such time
as the obligations Guaranteed thereby are paid in full.

                                      118


Any Guarantee of the Notes entered into by such an Affiliate will be deemed
released upon the release or discharge of each Guarantee that resulted in the
creation of such Guarantee of the Notes, except a discharge or release by or as
a result of payment under any such Guarantee.

     Limitation on Dividends and Other Payment Restrictions Affecting Restricted
     Subsidiaries

     The  Indenture  provides  that  Abraxas  will not,  and will not permit any
Restricted  Subsidiary to, directly or indirectly,  create or otherwise cause or
suffer to exist, or become effective,  any consensual encumbrance or restriction
of any kind on the ability of any Restricted Subsidiary to:

                  (1) pay  dividends,  in cash or  otherwise,  or make any other
         distribution  on or in respect of its  Capital  Stock to Abraxas or any
         other Restricted Subsidiary;

                  (2) make loans or advances to Abraxas or any other  Restricted
         Subsidiary  or to pay any  Indebtedness  owed to  Abraxas  or any other
         Restricted Subsidiary;

                  (3) make an  Investment  in  Abraxas  or any other  Restricted
         Subsidiary; or

                  (4) transfer any of its properties or assets to Abraxas or any
         other Restricted Subsidiary;

except in each instance for such encumbrances or restrictions pursuant to:

                           (a) applicable law;

                           (b)  the   Indenture,   the  Notes,   the  Collateral
                  Documents, the Revolving Credit Facility or the Bridge Loan;

                           (c)  agreements  in effect as of the Closing  Date to
                  the extent and in the manner such encumbrances or restrictions
                  are in effect on such date;

                           (d)  any  agreement  or  other  instrument  governing
                  Acquired Indebtedness, which encumbrance or restriction is not
                  applicable to any other Person, or the properties or assets of
                  any other  Person,  other than the Person,  or the property or
                  assets of the Person, so acquired;

                           (e) customary  non-assignment  restrictions in leases
                  and licenses  relating solely to the property  covered thereby
                  and entered into in the ordinary course of business;

                           (f) any agreement  for the sale or other  disposition
                  of  a  Restricted  Subsidiary  or  its  assets  not  otherwise
                  prohibited by the Indenture that restricts transactions by the
                  Restricted Subsidiary solely with respect to shares of Capital
                  Stock of the Restricted Subsidiary or such assets pending such
                  sale or other  disposition,  provided that any  encumbrance or
                  restriction  pursuant to such agreement by its terms lapses no
                  later than 180 days after the date of such agreement;

                           (g) customary  non-assignment  restrictions  in joint
                  venture  agreements,  Permitted  Farmout  Agreements  or other
                  similar  agreements not otherwise  prohibited by the Indenture
                  relating  solely to the equity  interests in the joint venture
                  or similar  entity,  or solely to the Farmout  Property in the
                  case  of a  Permitted  Farmout  Agreement,  and in  each  case
                  entered into in the ordinary course of business;

                           (h)   provisions   in  an  agreement  or   instrument
                  governing a  Permitted  Lien that limit the ability of Abraxas
                  or any  Restricted  Subsidiary to dispose of assets subject to
                  that Permitted Lien; or

                                      119


                           (i) any agreement governing Refinancing  Indebtedness
                  that  extends,  renews,  refinances  or replaces  Indebtedness
                  issued,  assumed or incurred pursuant to any of the agreements
                  referred to in the foregoing clauses (b) through (h); provided
                  that  the   provisions   relating  to  such   encumbrance   or
                  restriction  contained in such agreement governing Refinancing
                  Indebtedness are no less favorable to the holders of the Notes
                  as  determined  by the Board of  Directors  of  Abraxas in its
                  reasonable  and good faith  judgment (and evidenced by a Board
                  Resolution  delivered  to the  Trustee)  than  those  under or
                  pursuant  to  the  applicable  agreement  referred  to in  the
                  foregoing clauses (b) through (h).

     Limitation  on Issuance,  Sale and Ownership of Capital Stock of Restricted
     Subsidiaries

     The Indenture provides that Abraxas:

                  (1) will not permit  any  Restricted  Subsidiary  to issue any
         Capital  Stock  (other  than to  Abraxas or a  Wholly-owned  Restricted
         Subsidiary); and

                  (2) will not  permit  any  Person  (other  than  Abraxas  or a
         Wholly-owned  Restricted  Subsidiary)  to own any Capital  Stock of any
         Restricted Subsidiary, except, in the case of either clause (1) or (2),
         for:

                           (a) directors' qualifying shares;

                           (b)  Capital   Stock  of  a   Restricted   Subsidiary
                  organized  in a  jurisdiction  other  than the  United  States
                  required  as a legal  matter to be issued to, or owned by, the
                  government  of such foreign  jurisdiction  or an individual or
                  corporate  citizens of such foreign  jurisdiction in order for
                  such  Restricted  Subsidiary  to  transact  business  in  such
                  foreign jurisdiction;

                           (c)  a  sale  of  Capital   Stock  of  a   Restricted
                  Subsidiary effected in accordance with the covenants described
                  under "--Limitation on Incurrence of Indebtedness and Issuance
                  of  Disqualified  Stock,"  "--Limitation  on Asset  Sales" and
                  "--Limitation on Restricted Payments" and only if, immediately
                  after giving effect to such sale, such  Restricted  Subsidiary
                  would no longer  constitute  a Restricted  Subsidiary  and any
                  Investment  in such Person  remaining  after giving  effect to
                  such sale  would  have  been  permitted  under  the  covenants
                  described   under    "--Limitation   on   Asset   Sales"   and
                  "--Limitation on Restricted Payments;"

                           (d) the  issuance  of Capital  Stock by a  Restricted
                  Subsidiary  to a Person other than  Abraxas or a  Wholly-owned
                  Restricted  Subsidiary,  which issuance was made in accordance
                  with the covenants described under "--Limitation on Incurrence
                  of   Indebtedness   and  Issuance  of   Disqualified   Stock,"
                  "--Limitation on Asset Sales" and  "--Limitation on Restricted
                  Payments" and only if, immediately after giving effect to such
                  issuance,   such   Restricted   Subsidiary   would  no  longer
                  constitute a Restricted  Subsidiary and any Investment in such
                  Person  remaining  after giving effect to such issuance  would
                  have  been  permitted  under  the  covenants  described  under
                  "--Limitation on Asset Sales" and  "--Limitation on Restricted
                  Payments;" and

                           (e) the  ownership  of shares of  Capital  Stock of a
                  Restricted  Subsidiary  owned  by a Person  at the  time  such
                  Restricted   Subsidiary  became  a  Restricted  Subsidiary  or
                  acquired by such Person in  connection  with the  formation of
                  the Restricted Subsidiary;

provided,  however,  that any Capital Stock  retained by Abraxas or a Restricted
Subsidiary  in the  case  of  clause  (c),  (d) or (e)  will  be  treated  as an
Investment  for  purposes  of the  covenant  described  under  "--Limitation  on
Restricted  Payments," if the amount of such shares of Capital Stock  represents
less than a majority of the Voting Stock of such Restricted Subsidiary.

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     Merger, Consolidation or Sale of Assets

     The Indenture  provides that Abraxas will not, in any single transaction or
series of  related  transactions,  consolidate  or merge  with or into any other
Person, or sell, assign, convey,  transfer, lease or otherwise dispose of all or
substantially  all of the  properties  and assets of Abraxas and its  Restricted
Subsidiaries on a consolidated  basis to any other Person or group of Affiliated
Persons (other than Abraxas and its Wholly-owned Restricted  Subsidiaries),  and
Abraxas  will not permit any of its  Restricted  Subsidiaries  to enter into any
such  transaction  or series of  transactions  if such  transaction or series of
transactions, in the aggregate, would result in a sale, assignment,  conveyance,
transfer,  lease  or  other  disposition  of  all  or  substantially  all of the
properties  and  assets  of  Abraxas  and  its  Restricted   Subsidiaries  on  a
consolidated  basis to any other Person or group of  Affiliated  Persons  (other
than Abraxas and its Wholly-owned Restricted  Subsidiaries),  unless at the time
and after giving effect thereto, either:

                           (A) (1) either (a) if the  transaction is a merger or
                  consolidation,  Abraxas shall be the surviving  Person of such
                  merger or  consolidation  or (b) the  Person  (if  other  than
                  Abraxas) formed by such consolidation or into which Abraxas is
                  merged or to which the properties and assets of Abraxas or its
                  Restricted  Subsidiaries,  as  the  case  may  be,  are  sold,
                  assigned, conveyed,  transferred, leased or otherwise disposed
                  of (any such surviving  Person or transferee  Person being the
                  "Surviving  Entity")  shall  be a  corporation  organized  and
                  existing  under the laws of the United States of America,  any
                  state thereof or the District of Columbia and shall, in either
                  case, (I) expressly assume by a supplemental  indenture to the
                  Indenture and, if the Registration Rights Agreement is then in
                  effect,  a  joinder  agreement  to  the  Registration   Rights
                  Agreement, each executed and delivered to the Trustee, in form
                  and substance reasonably  satisfactory to the Trustee, all the
                  obligations of Abraxas under the Notes,  the Indenture and, if
                  applicable,  the  Registration  Rights Agreement and (II) take
                  such   actions   described   under    "--Security--Collateral;
                  After-Acquired Property; Permitted Liens," if applicable, such
                  that the transaction  does not result in the surviving  Entity
                  owning or having acquired  Collateral that is not subject to a
                  valid  and  enforceable   perfected  first  priority  security
                  interest  (subject to  Permitted  Prior Liens) in favor of the
                  Collateral Agent as security for the Note Obligations, and, in
                  the case of a  transaction  described  under  (a) or (b),  the
                  Notes,  the Indenture  and, if  applicable,  the  Registration
                  Rights Agreement shall remain in full force and effect;

                           (2) immediately  before and immediately  after giving
                  effect to such  transaction or series of transactions on a pro
                  forma basis (and treating any  Indebtedness  not previously an
                  obligation of Abraxas or any of its Restricted Subsidiaries in
                  connection  with  or  as  a  result  of  such  transaction  or
                  transactions  as  having  been  incurred  at the  time of such
                  transaction),  no  Default  or Event  of  Default  shall  have
                  occurred and be continuing;

                           (3) except in the case of the consolidation or merger
                  of any Restricted Subsidiary with or into Abraxas, immediately
                  after giving effect to such  transaction or  transactions on a
                  pro forma basis, the Consolidated  Fixed Charge Coverage Ratio
                  (or  that  of the  surviving  entity  if  Abraxas  is not  the
                  continuing  obligor under the  Indenture) is not less than the
                  Consolidated  Fixed Charge Coverage Ratio  immediately  before
                  such transaction or transactions;

                           (4) except in the case of the consolidation or merger
                  of Abraxas with or into a Wholly-owned  Restricted  Subsidiary
                  or of any  Restricted  Subsidiary  with or into Abraxas or any
                  Wholly-owned  Restricted  Subsidiary,  immediately  before and
                  immediately   after  giving  effect  to  such  transaction  or
                  transactions  on a pro forma basis (on the assumption that the
                  transaction or  transactions  occurred on the first day of the
                  period of four fiscal quarters for which financial  statements
                  are available ending  immediately prior to the consummation of
                  such  transaction  or   transactions,   with  the  appropriate
                  adjustments  with respect to the  transaction or  transactions
                  being included in such pro forma calculation)  Abraxas (or the
                  Surviving  Entity if  Abraxas  is not the  continuing  obligor
                  under  the   Indenture)   could  Incur  $1.00  of   additional
                  Indebtedness  (excluding Permitted Indebtedness) in compliance
                  with the covenant described under  "--Limitation on Incurrence
                  of Indebtedness and Issuance of Disqualified Stock;"

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                           (5) if any of the  properties or assets of Abraxas or
                  any of its Restricted Subsidiaries would upon such transaction
                  or series of related  transactions  become subject to any Lien
                  (other than a Permitted  Lien), the creation and imposition of
                  such Lien  shall  have been in  compliance  with the  covenant
                  described under "--Limitation on Liens;"

                           (6) if Abraxas is not the  continuing  obligor  under
                  the Indenture, then any Subsidiary Guarantor, unless it is the
                  Surviving Entity, shall have by supplemental  indenture to the
                  Indenture,  in form and substance  reasonably  satisfactory to
                  the Trustee,  confirmed that its  Subsidiary  Guarantee of the
                  Notes shall apply to the Surviving Entity's  obligations under
                  the Indenture and the Notes; and

                           (7)  Abraxas (or the  Surviving  Entity if Abraxas is
                  not the  continuing  obligor under the  Indenture)  shall have
                  delivered to the  Trustee,  in form and  substance  reasonably
                  satisfactory  to the  Trustee,  (a) an  Officers'  Certificate
                  stating   that  such   transaction   or   series  of   related
                  transactions and the supplemental  indenture to the Indenture,
                  if any, in respect thereto comply with the requirements  under
                  the Indenture  and (b) an opinion of counsel  stating that (I)
                  the requirements of clause (1) of this paragraph (A) have been
                  satisfied and (II) any supplemental indenture to the Indenture
                  or joinder  agreement  to the  Registration  Rights  Agreement
                  delivered to the Trustee in accordance  with the  requirements
                  of this paragraph (A) has been duly  authorized,  executed and
                  delivered by the Surviving Entity or any Subsidiary  Guarantor
                  a party  thereto and  constitutes  a legal,  valid and binding
                  obligation  of the  Surviving  Entity and any such  Subsidiary
                  Guarantor; or

                  (B)  the  transaction  is  effected  in  compliance  with  the
         covenant  described under  "--Limitation on Asset Sales;" provided that
         all of the  Notes  then  outstanding  are  actually  paid  in  full  in
         accordance with such covenant.

     The Indenture  expressly  provides that so long as the fair market value of
the Capital  Stock of Grey Wolf owned by Abraxas and its  Subsidiaries  does not
exceed  50% of the fair  market  value of all of the  properties  and  assets of
Abraxas and its Subsidiaries on a consolidated  basis  (determined in good faith
by the  Board of  Directors  of  Abraxas  and  evidenced  by a Board  Resolution
delivered  to the  Trustee),  then any  disposition  of all or a portion of such
Capital Stock by Abraxas and its Restricted  Subsidiaries  will not constitute a
sale of all or substantially all of the properties and assets of Abraxas and its
Restricted  Subsidiaries  on a consolidated  basis for purposes of the covenants
described under this "--Merger, Consolidation or Sale of Assets" or for purposes
of  clause  (3)  of  the  definition  of  Change  of  Control  (see   "--Certain
Definitions").

     Upon any  consolidation  or  merger or any  sale,  assignment,  conveyance,
transfer,  lease  or  other  disposition  of  all  or  substantially  all of the
properties  and  assets  of  Abraxas  and  its  Restricted   Subsidiaries  on  a
consolidated basis in accordance with the foregoing, in which Abraxas is not the
continuing   corporation,   the  Surviving  Entity  shall  succeed  to,  and  be
substituted  for, and may exercise  every right and power of,  Abraxas under the
Indenture  with the same  effect as if the  Surviving  Entity  had been named as
Abraxas  therein,  and  thereafter,  in the case of any such  sale,  assignment,
conveyance,  transfer or other  disposition  (but not a lease),  Abraxas will be
discharged  from all obligations and covenants under the Indenture and the Notes
and Abraxas may be dissolved and liquidated.

     Abraxas will not permit any  Subsidiary  Guarantor to  consolidate  with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of related  transactions,  all or substantially all of its properties and assets
to any Person unless:

                  (i) the resulting, surviving or transferee Person (if not such
         Subsidiary  Guarantor)  shall be a Person  organized and existing under
         the laws of the jurisdiction under which such Subsidiary  Guarantor was
         organized or under the laws of the United States of America,  any state
         thereof  or the  District  of  Columbia,  and  such  Person  shall  (I)
         expressly  assume by a supplemental  indenture to the Indenture and, if
         the  Registration  Rights  Agreement  is  then  in  effect,  a  joinder
         agreement  to the  Registration  Rights  Agreement,  each  executed and
         delivered to the Trustee, in form and substance reasonably satisfactory
         to the Trustee,  all the obligations of such Subsidiary Guarantor under
         its Subsidiary  Guarantee and, if applicable,  the Registration  Rights
         Agreement    and   (II)   take    such    actions    described    under
         "--Security--Collateral;  After-Acquired Property; Permitted Liens," if


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         applicable,  such that the  transaction  does not  result in either (x)
         such Person owning or having acquired Collateral that is not subject to
         a valid and  enforceable  perfected  first priority  security  interest
         (subject to Permitted Prior Liens) in favor of the Collateral  Agent as
         security for the Note  Obligations  or (y) all of the Capital  Stock of
         such Person owned  directly or indirectly by Abraxas being duly pledged
         as a first priority  perfected  security interest (subject to Permitted
         Prior Liens) to the Collateral  Agent for the benefit of the holders of
         the Note Obligations;

                  (ii)  immediately  after giving effect to such  transaction or
         transactions on a pro forma basis (and treating any Indebtedness  which
         becomes an obligation of the resulting,  surviving or transferee Person
         as a result of such transaction as having been issued by such Person at
         the time of such  transaction),  no Default  or Event of Default  shall
         have occurred and be continuing;

                  (iii)  Abraxas  would be  permitted by virtue of its pro forma
         Consolidated  Fixed Charge  Coverage  Ratio,  immediately  after giving
         effect  to such  transaction,  to Incur at  least  $1.00 of  additional
         Indebtedness  (excluding Permitted Indebtedness) in compliance with the
         Consolidated Fixed Charge Coverage Ratio test set forth in the covenant
         described  under "Certain  Covenants--Incurrence  of  Indebtedness  and
         Issuance of Disqualified Stock;" and

                  (iv) Abraxas  delivers to the Trustee,  in form and  substance
         reasonably  satisfactory to the Trustee,  (a) an Officers'  Certificate
         and an opinion of counsel  stating that such  consolidation,  merger or
         transfer and such supplemental  indenture to the Indenture,  if any, in
         respect  thereto comply with the  requirements  under the Indenture and
         (b) an opinion of counsel  stating that (I) the  requirements of clause
         (i) of this  paragraph  have been  satisfied and (II) any  supplemental
         indenture  to the  Indenture or joinder  agreement to the  Registration
         Rights  Agreement  delivered  to the  Trustee  in  accordance  with the
         requirements of this paragraph has been duly  authorized,  executed and
         delivered  by  the  resulting,   surviving  or  transferee  Person  and
         constitutes a legal, valid and binding obligation of such Person;

provided,  however,  that clauses (i), (iii) and (iv)(b) above will not apply if
such  transaction  or  transactions  comply with the  covenant  described  under
"--Limitation on Asset Sales" and such resulting, surviving or transferee Person
is no longer a Subsidiary of Abraxas. See "--Subsidiary Guarantees of Notes."


     Reports

     So long as any Note is outstanding and Abraxas is required by the rules and
regulations  of the  SEC,  it will  file  with the SEC via the  Electronic  Data
Gathering and Retrieval system ("EDGAR") for public availability (unless the SEC
will not accept such a filing),  within the time periods  specified in the SEC's
rules and regulations:

     o   all  quarterly  and annual  reports  that would be required to be filed
         with the SEC on Forms  10-Q and 10-K if we were  required  to file such
         reports; and

     o   all current  reports  that we would be required to file with the SEC on
         Form 8-K if we were required to file such reports.

     Abraxas  will also  concurrently  post on its  website  each such report so
filed with the SEC.  We will not take any action for the  purpose of causing the
SEC not to accept any such filings via EDGAR or otherwise.

     All such reports will be prepared in all  material  respects in  accordance
with all of the rules and  regulations  applicable to such reports.  Each annual
report  on Form  10-K  will  include  a  report  on our  consolidated  financial
statements by a firm of certified independent accountants.

     If, at any time,  Abraxas is no longer  subject to the  periodic  reporting
requirements of the Exchange Act for any reason or is not otherwise  required to
file with the SEC the  reports  specified  in the  first  paragraph  under  this
covenant,  Abraxas will instead furnish, or provide to the Trustee and cause the
Trustee to furnish, to the holders of the Notes the information required in each
such report within the time period  specified in the SEC's rules and regulations
(as if  Abraxas  was  required  to file such  report  with the  SEC);  provided,
however,  Abraxas  will not be required to include any  officer's  certification


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which would be required to be filed as an exhibit to such report had such report
been filed with the SEC.

     Abraxas' quarterly and annual financial  information  required by the first
paragraph under this covenant will include, for any period during which at least
one of our Subsidiaries continues to be an Unrestricted Subsidiary, a reasonably
detailed presentation,  either on the face of the financial statements or in the
footnotes thereto, of Abraxas' financial condition and results of operations and
those of its Restricted  Subsidiaries  separate from the financial condition and
results of operations of its Unrestricted Subsidiaries.

     In  addition,  Abraxas  will agree  that,  for so long as any Notes  remain
outstanding,  if at any time  Abraxas is not  required  to file with the SEC the
reports  specified in this first  paragraph  under this  covenant,  Abraxas will
furnish  to the  holders of Notes and to  securities  analysts  and  prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.

     Additional Covenants

     Among other matters,  the Indenture also contains covenants with respect to
the following: (i) payment of principal,  premium and interest; (ii) maintenance
of an  office  or agency  in The City of New  York;  and  (iii)  maintenance  of
corporate existence.

Events of Default and Remedies

     Each  of  the  following  constitutes  an  "Event  of  Default"  under  the
Indenture:

                  (1) default in the payment  when due of interest on the Notes,
         and such default continues for 30 days;

                  (2) default in the  payment  when due of the  principal  of or
         premium on any Note,  whether  such  payment is due at  maturity,  upon
         redemption,  upon repurchase pursuant to a Change of Control Offer or a
         Net Proceeds Offer, upon declaration of acceleration or otherwise;

                  (3)  default in the  performance  or breach of the  provisions
         described  under  "Repurchase at the Option of Holders Upon a Change of
         Control" and  "--Certain  Covenants--Merger,  Consolidation  or Sale of
         Assets;"

                  (4) failure by Abraxas or any Restricted  Subsidiary to comply
         with any other term,  covenant or agreement contained in the Notes, any
         Subsidiary  Guarantee,  any Collateral Document or the Indenture (other
         than a default  specified in clause (1), (2) or (3) above) for a period
         of 60 days after  written  notice of such failure  stating that it is a
         "notice of default"  under the Indenture and requiring  Abraxas or such
         Restricted  Subsidiary,  as the case may be, to remedy  the same  shall
         have been given (a) to Abraxas by the Trustee or (b) to Abraxas and the
         Trustee by the holders of at least 25% in aggregate principal amount of
         the Notes then outstanding;

                  (5) the  occurrence  and  continuation  beyond any  applicable
         grace  period of any default in the payment  when due of the  principal
         of, or premium or interest on, any  Indebtedness  for borrowed money of
         Abraxas  (other  than the Notes) or any  Restricted  Subsidiary  or any
         other  default  resulting  in  acceleration  of  any  Indebtedness  for
         borrowed money of Abraxas or any Restricted Subsidiary, but only in the
         event that the aggregate  principal amount of such  Indebtedness  shall
         exceed $2.0 million;

                  (6) without  limiting  clause (5) above,  the  occurrence  and
         continuation of an "event of default" under either the Revolving Credit
         Facility or the Bridge Loan;

                  (7) any Subsidiary Guarantee shall for any reason cease to be,
         or be asserted  by  Abraxas,  any  Subsidiary  Guarantor,  any of their
         respective  Affiliates  or any  Person  acting  on behalf of any of the
         foregoing  not to be, in full force and effect and  enforceable  in any
         material  respect in accordance with its terms (except  pursuant to the


                                      124


         release or termination of any such  Subsidiary  Guarantee in accordance
         with the Indenture);

                  (8) any Collateral  Document shall for any reason cease to be,
         or be asserted  by Abraxas,  any  Restricted  Subsidiary,  any of their
         respective  Affiliates  or any  Person  acting  on behalf of any of the
         foregoing  not to be, in full force and effect and  enforceable  in any
         material respect in accordance with its terms or to not otherwise grant
         a duly perfected first priority  security interest in the Collateral in
         favor of the  holders of the Note  Obligations  (subject  to  Permitted
         Prior  Liens and except  pursuant to a release or  termination  thereof
         consummated  in accordance  with the  Indenture  and the  Intercreditor
         Agreement and other Collateral Documents) for a period of 30 days after
         written notice  thereof  stating that it is a "notice of default" under
         the  Indenture  and  requiring  Abraxas  or the  respective  Restricted
         Subsidiary,  as the case may be, to  remedy  the same  shall  have been
         given (a) to Abraxas by the  Trustee or (b) to Abraxas  and the Trustee
         by the  holders of at least 25% in  aggregate  principal  amount of the
         Notes then outstanding;

                  (9) final judgments or orders rendered  against Abraxas or any
         Restricted Subsidiary that are unsatisfied and that require the payment
         in money,  either  individually or in an aggregate amount, that is more
         than $2.0 million over the coverage under applicable insurance policies
         and  either  (a)   commencement  by  any  creditor  of  an  enforcement
         proceeding  upon such judgment (other than a judgment that is stayed by
         reason of  pending  appeal or  otherwise)  or (b) the  occurrence  of a
         60-day period during which a stay of such judgment or order,  by reason
         of pending appeal or otherwise, was not in effect;

                  (10)  the  entry  of a  decree  or  order  by a  court  having
         jurisdiction  in the  premises  (a) for relief in respect of Abraxas or
         any  Subsidiary  in  an  involuntary   case  or  proceeding  under  any
         applicable Federal or state bankruptcy,  insolvency,  reorganization or
         other similar law or (b) adjudging  Abraxas or any Subsidiary  bankrupt
         or  insolvent,   or  approving  a  petition   seeking   reorganization,
         arrangement,  adjustment or  composition  of Abraxas or any  Subsidiary
         under any applicable Federal or state law, or appointing under any such
         law a custodian, receiver, liquidator,  assignee, trustee, sequestrator
         or  other  similar  official  of  Abraxas  or  any  Subsidiary  or of a
         substantial part of its consolidated assets, or ordering the winding up
         or liquidation of its affairs,  and the  continuance of any such decree
         or order for relief or any such other  decree or order  unstayed and in
         effect for a period of 60 consecutive days; and

                  (11)  the  commencement  by  Abraxas  or any  Subsidiary  of a
         voluntary  case or  proceeding  under any  applicable  Federal or state
         bankruptcy,  insolvency,  reorganization  or other  similar  law or any
         other case or proceeding to be  adjudicated  bankrupt or insolvent,  or
         the  consent by Abraxas or any  Subsidiary  to the entry of a decree or
         order  for  relief  in  respect  thereof  in  an  involuntary  case  or
         proceeding   under  any   applicable   Federal  or  state   bankruptcy,
         insolvency,  reorganization or other similar law or to the commencement
         of any bankruptcy or insolvency  case or proceeding  against it, or the
         filing by Abraxas or any  Subsidiary  of a petition or consent  seeking
         reorganization or relief under any applicable  Federal or state law, or
         the consent by it under any such law to the filing of any such petition
         or to the appointment of or taking possession by a custodian, receiver,
         liquidator,   assignee,  trustee  or  sequestrator  (or  other  similar
         official)  of any of Abraxas or any  Subsidiary  or of any  substantial
         part of its consolidated  assets,  or the making by it of an assignment
         for the benefit of creditors under any such law, or the admission by it
         in writing of its  inability to pay its debts  generally as they become
         due or the taking of corporate  action by Abraxas or any  Subsidiary in
         furtherance of any such action.

     If any Event of Default  (other  than as  specified  in clause (10) or (11)
above) occurs and is continuing,  the Trustee,  by written notice to Abraxas, or
the  holders  of at least 25% in  aggregate  principal  amount of the Notes then
outstanding, by notice to the Trustee and Abraxas, may, and the Trustee upon the
request of the holders of not less than 25% in aggregate principal amount of the
Notes then outstanding shall, declare the principal of, and premium, if any, and
accrued  interest on, all of the Notes due and payable  immediately,  upon which
declaration all amounts payable in respect of the Notes shall be immediately due
and  payable;  if an Event of  Default  specified  in clause  (10) or (11) above
occurs and is  continuing,  then the  principal  of, and  premium,  if any,  and
accrued  interest  on,  all of  the  Notes  shall  automatically  become  and be
immediately due and payable without any declaration,  notice or other act on the
part of the Trustee or any holder of the Notes.

                                      125


     After a  declaration  of  acceleration  under the  Indenture,  but before a
judgment or decree for payment of the money due has been obtained by the Trustee
or holders  of the Notes as  permitted  under the  Indenture,  the  holders of a
majority in aggregate  principal  amount of the  outstanding  Notes,  by written
notice to Abraxas,  the Subsidiary  Guarantors and the Trustee,  may (i) rescind
such  declaration and its  consequences and (ii) on behalf of the holders of all
the Notes,  waive any existing Event of Default and its  consequences,  except a
continuing Event of Default specified in clause (2) above, if:

                  (1) Abraxas or any Subsidiary  Guarantor has paid or deposited
         with the Trustee a sum  sufficient to pay (a) all sums paid or advanced
         by the Trustee  under the Indenture  and the  reasonable  compensation,
         expenses,  disbursements  and advances of the  Trustee,  its agents and
         counsel,  (b) all overdue  interest on all outstanding  Notes,  (c) the
         unpaid  principal of (and premium,  if any, on) any  outstanding  Notes
         which  have  become  due  otherwise   than  by  such   declaration   of
         acceleration  and  interest  thereon at the rate borne by the Notes and
         (d) to the extent that  payment of such  interest  is lawful,  interest
         upon overdue  interest  and overdue  principal at the rate borne by the
         Notes (without  duplication of any amount paid or deposited pursuant to
         clause (b) or (c));

                  (2) the  rescission  would not  conflict  with any judgment or
         decree of a court of competent jurisdiction as certified to the Trustee
         by Abraxas; and

                  (3) all  Defaults  and  Events  of  Default,  other  than  the
         nonpayment of principal of (or premium,  if any, on) or interest on the
         Notes that has become due solely by such  declaration of  acceleration,
         have been cured or waived as provided in the Indenture.

     No holder of any of the Notes  has any right to  institute  any  proceeding
with respect to the Indenture or any remedy  thereunder,  unless (i) such holder
has notified the Trustee in writing of a continuing  Event of Default,  (ii) the
holders of at least 25% in aggregate  principal amount of the outstanding  Notes
have made written  request to institute  such  proceeding or pursue such remedy,
and offered reasonable indemnity, satisfactory to the Trustee against the costs,
expenses and  liabilities to be incurred in compliance  with the request,  (iii)
the Trustee has failed to institute such proceeding within 60 days after receipt
of such notice and (iv) the Trustee, within such 60-day period, has not received
directions  inconsistent,  in the  opinion  of the  Trustee,  with such  written
request  by  holders  of  a  majority  in  aggregate  principal  amount  of  the
outstanding Notes. Such limitations do not apply,  however, to a suit instituted
by a holder of a Note for the enforcement of the payment of the principal of (or
premium,  if any,  on) or interest on such Note on or after the  respective  due
dates expressed in such Note.

     During the  existence of an Event of Default,  the Trustee will be required
to exercise  such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise  thereof as a prudent person would
exercise  under the  circumstances  in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing,  the Trustee will not
be under any  obligation  to  exercise  any of its  rights  or powers  under the
Indenture at the request or direction of any of the holders of Notes unless such
holders  shall have  offered to the Trustee  reasonable  security  or  indemnity
satisfactory to the Trustee. Subject to certain provisions concerning the rights
of the Trustee and to the terms and  provisions of the  Intercreditor  Agreement
and other Collateral Documents, the holders of a majority in aggregate principal
amount of the  outstanding  Notes have the right to direct the time,  method and
place of conducting any proceeding for any remedy  available to the Trustee,  or
exercising any trust or power conferred on the Trustee under the Indenture.  See
"Intercreditor Agreement."

     If a Default or an Event of Default  occurs and is continuing  and is known
to the Trustee by virtue of having received written notice thereof,  the Trustee
is required  to mail to each  holder of Notes  notice of the Default or Event of
Default  within 60 days after the  occurrence  thereof.  Except in the case of a
Default or an Event of Default in payment of principal  of (or premium,  if any,
on) or interest on any Notes, the Trustee may withhold the notice to the holders
of Notes if the board of directors  of the Trustee,  a committee of its board of
directors or a committee  of its Trust  officers  determines  in good faith that
withholding the notice is in the interest of such holders.

     Abraxas  is  required  to  deliver  to the  Trustee  annual  and  quarterly
statements  regarding  compliance  with the  Indenture,  and  Abraxas is also be
required,  upon becoming aware of any Default or Event of Default, to deliver to


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the Trustee,  promptly after becoming aware of such Default or Event of Default,
a statement specifying such Default or Event of Default.

Legal Defeasance and Covenant Defeasance

     Abraxas  may,  at its  option  and at any time  after  (1) the  penultimate
Interest Reset Date  preceding the final Stated  Maturity of the Notes or (2) if
applicable,  the  penultimate  Interest Reset Date preceding the redemption date
upon which all of the  outstanding  Notes have been  called  for  redemption  in
accordance with the terms of the Indenture, elect to have all of the obligations
of  Abraxas  and  the  Subsidiary  Guarantors  discharged  with  respect  to the
outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that Abraxas
and the  Subsidiary  Guarantors  will be deemed to have paid and  discharged the
entire  Indebtedness  represented  by the  outstanding  Notes  and to have  been
discharged from all their other  obligations  with respect to such Notes and the
Subsidiary Guarantees, except for (a) the rights of holders of outstanding Notes
to receive  payment from the trust referred to below in respect of the principal
of, and premium, if any, and interest on, such Notes when such payments are due,
(b) obligations of Abraxas to issue or replace any temporary Notes, register the
transfer or exchange of any Notes, replace mutilated,  destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of the Notes, (c)
the rights,  powers,  trusts,  duties and  immunities of the Trustee and (d) the
Legal Defeasance provisions of the Indenture.  In addition,  Abraxas may, at its
option and at any time after (1) the  penultimate  Interest Reset Date preceding
the final Stated  Maturity of the Notes or (2) if  applicable,  the  penultimate
Interest  Reset  Date  preceding  the  redemption  date  upon  which  all of the
outstanding  Notes have been called for redemption in accordance  with the terms
of the Indenture,  elect to have the  obligations of Abraxas and each Subsidiary
Guarantor  released with respect to certain  covenants that are described in the
Indenture,  some  of  which  are  described  under  "--Certain  Covenants,"  and
thereafter any omission to comply with such  obligations  shall not constitute a
Default  or  an  Event  of  Default  with   respect  to  the  Notes   ("Covenant
Defeasance").  In the event  Covenant  Defeasance  occurs,  certain  events (not
including non-payment, bankruptcy,  receivership,  insolvency and reorganization
events)  described  under  "Events  of  Default  and  Remedies"  will no  longer
constitute an Event of Default with respect to the Notes.

     In order to exercise either Legal Defeasance or Covenant Defeasance:

                  (1) Abraxas must specify  whether the Notes are being defeased
         to their final Stated Maturity or to a particular redemption date;

                  (2)  Abraxas  or any  Subsidiary  Guarantor  must  irrevocably
         deposit with the Trustee,  as trust funds in trust,  for the benefit of
         the  holders  of  the  Notes,  cash  in  United  States  dollars,  U.S.
         governmental  obligations,  or a combination thereof, in such aggregate
         amount as will be sufficient, in the opinion of a nationally recognized
         firm of independent  public  accountants,  to pay the principal of, and
         premium,  if any, and interest on, the outstanding Notes on their final
         Stated Maturity or on an applicable  redemption date for which a notice
         of redemption has  previously  been mailed,  as  applicable;  provided,
         that,  if the day on  which  such  deposit  is made  is not  after  the
         Interest Reset Date immediately preceding such final Stated Maturity or
         redemption  date,  as the case may be, then the interest  rate from and
         after such Interest  Reset Date used to calculate  such amount to be so
         deposited will be the interest rate on the Notes on the day immediately
         preceding  such  Interest  Reset Date plus the greater of (a) 2.00% and
         (b) such other  percent as may be  requested by the Trustee in order to
         provide  reasonable  assurance  in the judgment of the Trustee that the
         amount being so deposited  will be  sufficient to pay the principal of,
         and premium,  if any, and  interest on, the  outstanding  Notes on such
         final Stated Maturity or redemption date, as the case may be;

                  (3) Abraxas shall have  delivered to the Trustee an opinion of
         counsel, in form and substance reasonably  satisfactory to the Trustee,
         to the  effect  that the  holders  of the  outstanding  Notes  will not
         recognize  income,  gain or loss for United States  Federal  income tax
         purposes as a result of such Legal  Defeasance  or Covenant  Defeasance
         and will be subject  to United  States  Federal  income tax on the same
         amounts,  in the same  manner  and at the same times as would have been
         the  case if such  Legal  Defeasance  or  Covenant  Defeasance  had not
         occurred (in the case of Legal  Defeasance,  such opinion must refer to
         and be based upon a published ruling of the Internal Revenue Service or
         a change in applicable United States Federal income tax laws);

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                  (4) no Event of Default  shall have occurred and be continuing
         on the date of such  deposit or insofar as clauses  (10) and (11) under
         the  first  paragraph  under  "Events  of  Default  and  Remedies"  are
         concerned,  at any time during the period  ending on the 91st day after
         the date of deposit;

                  (5) Abraxas must deliver to the Trustee an opinion of counsel,
         in form and substance  reasonably  satisfactory to the Trustee,  to the
         effect that after the 91st day following such deposit,  the trust funds
         will  not be  subject  to the  effect  of  any  applicable  bankruptcy,
         insolvency,  reorganization or similar laws affecting creditors' rights
         generally;

                  (6)  Abraxas   must   deliver  to  the  Trustee  an  Officers'
         Certificate  stating that such deposit was not made by Abraxas with the
         intent of hindering,  delaying or  defrauding,  or making  preferential
         payments to the holders of Notes in lieu of payments  to,  creditors of
         Abraxas or its Subsidiaries;

                  (7) such Legal  Defeasance  or Covenant  Defeasance  shall not
         cause the Trustee to have a conflicting interest under the Indenture or
         the Trust  Indenture  Act with respect to any  securities of Abraxas or
         any Subsidiary Guarantor;

                  (8) such Legal  Defeasance  or Covenant  Defeasance  shall not
         result in a breach or violation of, or constitute a default under,  any
         material  agreement or instrument  to which  Abraxas or any  Subsidiary
         Guarantor is a party or by which it is bound; and

                  (9) Abraxas  shall have  delivered to the Trustee an Officers'
         Certificate and an opinion of counsel, in form and substance reasonably
         satisfactory to the Trustee, each stating that all conditions precedent
         under the Indenture to either Legal Defeasance or Covenant  Defeasance,
         as the case may be, have been satisfied.

     Following the date upon which the entire principal of, and all premium,  if
any, and interest on, all of the outstanding Notes is then due and payable,  the
Trustee will unless  there is then an Event of Default,  upon request made to it
by Abraxas,  be required  to pay to Abraxas the  difference,  if any, of (x) the
aggregate amount of any money or U.S.  governmental  obligations  deposited with
the Trustee in accordance with clause (2) of the immediately preceding paragraph
and (y) the aggregate  amount of any principal of, and all premium,  if any, and
interest on, the Notes which is then due and payable.

Satisfaction and Discharge

     Upon a request by  Abraxas,  the  Indenture,  the Notes and the  Subsidiary
Guarantees  will be discharged and will cease to be of further effect (except as
to surviving rights of registration of transfer or exchange of the Notes and the
rights  of the  holders  of  the  Notes  to  receive  payment  with  respect  to
Indebtedness under the Notes from the funds deposited with the Trustee described
below  and as  otherwise  expressly  provided  for in the  Indenture)  as to all
outstanding Notes when:

                  (1) either  (a) all the Notes  theretofore  authenticated  and
         delivered  (except  lost,  stolen  or  destroyed  Notes  that have been
         replaced or paid and Notes for whose  payment  money or certain  United
         States  governmental  obligations  have  theretofore  been deposited in
         trust or segregated and held in trust by Abraxas and thereafter  repaid
         to Abraxas or  discharged  from such trust) have been  delivered to the
         Trustee for cancellation or (b) all Notes not theretofore  delivered to
         the Trustee for cancellation (I) have become due and payable, (II) will
         become due and payable at their final Stated  Maturity  within a period
         of time that does not have more than one  Interest  Reset Date or (III)
         have been or are to be called for  redemption,  within a period of time
         that does not have more than one Interest  Reset Date,  under the terms
         of the Indenture for the serving of notice of redemption by the Trustee
         in the name, and at the expense, of Abraxas, and (in the case of clause
         (b)) Abraxas has  irrevocably  deposited or caused to be deposited with
         the Trustee  funds in an amount  sufficient  to pay and  discharge  the
         entire  Indebtedness  on the Notes  not  theretofore  delivered  to the
         Trustee for  cancellation,  for principal of (and premium,  if any, on)
         and  interest on the Notes to the date of deposit (in the case of Notes
         which have become due and payable) or to such final Stated  Maturity or
         redemption  date,  as the case may be,  provided,  that,  if the day on


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         which  such  deposit  is made is not  after  the  Interest  Reset  Date
         immediately preceding such final Stated Maturity or redemption date, as
         the case may be, the interest rate from and after such  Interest  Reset
         Date  used to  calculate  such  amount to be so  deposited  will be the
         interest  rate on the  Notes  on the  day  immediately  preceding  such
         Interest  Reset  Date plus the  greater of (a) 2.00% and (b) such other
         percent  as may be  requested  by  the  Trustee  in  order  to  provide
         reasonable  assurance  in the  judgment of the Trustee  that the amount
         being  so  deposited  will  be  sufficient  to pay  and  discharge  the
         principal  of, and premium,  if any,  and interest on, the  outstanding
         Notes on such final Stated Maturity or redemption date, as the case may
         be, together with instructions from Abraxas  irrevocably  directing the
         Trustee to apply  such funds to the  payment  thereof  at  maturity  or
         redemption, as the case may be;

                  (2) Abraxas has paid all other sums then due and payable under
         the Indenture by Abraxas; and

                  (3)  Abraxas  has   delivered  to  the  Trustee  an  Officers'
         Certificate and an opinion of counsel, in form and substance reasonably
         satisfactory to the Trustee, each stating that all conditions precedent
         under the Indenture  relating to the  satisfaction and discharge of the
         Indenture have been satisfied.

     Following the date upon which the entire principal of, and all premium,  if
any, and interest on, all of the outstanding Notes is then due and payable,  the
Trustee will unless  there is then an Event of Default,  upon request made to it
by Abraxas,  be required  to pay to Abraxas the  difference,  if any, of (x) the
aggregate amount deposited with the Trustee in accordance with clause (1) of the
immediately  preceding  paragraph and (y) the aggregate  amount of any principal
of, and all  premium,  if any,  and interest on, the Notes which is then due and
payable.

Amendment; Supplement and Waiver

     Except as provided in the next two  succeeding  paragraphs and as otherwise
limited by the  Intercreditor  Agreement or any other  Collateral  Document (see
"Intercreditor Agreement"), the Indenture, the Notes, the Subsidiary Guarantees,
the  Registration  Rights  Agreement and the  Intercreditor  Agreement and other
Collateral  Documents  may be amended or  supplemented  with our consent and the
consent of the holders of at least a majority in aggregate  principal  amount of
the Notes then  outstanding  (including  consents  obtained in connection with a
tender offer or exchange offer for Notes),  and any existing Default or Event of
Default, or compliance by us with any provision of the Indenture, the Notes, the
Subsidiary  Guarantees,  the Registration  Rights Agreement or the Intercreditor
Agreement or other Collateral  Documents,  may be waived with the consent of the
holders  of a  majority  in  principal  amount  of the  then  outstanding  Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).

     Without the consent of each holder of an outstanding Note affected thereby,
an amendment or waiver may not:

                  (1) reduce the  principal  amount of Notes whose  holders must
         consent to an amendment, supplement or waiver;

                  (2)  reduce  the  principal  of or  change  the  final  Stated
         Maturity of any Note or reduce the premium  payable upon the redemption
         or  repurchase of any Note or change the time stated in any Note or the
         Indenture  at which  any  Note  may be  redeemed  or  alter  any  other
         provisions  with  respect  to  redemption  of  the  Notes  (other  than
         provisions relating to the covenants described under "Repurchase at the
         Option of Holders Upon a Change of Control");

                  (3) reduce  the rate of  interest  on any Note,  or change the
         time stated in any Note or the Indenture for payment of interest on any
         Note;

                  (4) waive a Default  or Event of  Default  in the  payment  of
         principal  of (or the premium  on) or  interest on the Notes  (except a
         rescission  of  acceleration  of the Notes by the holders of at least a
         majority in aggregate principal amount of the Notes and a waiver of the
         payment default that resulted from such acceleration);

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                  (5) make any Note  payable in money  other than that stated in
         the Notes;

                  (6)  make  any  change  in the  provisions  of  the  Indenture
         relating to waivers of Defaults or Events of Default or protecting  the
         rights of holders of Notes to be paid the principal of, or premium,  if
         any,  or  interest  on,  the  Notes or to bring  suit to  enforce  such
         payment;

                  (7) waive a redemption payment with respect to any Note (other
         than a payment required by a covenant described above under the caption
         "Repurchase at the Option of Holders Upon a Change of Control");

                  (8) modify any Subsidiary Guarantee in any manner that, except
         in accordance  with the terms of the  Indenture  and the  Intercreditor
         Agreement and other Collateral Documents, releases or otherwise impairs
         or limits the  unconditional  obligation of the  respective  Subsidiary
         Guarantor (or any other Person that has  Guaranteed the Notes) to fully
         and promptly perform Abraxas'  obligations  under the Indenture and the
         Notes, including,  without limitation, the payment of principal of, and
         premium and interest on, the Notes, when due;

                  (9) make any change to any Note or  Subsidiary  Guarantee  (or
         any other  Guarantee of the Notes) in a manner that causes such Note or
         Subsidiary Guarantee (or other Guarantee) not to be senior indebtedness
         that is at least pari passu (subject to the terms of the  Intercreditor
         Agreement)  with  all  unsubordinated  and  unsecured  Indebtedness  of
         Abraxas  or  the  respective  Subsidiary  Guarantor  (or  other  Person
         providing such a Guarantee of the Notes), as the case may be;

                  (10) release any Collateral  from the  obligations  created by
         the  Collateral  Documents  except as provided in the Indenture and the
         Intercreditor Agreement and other Collateral Documents; or

                  (11) make any  change in the  foregoing  amendment  and waiver
         provisions.

     Notwithstanding the foregoing,  without the consent of any holder of Notes,
we (together with the Trustee) may amend or supplement the Indenture, the Notes,
the  Subsidiary   Guarantees,   the   Registration   Rights  Agreement  and  the
Intercreditor Agreement and the other Collateral Documents to:

     o   cure any  ambiguity,  defect or  inconsistency;  provided,  that,  such
         actions do not  adversely  affect the interests of holders of the Notes
         in any material respect;

     o   provide  for  uncertificated  Notes  in  addition  to  or in  place  of
         certificated  Notes,   provided  such   uncertificated   Notes  are  in
         registered  form for purposes of the Internal  Revenue Code of 1986, as
         amended;

     o   provide  for the  assumption  of  obligations  of Abraxas to holders of
         Notes in the case of a merger or  consolidation  or sale in  accordance
         with the terms of the Indenture;

     o   add or release any Subsidiary Guarantor in accordance with the terms of
         the Indenture and the Intercreditor Agreement;

     o   make,  complete or confirm any grant of a Lien on Collateral  permitted
         or required by the Collateral Documents or the Indenture or any release
         of a Lien on Collateral that becomes effective in compliance with terms
         and  provisions of the Indenture  and the  Intercreditor  Agreement and
         other Collateral Documents;

     o   make any change that would provide any additional rights or benefits to
         the holders of Notes and does not adversely affect the interests of any
         such holder in any material respect;

     o   comply with  requirements of the SEC in order to effect or maintain the
         qualification of the Indenture under the Trust Indenture Act;

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     o   conform  the  text  of  the  Indenture,   the  Notes,   the  Subsidiary
         Guarantees,  the  Registration  Rights  Agreement or the  Intercreditor
         Agreement  or  other  Collateral  Documents  to any  provision  of this
         Prospectus  (including this "Description of the Exchange Notes") to the
         extent  that  such  provision  in  this   Prospectus   (including  this
         "Description of the Exchange Notes") was intended to be a substantially
         verbatim  recitation of a provision of the  Indenture,  the Notes,  the
         Subsidiary   Guarantees  or  the   Intercreditor   Agreement  or  other
         Collateral Documents; or

     o   to add additional Events of Default;

     o   to evidence and provide for the  acceptance  of  appointment  under the
         Indenture by a successor Trustee or the acceptance of appointment under
         a Collateral Document by a successor Collateral Agent; or

     o   to secure the Notes.

     In addition to the terms and provisions contained in the Indenture relating
to  amendments,   supplements   and  waivers  (and   described   above  in  this
"--Amendment;  Supplement and Waiver"),  the  Intercreditor  Agreement and other
Collateral   Documents  contain  additional  terms  and  provisions   (including
limitations)  requiring  the  consent of other  parties in  interest  (which may
include the Revolving  Credit  Facility  Administrative  Agent and/or the Bridge
Loan  Administrative  Agent) to amend or supplement the Intercreditor  Agreement
and other  Collateral  Documents  that secure or otherwise  affect the Revolving
Credit Facility  Obligations or the Bridge Loan Obligations.  See "Intercreditor
Agreement."

Concerning the Trustee

     U.S. Bank National  Association is the current Trustee under the Indenture.
The  Trustee  maintains  normal  banking  relationships  with  Abraxas  and  its
Subsidiaries  and may perform  certain  services for and transact other business
with Abraxas or its  Subsidiaries  from time to time in the  ordinary  course of
business.

     The  Indenture  (including  the  provisions  of  the  Trust  Indenture  Act
incorporated  by reference  therein)  contains  limitations on the rights of the
Trustee thereunder,  should it become a creditor of Abraxas or its Subsidiaries,
to obtain  payment of claims in certain cases or to realize on certain  property
received by it in respect of any such  claims,  as security  or  otherwise.  The
Indenture  permits  the  Trustee  to  engage  in other  transactions;  provided,
however,  that if the Trustee  acquires any conflicting  interest (as defined in
the Trust Indenture Act), the Trustee must eliminate such conflict or resign.

Governing Law

     The Indenture, the Notes, the Registration Rights Agreement, the Subsidiary
Guarantees and the  Intercreditor  Agreement and other Collateral  Documents are
governed by the laws of the State of New York.

Certain Definitions

     Set forth below are certain defined terms used in the Indenture.  Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.

     "Acquired  Indebtedness"  means  Indebtedness  of a Person  (a)  assumed in
connection  with an acquisition of properties or assets from such Person,  which
assumption  and  acquisition  shall not be in violation of the provisions of the
Indenture,  or (b)  outstanding  at the time such Person becomes a Subsidiary of
any other  Person  (in  either  case other  than any  Indebtedness  incurred  in
connection  with,  or in  contemplation  of,  such  acquisition  or such  Person
becoming  such a  Subsidiary).  Acquired  Indebtedness  shall  be  deemed  to be
incurred on the date of the related acquisition of properties or assets from any
Person or the date the acquired Person becomes a Subsidiary.

                                      131


     "Adjusted  Net  Assets" of a  Subsidiary  Guarantor  means,  on any date of
determination,  the amount by which the fair value of the  properties and assets
of such Subsidiary Guarantor exceeds the total amount of liabilities, including,
without  limitation,  contingent  liabilities  (after giving effect to all other
fixed  and  contingent  liabilities  incurred  or  assumed  on such  date),  but
excluding  liabilities  under  its  Subsidiary  Guarantee,  of  such  Subsidiary
Guarantor.

     "Affiliate" of any specified  Person means (1) any other Person directly or
indirectly  controlling  or  controlled  by or under  direct or indirect  common
control with such specified  Person or (2) any other Person who is a director or
executive  officer of (a) such specified  Person or (b) any Person  described in
the  preceding  clause  (1).  For the  purposes  of this  definition,  "control"
(including,  with correlative meanings, the terms "controlling," "controlled by"
and "under common control with") as used with respect to any Person,  shall mean
the  possession,  directly  or  indirectly,  of the power to direct or cause the
direction  of the  management  or policies of such Person,  whether  through the
ownership of voting securities, by agreement or otherwise.

     "After-Acquired  Property" means any and all assets or property acquired by
Abraxas or a Restricted Subsidiary after the Closing Date.

     "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition  by  Abraxas  or  any  Restricted  Subsidiary  (including,   without
limitation,  by way  of  merger  or  consolidation  and  by  way  of a sale  and
leaseback) (collectively,  for purposes of this definition, a "transfer") to any
Person other than Abraxas or any Restricted Subsidiary,  directly or indirectly,
in one or a series of related transactions, of (1) any Capital Stock (other than
Disqualified  Stock)  of  any  Restricted  Subsidiary  held  by  Abraxas  or any
Restricted Subsidiary, (2) all or substantially all of the properties and assets
of Abraxas or any Restricted Subsidiary or (3) any other properties or assets of
Abraxas or any Restricted  Subsidiary (including Production Payments and Reserve
Sales), other than:

                  (a) a disposition  for value of  hydrocarbons or other mineral
         products (other than Production Payments and Reserve Sales), inventory,
         accounts  receivable,  cash,  Cash  Equivalents,  Oil and  Gas  Hedging
         Contracts,  Currency  Exchange  Contracts or Interest  Rate  Protection
         Obligations in the ordinary course of business;

                  (b) any lease,  abandonment,  disposition or relinquishment of
         any undeveloped oil and gas property in the ordinary course of business
         or any other oil and gas property  that is not capable of production in
         economic quantities;

                  (c) any  Farmout of oil and gas  property  consummated  in the
         ordinary course of business pursuant to a Permitted Farmout  Agreement,
         including  the transfer to the  respective  farmee(s) of an interest in
         Farmout  Property  pursuant  to the  terms  of such  Permitted  Farmout
         Agreement;

                  (d)  the   liquidation  of  property  or  assets  received  in
         settlement of debts owing to Abraxas or any Restricted  Subsidiary as a
         result of  foreclosure,  perfection or enforcement of any Lien or debt,
         which debt were owing to Abraxas or any  Restricted  Subsidiary  in the
         ordinary course of business of Abraxas or such Restricted Subsidiary;

                  (e) any transfer of  properties or assets that is governed by,
         and made in accordance with, the provisions  described under "--Merger,
         Consolidation or Sale of Assets;"

                  (f) any transfer of  properties  or assets if permitted  under
         the  covenant  described  under  "--Certain   Covenants--Limitation  on
         Restricted Payments;"

                  (g)  any   Production   Payment  and  Reserve  Sales  created,
         incurred,   issued,  assumed  or  Guaranteed  in  connection  with  the
         financing of, and within 60 days after, the acquisition of the property
         that is subject thereto, where the holder of such interest has recourse
         solely to such  production  or proceeds of  production,  subject to the
         obligation of the grantor or  transferor  to operate and  maintain,  or
         cause to be operated  and  maintained,  such  property in a  reasonably
         prudent manner or other customary standard or subject to the obligation


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         of the grantor or transferor to indemnify for  environmental,  title or
         other matters customary in the Oil and Gas Business;

                  (h) any transfer of  properties or assets to Abraxas or one or
         more Wholly-owned Restricted Subsidiaries;

                  (i)  any  disposal  in the  ordinary  course  of  business  of
         operating  assets and equipment that has become worn out,  defective or
         obsolete  or not used or  useful  in the  business  of  Abraxas  or any
         Restricted  Subsidiary  and  which is, to the  extent  required  by the
         Intercreditor  Agreement  or other  Collateral  Documents,  replaced by
         property of  substantially  equivalent  or greater  value which becomes
         subject to the Lien of any of the Collateral Documents;

                  (j) any  payment  of money  in  satisfaction  of  Indebtedness
         (including  the Notes)  Incurred  in  compliance  with the terms of the
         Indenture;

                  (k) an Event of Loss if the  Collateral  Agent is  immediately
         granted a  perfected  first  priority  security  interest  (subject  to
         Permitted Prior Liens) in the Net Loss Proceeds  received by Abraxas or
         the Restricted Subsidiary, as the case may be, as additional Collateral
         under the Collateral Documents to secure the Secured  Obligations,  and
         such Net Loss  Proceeds  are  deposited  into an  Asset  Sale  Proceeds
         Account,   all  on  terms  and  pursuant  to  arrangements   reasonably
         satisfactory  to the Collateral  Agent in its reasonable  determination
         (which may  include,  at the  Collateral  Agent's  reasonable  request,
         customary   Officers'   Certificates  and  legal  opinions),   and  the
         Intercreditor  Agreement and other Collateral Documents include release
         provisions  requiring the  Collateral  Agent to release such deposit as
         necessary to permit  Abraxas or its  Restricted  Subsidiaries  to apply
         such  Net  Loss  Proceeds  in the  manner  described  under  "--Certain
         Covenants--Limitation  on Asset Sales," unless the Collateral Agent has
         received written notice that a Default or Event of Default has occurred
         and is continuing; and

                  (l) any transfer,  in one or a series of related transactions,
         of  properties or assets in the ordinary  course of business;  provided
         that all properties and assets transferred  pursuant to this clause (l)
         shall have an aggregate fair market value of less than $1.0 million, as
         determined in good faith by the chief executive officer of Abraxas,  in
         any fiscal year.

     "Asset Sale  Proceeds  Account"  means a segregated  account under the sole
control of the  Collateral  Agent that  includes  only proceeds from the Sale of
Collateral, Net Loss Proceeds and interest and investment income earned thereon.

     "Attributable  Indebtedness"  in  respect of a  Sale-Leaseback  Transaction
means,  at the time of  determination,  the  present  value of such  obligations
implicit in such transaction, determined in accordance with GAAP.

     "Average Life" means,  with respect to any Indebtedness or Preferred Stock,
as at any date of  determination,  the quotient obtained by dividing (1) the sum
of the products of (a) the number of years (and any portion  thereof  rounded up
to the  nearest  month) from the date of  determination  to the date or dates of
each successive scheduled principal payment (including,  without limitation, any
sinking fund or mandatory redemption payment  requirements) of such Indebtedness
or redemption or similar payment with respect to Preferred  Stock  multiplied by
(b) the amount of each such payment by (2) the sum of all such payments.

     "Board of  Directors"  means  the Board of  Directors  of  Abraxas  and any
committee of such Board of Directors duly authorized to act hereunder;  provided
that as the term "Board of Directors" is used in the  definition of  "Continuing
Directors"  it shall refer only to the Board of  Directors of Abraxas and not to
any committee thereof.

     "Board Resolution" means a copy of a resolution  certified by the Secretary
or an  Assistant  Secretary of Abraxas to have been duly adopted by its Board of
Directors and to be in full force and effect on the date of such  certification,
and delivered to the Trustee,  and,  with respect to a  Subsidiary,  a copy of a


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resolution  certified  by  the  Secretary  or an  Assistant  Secretary  of  such
Subsidiary to have been duly adopted by its Board of Directors and to be in full
force  and  effect  on the  date of such  certification,  and  delivered  to the
Trustee.

     "Bridge Loan" means that certain  second lien  increasing  rate bridge loan
agreement,  to be  dated  as of the  Closing  Date,  with an  initial  aggregate
commitment of $25.0 million among Abraxas,  certain Subsidiaries of Abraxas, the
Bridge Loan  Administrative  Agent and the lenders named therein,  including any
related notes,  Guarantees,  Collateral  Documents,  instruments  and agreements
executed in  connection  therewith,  or any successor or  replacement  agreement
(together  with  any  related  successor  or  replacement   notes,   Guarantees,
Collateral   Documents,   instruments  and  agreements  executed  in  connection
therewith),  whether  with the same or any other  lender,  group of  lenders  or
agent,  in each case as the same may be amended  (including  any  amendment  and
restatement thereof),  modified,  supplemented,  extended,  restated,  replaced,
renewed or refinanced (up to an aggregate commitment of $25.0 million) from time
to  time  in  accordance  with  its  terms  and  the  applicable  terms  of  the
Intercreditor Agreement.

     "Bridge Loan Administrative Agent" means Guggenheim Corporate Funding, LLC,
as administrative  agent under the Bridge Loan,  together with its successors in
such capacity.

     "Bridge  Loan Asset Sale  Proceeds  Account"  means an Asset Sale  Proceeds
Account that includes  only proceeds from the Sale of Collateral  pursuant to an
Asset Sale  consummated  under the Bridge Loan in accordance with the provisions
described under  "--Repurchase  at the Option of the Holders Upon the Occurrence
of Certain  Asset  Sales," and interest  and  investment  income  earned on such
proceeds.

     "Bridge Loan Obligations" means all Obligations under the Bridge Loan.

     "Business  Day" means any day other than a Saturday or Sunday,  or a day on
which banking institutions in The City of New York are authorized or required by
law, regulation or executive order to remain closed.

     "Calculation Agent" means initially U.S. Bank National  Association and any
duly  appointed  successor,  appointed by Abraxas,  as its agent,  pursuant to a
calculation  agent  agreement  to  determine  the  Six-Month  LIBOR rate on each
Interest Determination Date in accordance with the terms of the Indenture.

     "Capital  Stock"  means,  with  respect to any Person,  any and all shares,
interests,  participations,  rights  in  or  other  equivalents  in  the  equity
interests  (however  designated) in such Person, and any rights (other than debt
securities convertible into an equity interest), warrants or options exercisable
for,  exchangeable  for or  convertible  into  such an equity  interest  in such
Person.

     "Capitalized  Lease  Obligation"  means,  with  respect to any Person,  any
obligation  that is required to be  classified  and  accounted  for as a capital
lease obligation  under GAAP, and, for the purpose of the Indenture,  the amount
of such obligation at any date shall be the  capitalized  amount thereof at such
date,  determined in accordance with GAAP; the stated maturity  thereof shall be
the date of the last  payment of any amount due under such  obligation  prior to
the first date upon which  such  obligation  may be  terminated  by the  obligee
without payment of penalty.

     "Cash Equivalents" means:

                  (1) any evidence of  Indebtedness  with a maturity of 180 days
         or less  issued or  directly  and fully  guaranteed  or  insured by the
         United  States of  America  or any  agency or  instrumentality  thereof
         (provided  that the full  faith  and  credit  of the  United  States of
         America is pledged in support thereof);

                  (2) demand and time  deposits and  certificates  of deposit or
         acceptances  with a  maturity  of 180  days or  less  of any  financial
         institution  that is a member  of the  Federal  Reserve  System  having
         combined  capital and surplus  and  undivided  profits of not less than
         $500.0 million;

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                  (3)  commercial  paper  with a  maturity  of 180  days or less
         issued by a  corporation  that is not an  Affiliate  of Abraxas  and is
         organized  under  the laws of any  state of the  United  States  or the
         District of  Columbia  and rated at least A-1 by S&P or at least P-1 by
         Moody's;

                  (4) repurchase  obligations with a term of not more than seven
         days for  underlying  securities  of the types  described in clause (1)
         above entered into with any commercial bank meeting the  specifications
         of clause (2) above;

                  (5) overnight  bank deposits and bankers'  acceptances  at any
         commercial  bank  meeting the  qualifications  specified  in clause (2)
         above;

                  (6)  deposits  available  for  withdrawal  on demand  with any
         commercial bank not meeting the qualifications  specified in clause (2)
         above but which is  organized  under the laws of any  country  in which
         Abraxas or any Restricted  Subsidiary maintains an office or is engaged
         in the Oil and Gas  Business,  provided  that (a) all such deposits are
         required  to be  made  in  such  accounts  in the  ordinary  course  of
         business,  (b) such deposits do not at any one time exceed $2.5 million
         in the  aggregate  and (c) no funds so  deposited  remain on deposit in
         such bank for more than 30 days;

                  (7)  deposits  available  for  withdrawal  on demand  with any
         commercial bank not meeting the qualifications  specified in clause (2)
         above but which is a lending bank under any credit  facility of Abraxas
         or any  Restricted  Subsidiary,  provided that all such deposits do not
         exceed $2.5 million in the aggregate at any one time; and

                  (8)  investments  in money market funds  substantially  all of
         whose assets comprise  securities of the types described in clauses (1)
         through (5).

     "Cash Pay Preferred  Stock" means any Capital Stock that, by its terms,  by
the terms of any  security  into which it is  convertible  or  exchangeable,  by
contract or otherwise, requires, or upon the happening of an event or passage of
time would require,  the payment of dividends  (other than dividends paid (1) in
Qualified  Capital  Stock and/or (2) from a segregated  reserve  account  funded
solely out of amounts paid by the  purchaser or purchasers of such Capital Stock
in connection with the issuance of such Capital Stock) prior to the date that is
91 days after the final Stated Maturity of the Notes.

     "Change of Control" means the occurrence of any of the following events:

                  (1) any  "person"  or  "group"  (as  such  terms  are  used in
         Sections 13(d) and 14(d) of the Exchange Act),  becomes the "beneficial
         owner" (as  defined in Rule 13d-3 and 13d-5  under the  Exchange  Act),
         directly or  indirectly,  of shares  representing  more than 35% of the
         total voting power of our then  outstanding  Voting Stock other than by
         means of a Qualified Equity Offering;

                  (2)  Abraxas  is  merged  with or into  or  consolidated  with
         another  Person and,  immediately  after giving effect to the merger or
         consolidation,  (a) less  than  65% of the  total  voting  power of the
         outstanding  Voting Stock of the surviving or resulting  Person is then
         "beneficially  owned"  (within  the  meaning  of Rule  13d-3  under the
         Exchange  Act)  in  the  aggregate  by  the   stockholders  of  Abraxas
         immediately  prior to such merger or consolidation and (b) any "person"
         or "group" (as defined in Section  13(d)(3) or 14(d)(2) of the Exchange
         Act) has become the direct or indirect  "beneficial  owner" (as defined
         in Rule  13d-3  under the  Exchange  Act) of more than 35% of the total
         voting power of the Voting Stock of the surviving or resulting Person;

                  (3) Abraxas, either individually or in conjunction with one or
         more  Restricted  Subsidiaries,  sells,  assigns,  conveys,  transfers,
         leases or otherwise disposes of, or one or more Restricted Subsidiaries
         sells, assigns,  conveys,  transfers,  leases or otherwise disposes of,
         all or  substantially  all of the  properties and assets of Abraxas and
         the  Restricted   Subsidiaries,   taken  as  a  whole  (either  in  one
         transaction  or a series of related  transactions),  including  Capital
         Stock of the  Restricted  Subsidiaries,  to any "person" or "group" (as


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         such terms are used in  Section  13(d) and 14(d) of the  Exchange  Act)
         (other   than   Abraxas   or  one  or  more   Wholly-owned   Restricted
         Subsidiaries);

                  (4) during any consecutive two-year period, individuals who at
         the  beginning  of such period  constituted  the Board of  Directors of
         Abraxas  (together with any new directors  whose election by such Board
         of Directors or whose  nomination for election by the  stockholders  of
         Abraxas  was  approved by a vote of a majority  of the  directors  then
         still in office who were  either  directors  at the  beginning  of such
         period or whose  election or nomination  for election was previously so
         approved) cease for any reason to constitute a majority of the Board of
         Directors of Abraxas then in office; or

                  (5) the liquidation or dissolution of Abraxas.

     "Change of Control  Offer"  means an offer to purchase  upon the request of
any holder all or any part of the Notes of such  holder at the Change of Control
Purchase  Price on the Change of Control  Payment Date within 30 days  following
any Change of Control.

     "Closing  Date" means the date on which Notes are  originally  issued under
the Indenture.

     "Collateral" means,  collectively,  all of the property and assets that are
from time to time subject to the Lien of the Collateral Documents, including the
Liens, if any, required to be granted pursuant to the Indenture.

     "Collateral   Account"  means  each  collateral  account   established  and
maintained by the Collateral Agent pursuant to the  Intercreditor  Agreement for
the receipt of Trust Monies, including an Asset Sale Proceeds Account.

     "Collateral Agent" means U.S. Bank National Association, in its capacity as
collateral  agent  under the  collateral  agency  agreement,  together  with its
successors in such capacity.

     "Collateral  Agent's Liens" means a Lien granted to the Collateral Agent as
security for Secured Obligations.

     "Collateral Documents" means, collectively, the Intercreditor Agreement and
the security agreements,  mortgages,  deeds of trust, account control agreements
and other  security  documents  applicable to the Collateral and given to secure
the  Secured  Obligations,  each  as may  be  amended,  modified,  supplemented,
restated or replaced from time to time in accordance with its terms.

     "Common  Stock" of any Person means  Capital Stock of such Person that does
not rank prior,  as to the payment of  dividends  or as to the  distribution  of
assets upon any voluntary or involuntary liquidation,  dissolution or winding-up
of such Person, to shares of Capital Stock of any other class of such Person.

     "Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio
of  (1)  the  sum  of  Consolidated  Net  Income,  Consolidated  Fixed  Charges,
Consolidated Income Tax Expense and Consolidated  Non-Cash Charges to the extent
deducted in computing Consolidated Net Income, in each case, for such period, of
Abraxas and its Restricted  Subsidiaries  on a consolidated  basis decreased (to
the extent included in determining  Consolidated  Net Income for such period) by
the sum of (a) the amount of deferred  revenues that are  amortized  during such
period  and  are  attributable  to  reserves  that  are  subject  to  Volumetric
Production  Payments and (b) amounts recorded for such period in accordance with
GAAP as  repayments  of principal  and interest  pursuant to  Dollar-Denominated
Production  Payments,  to (2) the  Consolidated  Fixed  Charges for such period;
provided, however, that:

                  (a) the  Consolidated  Fixed  Charge  Coverage  Ratio shall be
         calculated on the assumption  that (1) any  Indebtedness to be incurred
         (and all other Indebtedness incurred after the first day of such period
         of four full  fiscal  quarters  referred to in the  covenant  described
         under  "--Certain  Covenants--Limitation  on Incurrence of Indebtedness
         and Issuance of  Disqualified  Stock" through and including the date of
         determination)  and (if applicable) the application of the net proceeds
         therefrom  (and  from  any  other  such  Indebtedness),   including  to
         refinance other Indebtedness, but excluding the Incurrence or repayment


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         of Indebtedness in the ordinary  business for working capital  purposes
         pursuant to working capital facilities,  had been incurred on the first
         day of such  period  and,  in the  case  of  Acquired  Indebtedness  or
         Indebtedness  to be Incurred in connection with an acquisition or other
         transaction, on the assumption that the related transaction (whether by
         means of purchase,  merger or otherwise) also had occurred on such date
         with the appropriate adjustments with respect to such acquisition being
         included  in such pro  forma  calculation  and (2) any  acquisition  or
         disposition by Abraxas or any  Restricted  Subsidiary of any properties
         or assets outside the ordinary course of business,  or any repayment of
         any principal  amount of any  Indebtedness of Abraxas or any Restricted
         Subsidiary prior to the Stated Maturity  thereof,  in either case since
         the  first  day of  such  period  through  and  including  the  date of
         determination, had been consummated on such first day of such period;

                  (b) in making such computation, the Consolidated Fixed Charges
         attributable to interest on any Indebtedness required to be computed on
         a pro forma  basis in  accordance  with the  covenant  described  under
         "--Certain  Covenants--Limitation  on  Incurrence of  Indebtedness  and
         Issuance of  Disqualified  Stock" and (1)  bearing a floating  interest
         rate  shall  be  computed  as if the  rate  in  effect  on the  date of
         computation  had been the applicable rate for the entire period and (2)
         which was not  outstanding  during the period for which the computation
         is being made but which  bears,  at the option of  Abraxas,  a fixed or
         floating rate of interest, shall be computed by applying, at the option
         of Abraxas, either the fixed or floating rate;

                  (c) in making such computation, the Consolidated Fixed Charges
         attributable to interest on any  Indebtedness  under a revolving credit
         facility  required to be  computed  on a pro forma basis in  accordance
         with the covenant  described  under "Certain  Covenants--Limitation  on
         Incurrence of Indebtedness and Issuance of Disqualified Stock" shall be
         computed  based upon the  average  daily  balance of such  Indebtedness
         during the applicable period,  provided that such average daily balance
         shall be reduced by the amount of any repayment of Indebtedness under a
         revolving credit facility during the applicable period, which repayment
         permanently   reduced  the  commitments  or  amounts  available  to  be
         reborrowed under such facility;

                  (d)  notwithstanding  clauses  (b) and  (c) of  this  proviso,
         interest on  Indebtedness  determined  on a fluctuating  basis,  to the
         extent such interest is covered by agreements relating to Interest Rate
         Protection Obligations, shall be deemed to have accrued at the rate per
         annum   resulting   after  giving  effect  to  the  operation  of  such
         agreements;

                  (e) in making such  calculation,  Consolidated  Fixed  Charges
         shall exclude interest  attributable to  Dollar-Denominated  Production
         Payments; and

                  (f) if after the first day of the period referred to in clause
         (1) of this definition  Abraxas has retired any Indebtedness out of the
         net cash proceeds of the issue and sale of shares of Qualified  Capital
         Stock of Abraxas within 30 days of such issuance and sale, Consolidated
         Fixed  Charges  shall be  calculated  on a pro  forma  basis as if such
         Indebtedness had been retired on the first day of such period.

     "Consolidated  Fixed Charges" means, for any period,  without  duplication,
(1) the sum of

     (a) the interest  expense of Abraxas and its  Restricted  Subsidiaries  for
such period as  determined  on a  consolidated  basis in  accordance  with GAAP,
including, without limitation,

                  (i) any amortization of original issue discount;

                  (ii) the net cost under Interest Rate  Protection  Obligations
         (including any amortization of discounts);

                  (iii) the interest portion of any deferred payment  obligation
         constituting Indebtedness;

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                  (iv) all  commissions,  discounts  and other fees and  charges
         owed  with  respect  to  letters  of  credit  and  bankers'  acceptance
         financing; and

                  (v)  all  accrued  interest,   in  each  case  to  the  extent
         attributable to such period;

         (b) to the extent any Indebtedness of any Person (other than Abraxas or
     a  Restricted  Subsidiary)  is  guaranteed  by  Abraxas  or any  Restricted
     Subsidiary,  the  aggregate  amount of  interest  paid (to the  extent  not
     accrued in a prior  period) or accrued  by such other  Person  during  such
     period  attributable to any such  Indebtedness,  in each case to the extent
     attributable to that period;

         (c) the aggregate amount of the interest component of Capitalized Lease
     Obligations  paid (to the extent not  accrued in a prior  period),  accrued
     and/or  scheduled  to be paid or  accrued  by  Abraxas  and its  Restricted
     Subsidiaries  during such period as determined on a  consolidated  basis in
     accordance with GAAP; and

         (d) the aggregate  amount of dividends  paid (to the extent not accrued
     in a prior  period)  or accrued on  Disqualified  Stock of Abraxas  and its
     Restricted  Subsidiaries,  to the extent such Disqualified Capital Stock is
     owned by Persons other than Abraxas or its Restricted Subsidiaries,  and to
     the extent such dividends are not paid in Qualified Capital Stock;

less (2) to the extent  included in (1) above,  (A)  amortization of capitalized
debt  issuance  costs of Abraxas  and its  Restricted  Subsidiaries  during such
period and (B) amounts paid,  accrued and/or  scheduled to be paid or accrued to
Abraxas or any of its Restricted Subsidiaries.

     "Consolidated  Income Tax Expense" means, for any period, the provision for
Federal,  state,  local and foreign income taxes  (including any state franchise
taxes  accounted for as income taxes in accordance with GAAP) of Abraxas and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.

     "Consolidated   Indebtedness"   means,   at  any  date,  the   consolidated
Indebtedness of Abraxas and its Restricted Subsidiaries on such date.

     "Consolidated  Net Income"  means,  for any period,  the  consolidated  net
income (or loss) of Abraxas and its Restricted  Subsidiaries  for such period as
determined  in  accordance  with  GAAP,  adjusted  to  the  extent  included  in
calculating such net income (or loss) by excluding, without duplication:

                  (1) net  after-tax  extraordinary  or  non-recurring  gains or
         losses to the extent classified as such in accordance with GAAP;

                  (2) net after-tax  gains or losses (less all fees and expenses
         relating  thereto)  attributable to Asset Sales (or abandoned  reserves
         related thereto);

                  (3) the net  income (or net loss) of any  Person  (other  than
         Abraxas or any of its Restricted Subsidiaries), in which Abraxas or any
         of its Restricted  Subsidiaries has an ownership interest,  except that
         the net income of such Person  shall be included  in  Consolidated  Net
         Income to the extent of the amount of dividends or other  distributions
         or  interest  on  indebtedness  actually  paid to Abraxas or any of its
         Restricted Subsidiaries in cash by such other Person during such period
         (regardless of whether such cash dividends,  distributions  or interest
         on  indebtedness  is  attributable  to net income (or net loss) of such
         Person during such period or during any prior period);

                  (4) the net income of any  Subsidiary  Guarantor to the extent
         that the  declaration or payment of dividends or similar  distributions
         by that  Restricted  Subsidiary  is not at the  date  of  determination
         permitted,  directly or  indirectly,  by  operation of the terms of its
         charter or any agreement, instrument, judgment, decree, order, statute,
         rule  or   governmental   regulation   applicable  to  that  Restricted
         Subsidiary or its stockholders;

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                  (5) the net income (or net loss)  attributable to discontinued
         operations  (including,  without  limitation,  operations  disposed  of
         during such period whether or not such  operations  were  classified as
         discontinued); and

                  (6) in the case of a successor to Abraxas by  consolidation or
         merger or as  transferee  of  Abraxas'  assets,  the net  income of the
         successor  corporation prior to such consolidation,  merger or transfer
         of assets.

     "Consolidated  Non-Cash  Charges"  means,  for any  period,  the  aggregate
depreciation, depletion, amortization and other non-cash expenses of Abraxas and
its Restricted  Subsidiaries  reducing  Consolidated Net Income for such period,
determined on a consolidated  basis in accordance  with GAAP (excluding any such
non-cash  charge that requires an accrual of or reserve for cash charges for any
future period).

     "Control  Party" has the  meaning  given to such term in the  Intercreditor
Agreement and as described under "Intercreditor Agreement."

     "Currency  Exchange  Contract"  means,  with  respect  to  Abraxas  or  its
Restricted Subsidiaries,  any foreign exchange contract, currency swap agreement
or other similar  agreement or arrangement  that is entered into in the ordinary
course of business for the purpose of protecting itself against  fluctuations in
currency values and not for the purpose of speculation.

     "Default" means any event,  act or condition which with the passage of time
or the giving of notice pursuant to the Indenture, or both, would be an Event of
Default as described under "--Events of Default and Remedies."

     "Designated LIBOR Page" means the display on the Moneyline service (or such
other  service  or  services  as  may  be  nominated  by  the  British  Bankers'
Association) for the purpose of displaying London interbank rates of major banks
for U.S. dollar deposits.  If no such rate appears on an Interest  Determination
Date,  the  Six-Month  LIBOR rate on such  Interest  Determination  Date will be
determined as described in clause (2) of the definition of "Six-Month LIBOR."

     "Disqualified  Stock" means Capital Stock that is either Cash Pay Preferred
Stock or Redeemable Capital Stock.

     "Dollar-Denominated   Production   Payments"   means   production   payment
obligations  recorded as liabilities in accordance with GAAP,  together with all
undertakings and obligations in connection therewith.

     "Event of  Default"  has the  meaning  set forth  above  under the  caption
"Events of Default and Remedies."

     "Event  of Loss"  means,  with  respect  to any  Collateral,  any (1) loss,
destruction or damage of such Collateral, (2) condemnation, seizure or taking by
exercise of the power of eminent  domain or  otherwise  of such  Collateral,  or
confiscation  of  such  Collateral  or  the  requisition  of  the  use  of  such
Collateral,  by any governmental or quasi-governmental  entity or (3) settlement
in lieu of clause (2) above.

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     "Existing  Senior Debt  Facility"  means the Loan and  Security  Agreement,
dated  as of  January  22,  2003,  among  Abraxas,  as  borrower,  each  of  its
Subsidiaries,  as a guarantor,  the lenders named therein, Wells Fargo Foothill,
Inc.,  as the  arranger  and  administrative  agent,  and  Guggenheim  Corporate
Funding, LLC, as the specified appointee, as previously amended and in existence
on the Closing Date.

     "Farmout" means an arrangement whereby the owner(s) of one or more oil, gas
and/or mineral lease or other oil and natural gas working  interest with respect
to Farmout  Property  (referred to as the "farmor") agrees to transfer or assign
an interest in such Farmout  Property to one or more other Persons  (referred to
as the "farmee") in exchange for the farmee (1) drilling,  or  participating  in
the cost of the  drilling  of, one or more oil  and/or  natural  gas  wells,  or
undertaking  other  exploration or development  activity or participating in the
cost of such other  activity,  to attempt to obtain  production of  hydrocarbons


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from such Farmout  Property,  (2)  agreeing to so drill or undertake  such other
activity,  or agreeing to participate in the cost of such drilling or such other
activity,  with respect to such Farmout Property, or (3) obtaining production of
hydrocarbons  from  such  Farmout  Property,  or  participating  in the costs of
obtaining such production.

     "Farmout  Agreement"  means,  with respect to a Farmout,  the  agreement or
agreements governing such Farmout.

     "Farmout  Property"  means,  with respect to a Farmout,  the property  from
which  production of hydrocarbons is sought to be obtained through such Farmout.
The Farmout  Property  with  respect to a Farmout  may  consist of only  certain
specified  depths,  strata,  zones or  geological  formations  under one or more
tracts of land,  but shall not include any depths,  strata,  zones or geological
formations  under such  tract(s) of land (i) that,  at the time of such Farmout,
are being  produced or developed by the farmor or any of its  Affiliates  in the
same field or area or (ii) that have been subject to production  or  development
activity  by the farmor or any of its  Affiliates  in the same field or area and
such activity was discontinued with the desire or expectation of entering into a
Farmout.

     "Farmout Property Value" means, with respect to a Farmout, the value of the
Farmout  Property  of Abraxas  or its  Restricted  Subsidiaries  at the time the
relevant Farmout Agreement is entered into determined as follows:

     o   with  respect  to  Farmout  Property  with a value not  exceeding  $1.0
         million,  as determined in good faith by the chief executive officer of
         Abraxas and  evidenced  by an  Officers'  Certificate  delivered to the
         Trustee;

     o   with respect to Farmout  Property with a value  exceeding  $1.0 million
         but not  exceeding  $5.0  million,  as  determined in good faith by the
         Board of  Directors  of Abraxas  and  evidenced  by a Board  Resolution
         delivered to the Trustee; and

     o   with respect to Farmout  Property with a value  exceeding $5.0 million,
         as  reflected  in an  opinion  or  appraisal  issued by an  independent
         accounting or investment banking firm which is nationally recognized in
         the United States, or by a reputable independent appraisal or petroleum
         engineering firm, as appropriate under the circumstances,  delivered to
         the Trustee.

     "Foreign Unrestricted Subsidiary" means any Unrestricted Subsidiary that is
a controlled  foreign  corporation  (within the meaning of section 957(a) of the
Internal Revenue Code of 1986, as amended).

     "GAAP"  means  generally  accepted  accounting   principles,   consistently
applied, that are set forth in the opinions and pronouncements of the Accounting
Principles Board of the American  Institute of Certified Public  Accountants and
statements and pronouncements of the Financial  Accounting Standards Board or in
such other  statements  by such other entity as may be approved by a significant
segment of the accounting profession of the United States of America, which were
effective as of the Closing Date.

     "Grey Wolf Loan Administrative  Agent" means Guggenheim  Corporate Funding,
LLC, as administrative  agent under the Grey Wolf Term Loan Agreement,  together
with its successors in such capacity.

     "Grey  Wolf  Term  Loan"  means  that  certain  senior  secured  term  loan
agreement,  to be  dated  as of the  Closing  Date,  with an  initial  aggregate
commitment of $35.0 million among Grey Wolf,  the Grey Wolf Loan  Administrative
Agent and the lenders named therein,  including any related  notes,  Guarantees,
Collateral   Documents,   instruments  and  agreements  executed  in  connection
therewith,  or any successor or replacement agreement (together with any related
successor or replacement notes,  Guarantees,  Collateral Documents,  instruments
and agreements executed in connection  therewith),  whether with the same or any
other  lender,  group of  lenders,  or  agent,  in each  case as the same may be
amended   (including   any  amendment  and   restatement   thereof),   modified,
supplemented,  extended,  restated,  replaced,  renewed or refinanced  (up to an
aggregate  commitment of $35.0 million) from time to time in accordance with its
terms and the applicable terms of the Intercreditor Agreement.

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         "Guarantee" means any obligation, contingent or otherwise, of any
Person guaranteeing Indebtedness of another Person (including, without
limitation, obligations, agreements to purchase assets, securities or services,
to take-or-pay such Indebtedness of another Person or to maintain financial
statement conditions, or similar arrangements or agreements, in each case
entered into for the purpose of assuring the obligee of such Indebtedness of the
payment thereof, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit, or to protect such obligee against loss
in respect thereof, in whole or in part), but excluding (i) endorsements of
negotiable instruments for collection or deposit in the ordinary course of
business, and (ii) contingent obligations in connection with the sale or
discount of accounts receivable and similar paper; provided, however, that a
Guarantee by any Person shall not include a contractual commitment by one Person
to invest in another Person and provided, further, that such Investment is
otherwise permitted by the Indenture. When used as a verb, "Guarantee" shall
have a corresponding meaning.

     "Incur" means to,  create,  incur,  assume,  Guarantee or otherwise  become
directly or indirectly liable for the payment of any Indebtedness.

     "Indebtedness" means, with respect to any Person, without duplication:

                  (1) all  liabilities  of such Person for borrowed money or for
         the  deferred  purchase  price of property or services  (excluding  any
         trade accounts payable and other accrued current  liabilities  incurred
         in the ordinary course of business), and all liabilities of such Person
         incurred in connection with any letters of credit, bankers' acceptances
         or other similar credit transactions, if, and to the extent, any of the
         foregoing  would  appear as a  liability  upon a balance  sheet of such
         Person prepared in accordance with GAAP;

                  (2) all obligations of such Person evidenced by bonds,  notes,
         debentures or other similar instruments,  if, and to the extent, any of
         the foregoing  would appear as a liability upon a balance sheet of such
         Person prepared in accordance with GAAP;

                  (3) all  indebtedness  of such Person created or arising under
         any conditional sale, title retention or similar agreement with respect
         to property acquired by such Person (even if the rights and remedies of
         the seller or lender  under such  agreement in the event of default are
         limited to repossession or sale of such property),  but excluding trade
         accounts payable arising in the ordinary course of business;

                  (4) all Capitalized Lease Obligations of such Person;

                  (5) all  obligations  of such  Person  under or in  respect of
         Currency Exchange Contracts, Oil and Gas Hedging Contracts and Interest
         Rate Protection Obligations;

                  (6) all indebtedness  referred to in the preceding  clauses of
         other Persons and all dividends of other Persons,  the payment of which
         is  secured  by (or for which the  holder of such  Indebtedness  has an
         existing  right to be secured  by) any Lien upon  property  (including,
         without limitation, accounts and contract rights) owned by such Person,
         even  though  such  Person  has not  assumed  or become  liable for the
         payment  of such  Indebtedness  (the  amount of such  obligation  being
         deemed to be the lesser of the value of such  property  or asset or the
         amount of the obligation so secured);

                  (7) all Redeemable  Capital Stock of such Person valued at the
         greater of its voluntary or involuntary  maximum fixed repurchase price
         plus accrued dividends;

                  (8) all Guarantees by such Person of Indebtedness  referred to
         in this definition  (including,  with respect to any Production Payment
         and Reserve  Sales,  any  warranties  or  Guarantees  of  production or
         payment by such  Person  with  respect to such  Production  Payment and
         Reserve  Sales,  but excluding  other  contractual  obligations of such
         Person with respect to such Production Payment and Reserve Sales); and

                  (9) all  obligations  of such Person  under any  agreement  to
         purchase,  redeem, exchange, convert or otherwise acquire for value any
         Capital  Stock of such  Person or any  warrants,  rights or  options to
         acquire such Capital Stock  outstanding on the date of the Indenture or
         thereafter if, and to the extent,  such  obligations  would have caused


                                      141


         such  Capital  Stock  to have  been  Redeemable  Capital  Stock if such
         obligations had been included in the terms of such Capital Stock.

     For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed  repurchase  price shall be calculated
in  accordance  with  the  terms  of such  Redeemable  Capital  Stock as if such
Redeemable  Capital Stock were purchased on any date on which Indebtedness shall
be required to be  determined  pursuant to the  Indenture,  and if such price is
based upon,  or measured  by, the fair market value of such  Redeemable  Capital
Stock,  such fair market value shall be determined in good faith by the board of
directors of the issuer of such  Redeemable  Capital Stock;  provided,  however,
that  if such  Redeemable  Capital  Stock  is not at the  date of  determination
permitted or required to be repurchased,  the "maximum fixed  repurchase  price"
shall be the book value of such Redeemable Capital Stock.  Subject to clause (8)
of the first sentence of this definition,  neither Dollar-Denominated Production
Payments nor Volumetric Production Payments shall be deemed to be Indebtedness.

     "Indenture"  means that certain  indenture entered into on October 28, 2004
among Abraxas,  the initial  Subsidiary  Guarantors and the Trustee  pursuant to
which the  outstanding  Notes were issued and the exchange notes will be issued,
as the same may be amended  (including any amendment and  restatement  thereof),
modified or supplemented from time to time in accordance with its terms.

     "Intercreditor  Agreement" means that certain intercreditor agreement to be
entered  into  on  the  Closing  Date  among  Abraxas,  the  initial  Restricted
Subsidiaries,  the Trustee, the Revolving Credit Facility  Administrative Agent,
the Bridge Loan  Administrative  Agent and the Collateral Agent, as the same may
be amended  (including  any  amendment  and  restatement  thereof),  modified or
supplemented from time to time in accordance with its terms.

     "Interest   Determination  Date"  means  the  second  London  Business  Day
preceding each Interest Reset Date.

     "Interest  Payment  Date"  means  the  first  day  of  June  and  December,
commencing  on June 1, 2005;  provided,  that, if any such day is not a Business
Day, such Interest Payment Date shall be the next succeeding Business Day.

     "Interest Rate Protection  Obligations" means the obligations of any Person
pursuant  to  any  arrangement  with  any  other  Person  whereby,  directly  or
indirectly,  such  Person is  entitled  to  receive  from time to time  periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional  amount in exchange for periodic  payments made by such Person
calculated  by  applying  a fixed or a  floating  rate of  interest  on the same
notional  amount and shall  include,  without  limitation,  interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to protect
against  or  manage  such  Person's  and any of its  Subsidiaries'  exposure  to
fluctuations in interest rates.

     "Interest Reset Date" means the first day of June and December,  commencing
on June 1, 2005.

     "Investment"  means,  with  respect to any  Person,  any direct or indirect
advance, loan, Guarantee of Indebtedness or other extension of credit or capital
contribution to (by means of any transfer of cash or other property or assets to
others or any payment for property, assets or services for the account or use of
others),  or any purchase or  acquisition  by such Person of any Capital  Stock,
bonds,  notes,   debentures  or  other  securities  (including  derivatives)  or
evidences of Indebtedness issued by, any other Person. In addition:

     o   the fair  market  value as  determined  by the  Board of  Directors  of
         Abraxas in good faith of the net  assets of any  Restricted  Subsidiary
         (prorated  for  Abraxas'  direct and  indirect  interest in the Capital
         Stock of such Restricted  Subsidiary if such  Restricted  Subsidiary is
         not a  Wholly-owned  Restricted  Subsidiary)  at  the  time  that  such
         Restricted Subsidiary is designated an Unrestricted Subsidiary shall be
         deemed  to be an  "Investment"  made by  Abraxas  in such  Unrestricted
         Subsidiary at such time; and

     o   the fair  market  value as  determined  by the  Board of  Directors  of
         Abraxas  in good  faith of  Capital  Stock  retained  by  Abraxas  or a
         Restricted  Subsidiary  in  connection  with  the sale or  issuance  of


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         Capital  Stock  of a  Restricted  Subsidiary  in  accordance  with  the
         covenant described under "--Certain  Covenants--Limitation on Issuance,
         Sale and Ownership of Capital Stock of Restricted  Subsidiaries"  that,
         as a result of such transaction,  is no longer a Restricted  Subsidiary
         (prorated  for Abraxas'  direct and  indirect  interest in such Capital
         Stock if such  Restricted  Subsidiary is not a Wholly-owned  Restricted
         Subsidiary  immediately prior to such sale or issuance) shall be deemed
         to be an "Investment" made at the time of such transaction.

     "Investments" shall exclude:

     o   extensions  of  trade  credit  under a  joint  operating  agreement  or
         otherwise in the ordinary  course of business,  workers'  compensation,
         utility,  lease and similar  deposits and prepaid  expenses made in the
         ordinary course of business;

     o   Interest  Rate  Protection  Obligations  entered  into in the  ordinary
         course of business or as required by any Permitted  Indebtedness or any
         other  Indebtedness  incurred in compliance with the covenant described
         under  "--Certain  Covenants--Limitation  on Incurrence of Indebtedness
         and  Issuance of  Disqualified  Stock," but only to the extent that the
         stated  aggregate  notional  amounts of such Interest  Rate  Protection
         Obligations  do not exceed 105% of the  aggregate  principal  amount of
         such  Indebtedness to which such Interest Rate  Protection  Obligations
         relate;

     o   bonds,  notes,  debentures or other  securities  received in compliance
         with the covenant described under "--Certain  Covenants--Limitation  on
         Asset Sales;" and

     o   endorsements of negotiable  instruments and documents for collection in
         the ordinary course of business.

     "Lien" means any  mortgage,  charge,  pledge,  lien  (statutory  or other),
security interest, hypothecation,  assignment for security, claim, or preference
or  priority  or  other   encumbrance  or  similar   agreement  or  preferential
arrangement of any kind or nature whatsoever  serving to provide security for an
obligation,  whether  or  not  filed,  recorded  or  otherwise  perfected  under
applicable law (including,  without limitation, any agreement to give or grant a
lien or any lease, conditional sale, title retention or similar agreement having
substantially  the same economic  effect as any of the  foregoing)  upon or with
respect to any  property of any kind. A Person shall be deemed to own subject to
a Lien any  property  that such  Person  has  acquired  or holds  subject to the
interest of a vendor or lessor under any  conditional  sale  agreement,  capital
lease or other title retention agreement.

     "London  Business  Day"  means any day on which  dealings  in U.S.  dollars
generally are transacted in the London interbank market.

     "Moody's" means Moody's Investors Service, Inc. and its successors.

     "NetCash Proceeds" means, with respect to any Asset Sale, sale, transfer or
other disposition by any Person,  the aggregate  proceeds thereof in the form of
cash or Cash  Equivalents,  including  payments in respect of  deferred  payment
obligations when received in the form of cash or Cash Equivalents (except to the
extent that such  obligations  are financed or sold with  recourse to Abraxas or
any  Restricted  Subsidiary),  pursuant  to,  or  monetization  of,  a  note  or
installment receivable or otherwise, net of

     o   brokerage  commissions and other fees and expenses (including,  without
         limitation, fees and expenses of legal counsel, accountants,  petroleum
         engineering firms and investment banks) incurred by such Person related
         to such Asset Sale, sale, transfer or other disposition;

     o   the amount of any Indebtedness  (including  Redeemable Capital Stock or
         Preferred Stock of a Subsidiary)  that is required to be repaid by such
         Person or its  Affiliates  in  connection  with such Asset Sale,  sale,
         transfer or other disposition;

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     o   provisions for all taxes,  including income taxes,  payable as a result
         of such Asset Sale, sale, transfer or other disposition or attributable
         to required prepayments or repayments of Indebtedness with the proceeds
         of such Asset Sale, sale, transfer or other disposition;

     o   amounts required to be paid to any Person or its Affiliates (other than
         Abraxas or any Restricted  Subsidiary) owning a beneficial  interest in
         the  assets  subject  to  the  Asset  Sale,  sale,  transfer  or  other
         disposition  or  to  holders  of  minority  interests  in a  Restricted
         Subsidiary  or other  entity  as a result  of such  Asset  Sale,  sale,
         transfer or other disposition; and

     o   appropriate  amounts  to be  provided  by  Abraxas  or  any  Restricted
         Subsidiary,  as the case may be, as a reserve in  accordance  with GAAP
         applied against post closing adjustments or any liabilities  associated
         with such Asset Sale, sale,  transfer or other disposition and retained
         by Abraxas or any Restricted Subsidiary, as the case may be, after such
         Asset Sale, sale,  transfer or other  disposition,  including,  without
         limitation,  pension  and other  post-employment  benefit  liabilities,
         liabilities related to environmental  matters and liabilities under any
         indemnification  obligations  associated  with such Asset  Sale,  sale,
         transfer  or  other  disposition,  all  as  reflected  in an  Officers'
         Certificate  delivered  to the  Trustee;  provided,  however,  that any
         amounts  remaining after  adjustments,  revaluations or liquidations of
         such reserves shall constitute Net Cash Proceeds.

     "Net Loss Proceeds" means,  with respect to any Event of Loss, the proceeds
in the  form of  cash or Cash  Equivalents  received  by  Abraxas  or any of its
Restricted Subsidiaries from such Event of Loss net of:

     o   reasonable  out-of-pocket  expenses and fees  relating to such Event of
         Loss  (including,  without  limitation,  fees  and  expenses  of  legal
         counsel,  accountants,   petroleum  engineering  firms  and  investment
         banks);

     o   provisions for all taxes,  including income taxes,  payable as a result
         of such  Event of Loss after  taking  into  account  any  reduction  in
         consolidated  tax  liability due to available tax credits or deductions
         and any tax sharing arrangements; and

     o   repayment of Indebtedness  that is secured by, or directly  related to,
         the property or assets that are the subject of such Event of Loss.

     "Note Documents"  means the Indenture,  the Notes (including all additional
notes and all  exchange  notes  therefor),  the  Subsidiary  Guarantees  and the
Collateral  Documents to the extent the Collateral  Documents secure obligations
under the Indenture, the Notes or the Subsidiary Guarantees.

     "Note Obligations" means all Obligations under the Note Documents.

     "Note  Register"  means the register  maintained by or for Abraxas in which
Abraxas shall provide for the  registration  of the Notes and of transfer of the
Notes.

     "Notes" means the Floating Rate Senior Secured Notes due 2009,  Series A of
Abraxas and the Floating Rate Senior Secured Notes due 2009, Series B offered by
Abraxas in exchange for the Series A  outstanding  notes  pursuant to the Series
A/B exchange offer described in this prospectus.

     "Obligations"  means any principal,  premium (if any),  interest (including
additional or special  interest),  if any, and interest accruing on or after the
filing of any petition in bankruptcy or for  reorganization  relating to Abraxas
or its Restricted  Subsidiaries  whether or not a claim for post-filing interest
is  allowed  in  such   proceeding),   penalties,   fees,   charges,   expenses,
indemnifications,  reimbursement  obligations,  damages (including additional or
special interest),  Guarantees  (including the Subsidiary  Guarantees) and other
liabilities   or  amounts   payable  under  the   documentation   governing  any
Indebtedness or in respect thereof.

     "Officers'  Certificate"  means  a  certificate  signed  by two  Authorized
Officers of Abraxas.

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     "Oil and Gas Business" means:

                  (1) the acquisition,  exploration,  development, operation and
         disposition of interests in oil, gas and other hydrocarbon properties;

                  (2) the gathering,  marketing, treating, processing,  storage,
         selling and  transporting  of any  production  from such  interests  or
         properties;

                  (3) any business  relating to or arising from  exploration for
         or   development,    production,    treatment,   processing,   storage,
         transportation  or  marketing  of  oil,  gas,  hydrocarbons  and  other
         minerals and products produced in association therewith;

                  (4) any business relating to oil field sales and service; and

                  (5) any activity  necessary,  appropriate or incidental to the
         activities  described in the foregoing  clauses (1) through (4) of this
         definition.

     "Oil and Gas  Hedging  Contracts"  means,  with  respect  to Abraxas or its
Restricted  Subsidiaries,  any  agreement  or  arrangement,  or any  combination
thereof,  relating  to  hydrocarbon  prices,  transportation  or basis  costs or
differentials or other similar financial  factors,  that is customary in the Oil
and Gas Business and is entered into in the ordinary  course of business for the
purpose of limiting or  managing  risks  associated  with  fluctuations  in such
prices,  costs,  differentials  or similar  factors  and not for the  purpose of
speculation.

     "Permitted  Farmout  Agreement" means any Farmout Agreement entered into by
Abraxas and/or any Restricted Subsidiary,  as the farmor, in the ordinary course
of  business,  (a)  covering  Farmout  Property  of  Abraxas  and/or one or more
Restricted  Subsidiaries  that  does  not  include  proved  oil or  natural  gas
properties  (other  than  those (i) proved by the  efforts to obtain  production
taken  pursuant to such Farmout  Agreement  or (ii) that are not then  otherwise
included  in our PV-10 or as a proved  reserve in any  reserve  or other  report
prepared by or on behalf of us in amount  which  exceeds  either  $150,000  with
respect to any individual property subject to such Farmout Agreement or $500,000
when  aggregated  with any other proved oil or natural gas property then subject
to such  Farmout  Agreement or any other  Farmout  Agreement)  and (b) that,  as
determined in good faith by the Board of Directors of Abraxas and evidenced by a
Board  Resolution  delivered  to the Trustee  (or,  solely  with  respect to any
Farmout with a Farmout Property Value not exceeding $1.0 million,  as determined
in good faith by the chief  executive  officer of Abraxas  and  evidenced  by an
Officers' Certificate delivered to the Trustee), is in the best interests of the
holders of the Notes and does not adversely  affect the ability of Abraxas,  the
Restricted   Subsidiaries  and  the  Subsidiary   Guarantors  to  perform  their
respective  obligations  under  the  Notes,  the  Indenture  and the  Subsidiary
Guarantees, as applicable.

     "Permitted Indebtedness" means any of the following:

         (1)  Indebtedness  under the Revolving Credit Facility (but if Incurred
     under any renewal,  substitution,  refinancing or replacement thereof, only
     to the extent  permitted by clause (9) of this  definition) in an aggregate
     principal  amount at any one time  outstanding  not to exceed $15.0 million
     (less  the  aggregate  amount  of  permanent  reductions  of  the  lenders'
     commitment  under  the  Revolving  Credit  Facility  made  pursuant  to the
     covenants  described under the  "--Repurchase at the Option of Holders Upon
     the Occurrence of Certain Asset Sales" and "--Certain Covenants--Limitation
     on Asset Sales"), any Guarantee of any such Indebtedness  (including by any
     Subsidiary  of  Abraxas)  and  any  interest,   fees,  premiums,   expenses
     (including  costs of collection),  indemnities and other amounts payable in
     connection with such Indebtedness,  including, without limitation,  Related
     Revolving  Indebtedness;  provided,  that,  the  aggregate  amount  of  all
     permanent  reductions of the lenders' commitment under the Revolving Credit
     Facility made pursuant to the covenants  described under  "--Repurchase  at
     the Option of Holders  Upon the  Occurrence  of  Certain  Asset  Sales" and
     "--Certain  Covenants--Limitation  on Asset  Sales" can be  established  by
     Abraxas at any time by providing the Trustee with an Officers'  Certificate
     stating such amount;

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         (2)  Indebtedness  under the Notes (including any Notes issued pursuant
     to an  exchange  offer  made in  accordance  with the  Registration  Rights
     Agreement),  the Subsidiary Guarantees (including any Subsidiary Guarantees
     issued   pursuant  to  an  exchange  offer  made  in  accordance  with  the
     Registration  Rights Agreement) and the Collateral  Documents to the extent
     they secure the Notes or the Subsidiary Guarantees;

         (3)  Indebtedness  under the  Bridge  Loan (but if  Incurred  under any
     renewal,  substitution,  refinancing  or replacement  thereof,  only to the
     extent  permitted  by  clause  (10) of  this  definition)  in an  aggregate
     principal  amount at any one time  outstanding not to exceed $25.0 million,
     any  Guarantee of any such  Indebtedness  (including  by any  Subsidiary of
     Abraxas) and any interest,  fees,  premiums,  expenses  (including costs of
     collection),  indemnities and other amounts payable in connection with such
     Indebtedness;

         (4) (a)  Indebtedness  outstanding on the date of the Indenture and not
     repaid or defeased  with the proceeds of the Notes,  the Bridge Loan or the
     Grey  Wolf  Term Loan (but if  Incurred  under any  renewal,  substitution,
     refinancing or replacement thereof,  only to the extent permitted by clause
     (10) of this  definition),  (b) the 2003 Notes and (c) the Existing  Senior
     Debt  Facility;  provided that the 2003 Notes and the Existing  Senior Debt
     Facility are repaid and  defeased,  respectively,  with the proceeds of the
     Notes,  the Bridge Loan and/or the Grey Wolf Term Loan on the Closing  Date
     and that the 2003  Notes  are  redeemed  on or prior to the date that is 90
     days after the Closing Date;

         (5) Indebtedness of Abraxas or a Restricted  Subsidiary pursuant to (i)
     Interest  Rate  Protection  Obligations,  but only to the  extent  that the
     stated aggregate notional amounts of such obligations do not exceed 105% of
     the aggregate principal amount of the Indebtedness covered by such Interest
     Rate Protection  Obligations,  (ii) Currency  Exchange  Contracts and (iii)
     obligations under Oil and Gas Hedging Contracts, in each case, entered into
     in the ordinary course of business and not for speculative purposes;

         (6)   Indebtedness  of  Abraxas  owed  to  a  Wholly-owned   Restricted
     Subsidiary and Indebtedness of a Restricted Subsidiary owed to Abraxas or a
     Wholly-owned   Restricted   Subsidiary;   provided,   however,   that  such
     Indebtedness is owned beneficially by Abraxas or such Restricted Subsidiary
     and  constitutes  Subordinated  Indebtedness;  provided  further,  that the
     incurrence  of such  Indebtedness  does not violate the covenant  described
     under  "--Certain   Covenants--Limitation   on  Restricted  Payments;"  and
     provided  further,  that upon any  subsequent  issuance  or transfer of any
     Capital  Stock or any other  event which  results in any such  Wholly-owned
     Restricted Subsidiary ceasing to be a Wholly-owned Restricted Subsidiary or
     any other subsequent  transfer of any such Indebtedness  (except to Abraxas
     or a  Wholly-owned  Restricted  Subsidiary),  such  Indebtedness  shall  be
     deemed,  in each case, to be incurred and shall be treated as an incurrence
     for    purposes   of   the    covenants    described    under    "--Certain
     Covenants--Limitation   on  Incurrence  of  Indebtedness  and  Issuance  of
     Disqualified  Stock" and "--Limitation on Restricted  Payments" covenant at
     the time the Wholly-owned  Restricted Subsidiary in question ceased to be a
     Wholly-owned Restricted Subsidiary;

         (7) Indebtedness in respect of bid,  performance or surety bonds issued
     for the account of Abraxas or any  Restricted  Subsidiary  in the  ordinary
     course of business,  including  Guarantees and letters of credit supporting
     such bid, performance or surety obligations (in each case other than for an
     obligation for money borrowed);

         (8) any  Guarantee  of  Indebtedness  incurred in  compliance  with the
     "Limitation  on Incurrence  of  Indebtedness  and Issuance of  Disqualified
     Stock" covenant, by a Restricted Subsidiary or Abraxas;

         (9)  Indebtedness  under  any  renewal,  substitution,  refinancing  or
     replacement (each, for purposes of this clause, a "refinancing") by Abraxas
     or a Restricted  Subsidiary of any Indebtedness incurred pursuant to clause
     (1) of this  definition  (or any  refinancing  thereof under this paragraph
     (9)),  including any successive  refinancings by Abraxas or such Restricted
     Subsidiary not incurred in violation of the  Indenture,  so long as (a) any
     such  refinancing  shall be in a principal  amount that does not exceed the
     aggregate amount of Indebtedness then permitted to be Incurred under clause
     (1) of this definition,  (b) in the case such Indebtedness being refinanced


                                      146


     is secured, the Liens securing such new Indebtedness (i) are not materially
     less  favorable  to the  holders of the Notes and are not  materially  more
     favorable to the  lienholders  with respect to such Liens than the Liens in
     respect of the Indebtedness being refinanced and (ii) are limited to all or
     part of the same  property  that was or would have been  encumbered  by the
     original  Lien  under the terms of the  documents  governing  the  original
     Indebtedness;  provided,  that, if the terms of the Intercreditor Agreement
     apply to the Liens securing such new Indebtedness,  then such Liens will be
     considered to have  satisfied  the  conditions of this clause (b), (c) such
     new  Indebtedness  has a final  Stated  Maturity not earlier than the final
     Stated  Maturity  of the  Indebtedness  being  refinanced  and (d) such new
     Indebtedness  is incurred by either Abraxas or a Restricted  Subsidiary who
     is the obligor of the Indebtedness being refinanced;

         (10)  Indebtedness  under any  renewal,  substitution,  refinancing  or
     replacement (each, for purposes of this clause, a "refinancing") by Abraxas
     or a Restricted  Subsidiary of any Indebtedness incurred pursuant to clause
     (3) or (4) of  this  definition  (or any  refinancing  thereof  under  this
     paragraph (10)) or Indebtedness (excluding Permitted Indebtedness) incurred
     after the Closing  Date in  compliance  with the covenant  described  under
     "--Limitation  on Incurrence of  Indebtedness  and Issuance of Disqualified
     Stock," including any successive refinancings by Abraxas or such Restricted
     Subsidiary not incurred in violation of the  Indenture,  so long as (a) any
     such  refinancing  shall be in a principal  amount that does not exceed the
     principal amount (or, if such Indebtedness being refinanced provides for an
     amount less than the principal  amount thereof to be due and payable upon a
     declaration of acceleration  thereof,  such lesser amount as of the date of
     determination)  so refinanced plus the amount of accrued  interest  thereon
     plus the amount of any premium  required to be paid in connection with such
     refinancing  pursuant to the terms of the  Indebtedness  refinanced  or the
     amount of any premium  reasonably  determined by Abraxas or such Restricted
     Subsidiary as necessary to accomplish such refinancing,  plus the amount of
     expenses of Abraxas or such  Restricted  Subsidiary  incurred in connection
     with such  refinancing  (all of which  amounts are  included  as  Permitted
     Indebtedness under this clause (10)), (b) in the case of any refinancing of
     Indebtedness  of  Abraxas  that  is  Subordinated  Indebtedness,  such  new
     Indebtedness  shall be  subordinated  in right of  payment  to the Notes on
     terms at least as favorable to the holders of the Notes as those  contained
     in the documentation  governing the Indebtedness  being refinanced,  (c) in
     the case of any  refinancing  of  Indebtedness  that is secured,  the Liens
     securing such new Indebtedness (i) are not materially less favorable to the
     holders  of  the  Notes  and  are  not  materially  more  favorable  to the
     lienholders  with  respect  to such  Liens than the Liens in respect of the
     Indebtedness  being  refinanced  and (ii) are limited to all or part of the
     same property  that was or would have been  encumbered by the original Lien
     under the terms of the documents governing the original  Indebtedness,  (d)
     such new  Indebtedness  has an Average  Life  equal to or greater  than the
     Average  Life of the  Indebtedness  being  refinanced  and a  final  Stated
     Maturity  not earlier than the final  Stated  Maturity of the  Indebtedness
     being  refinanced  and (e) such new  Indebtedness  is  incurred  by  either
     Abraxas or a Restricted  Subsidiary who is the obligor of the  Indebtedness
     being refinanced;

         (11) any Indebtedness  incurred to finance unpaid  insurance  premiums,
     provided,  however,  that  recourse  with respect to such  Indebtedness  is
     limited to the insurance  policies with respect to which premiums have been
     financed;

         (12)  Indebtedness  arising  from  the  honoring  by a  bank  or  other
     financial institution of a check, draft or similar instrument inadvertently
     (except in the case of  daylight  overdrafts)  drawn  against  insufficient
     funds in the ordinary  course of  business;  provided,  however,  that such
     Indebtedness is extinguished within two Business Days of incurrence;

         (13)  Indebtedness  of  Abraxas or any of its  Restricted  Subsidiaries
     represented  by letters of credit for the  account of Abraxas or any of its
     Restricted  Subsidiaries,  as the case may be, in order to provide security
     for workers'  compensation  claims,  payment obligations in connection with
     self-insurance or similar  requirements in the ordinary course of business;
     and

         (14)  additional  Indebtedness  of  Abraxas  or any  of its  Restricted
     Subsidiaries,  other than Indebtedness  Incurred under the Revolving Credit
     Facility,  in an aggregate  principal amount at any time outstanding not to
     exceed $500,000 under this clause (14).

                                      147


     "Permitted Investments" means any of the following:

                  (1) Investments in Cash Equivalents;

                  (2)   Investments   in  Abraxas  or  any  of  its   Restricted
         Subsidiaries;

                  (3)   Investments   by  Abraxas  or  any  of  its   Restricted
         Subsidiaries in another  Person,  if as a result of such Investment (a)
         such other  Person  becomes a Restricted  Subsidiary  or (b) such other
         Person is merged or consolidated  with or into, or transfers or conveys
         all or substantially  all of its properties and assets to, Abraxas or a
         Restricted Subsidiary;

                  (4) Investments and  expenditures  made in the ordinary course
         of, and of a nature that is or shall have become  customary in, the Oil
         and Gas  Business as a means of  actively  exploiting,  exploring  for,
         acquiring, developing, processing, gathering, marketing or transporting
         oil and gas through agreements, transactions, interests or arrangements
         which permit a Person to share risks or costs,  comply with  regulatory
         requirements  regarding  local  ownership or satisfy  other  objectives
         customarily  achieved  through  the  conduct  of Oil and  Gas  Business
         jointly  with  third  parties,   including,   without  limitation,  (a)
         ownership  interests in oil and gas properties or gathering systems and
         (b)  Investments  and  expenditures  in  the  form  of or  pursuant  to
         operating  agreements,   processing  agreements,   Farmout  Agreements,
         development agreements, area of mutual interest agreements, unitization
         agreements,  pooling  arrangements,  joint bidding agreements,  service
         contracts,  joint venture agreements,  partnership  agreements (whether
         general or limited), limited liability company agreements, subscription
         agreements, stock purchase agreements and other similar agreements with
         third parties (including Unrestricted Subsidiaries);

                  (5) Investments arising in connection with Oil and Gas Hedging
         Contracts  entered into in the ordinary  course of business  solely for
         the purpose of protecting  the  production of Abraxas or any Restricted
         Subsidiary against fluctuations in oil or natural gas prices;

                  (6)  Investments  arising in  connection  with  Interest  Rate
         Protection  Obligations or Currency  Exchange  Contracts,  in each case
         Incurred in the  ordinary  course of business  and not for  speculative
         purposes;

                  (7) Investments in stock,  obligations or securities  received
         in settlement of debts owing to Abraxas or a Restricted Subsidiary as a
         result of bankruptcy or insolvency proceedings or upon the foreclosure,
         perfection  or  enforcement  of any  Lien  in  favor  of  Abraxas  or a
         Restricted  Subsidiary,  in each case as to debt  owing to Abraxas or a
         Restricted  Subsidiary that arose in the ordinary course of business of
         Abraxas or any such Restricted Subsidiary;

                  (8) any Investment  received in settlement of debts, claims or
         disputes owed to Abraxas or any Restricted Subsidiary that arose out of
         transactions in the ordinary course of business;

                  (9)  Investments in the form of  intercompany  Indebtedness or
         Guarantees of Indebtedness of a Restricted  Subsidiary  permitted under
         the covenant described under "--Certain  Covenants--Limitations  on the
         Incurrence of Indebtedness and Issuance of Disqualified Stock;"

                  (10) any security or other  Investment  received or Investment
         made as a result of the receipt of non-cash consideration from an Asset
         Sale that was made  pursuant  to and in  compliance  with the  covenant
         described above under "Certain Covenants--Limitation on Asset Sales;"

                  (11)  advances  and  extensions  of  credit  in the  nature of
         accounts receivable arising from the sale or lease of goods or services
         in the ordinary course of business;

                  (12)  Investments  in the form of,  or  pursuant  to,  working
         interests,  royalty  interests,  mineral leases,  Farmout Agreements or
         contracts  for the sale of oil and natural  gas, in each case,  made or
         entered into the ordinary course of the business,  excluding,  however,
         investments in other Persons;

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                  (13) so long as Grey Wolf is a Subsidiary of Abraxas, up to an
         aggregate principal amount of $1.0 million of intercompany loans made
         to Grey Wolf for use by Grey Wolf solely for its working capital
         purposes in a manner consistent with its operations on the Closing
         Date; and

                  (14) other Investments by Abraxas or any Restricted Subsidiary
         in any Person having an aggregate fair market value (determined in good
         faith by the chief executive officer of Abraxas and measured as of the
         date each such Investment is made and without giving effect to
         subsequent changes in value), when taken together with all other
         Investments made pursuant to this clause (14) (net of returns of
         capital, dividends and interest paid on Investments and sales,
         liquidations and redemptions of Investments), not in excess of
         $500,000.



     "Permitted Liens" means any and all of the following:

                  (1) Liens existing as of the Closing Date;

                  (2) Liens securing the Notes,  the  Subsidiary  Guarantees and
         other obligations arising under the Indenture;

                  (3) Liens securing the Revolving Credit Facility Obligations;

                  (4) Liens securing the Bridge Loan Obligations;

                  (5) any Liens existing on any property of a Person at the time
         such  Person  is  merged  or  consolidated  with or into  Abraxas  or a
         Subsidiary  Guarantor  or  becomes a  Restricted  Subsidiary  that is a
         Subsidiary   Guarantor  (and  not  incurred  in  anticipation  of  such
         transaction),  provided  that  such  Liens  are not  extended  to other
         property of Abraxas or the Subsidiary Guarantors;

                  (6) any Lien existing on any property or assets at the time of
         the  acquisition  thereof  (and not  incurred in  anticipation  of such
         transaction),  provided  that  such  Liens  are not  extended  to other
         property or assets of Abraxas or the Subsidiary Guarantors;

                  (7)  Liens  on  cash  and  Cash   Equivalents   securing   the
         performance  of  Oil  and  Gas  Hedging  Contracts,  Currency  Exchange
         Contracts and Interest  Rate  Protection  Obligations  permitted by the
         terms of the Indenture;

                  (8) Liens with respect to amounts payable as  reimbursement of
         premiums  in favor of  Persons  financing  unpaid  insurance  premiums,
         provided,  however,  such Liens are limited to insurance  policies with
         respect to which premiums are financed;

                  (9)  Liens   securing  any   permitted   extension,   renewal,
         refinancing, refunding or exchange (or successive extensions, renewals,
         refinancings,  refundings or exchanges), in whole or in part, of or for
         any Indebtedness secured by Liens referred to in clauses (1), (2), (4),
         (5) and (6) above and this clause (9); provided, however, that (a) such
         new Lien shall be limited to all or part of the same  property that was
         or would have been  encumbered  by the original Lien under the terms of
         the  documents  governing  the  original  Indebtedness,   and  (b)  the
         Indebtedness  secured  by  such  Lien at the  time  of such  extension,
         renewal,  refinancing,  refunding  or  exchange  (and  such  successive
         extension,  renewal,   refinancing,   refunding  or  exchange)  is  not
         increased  to any amount  greater  than the sum of (i) the  outstanding
         principal  amount of the  Indebtedness  secured by such  original  Lien
         immediately prior to such extension, renewal, refinancing, refunding or
         exchange and accrued  interest  thereon and (ii) an amount necessary to
         pay  any  fees  and  expenses,  including  premiums,  related  to  such
         refinancing, refunding, extension, renewal or replacement;

                  (10) Liens securing  Indebtedness Incurred under clause (9) of
         the definition of Permitted Indebtedness;

                                      149


                  (11) Liens in favor of Abraxas or a Subsidiary Guarantor;

                  (12) Liens for taxes,  assessments or governmental  charges or
         claims either (a) not yet  delinquent or (b) contested in good faith by
         appropriate  proceedings  and  as  to  which  Abraxas  or a  Restricted
         Subsidiary,  as the case may be, shall have set aside on its books such
         reserves as may be required pursuant to GAAP;

                  (13) statutory and contractual  Liens of (a) landlords arising
         in the ordinary  course of business to secure rent not yet  delinquent,
         but only to the extent such Liens relate only to the tangible  property
         of the  lessee  which is  located on such  property  and (b)  carriers,
         warehousemen,  mechanics, builders, suppliers,  materialmen,  repairmen
         and other similar Liens incurred in the ordinary course of business for
         sums not yet delinquent or being contested in good faith by appropriate
         proceedings,  in  each  case,  if such  reserve  or  other  appropriate
         provision, if any, as shall be required by GAAP shall have been made in
         respect thereof;

                  (14) Liens incurred on deposits made in the ordinary course of
         business (a) in  connection  with workers'  compensation,  unemployment
         insurance  and  other  types of  social  security,  including  any Lien
         securing  letters of credit  issued in the ordinary  course of business
         consistent with past practice in connection therewith, or (b) to secure
         performance  bonds,  statutory  obligations,  surety and appeal  bonds,
         bids, leases,  government  contracts,  performance and  return-of-money
         bonds and other similar  obligations  (exclusive of obligations for the
         payment of borrowed money);

                  (15)   easements,    rights-of-way,    zoning    restrictions,
         restrictive  covenants,  minor imperfections in title and other similar
         charges or encumbrances in respect of real property that,  individually
         or in the aggregate,  are not interfering in any material  respect with
         the  ordinary  conduct of the  business  of  Abraxas or any  Restricted
         Subsidiary;

                  (16) any interest or title of a lessor  under any  Capitalized
         Lease Obligation permitted by the terms of the Indenture; provided that
         such  Liens do not  extend  to any  property  which  is not the  leased
         property subject to such Capitalized Lease Obligation;

                  (17) Liens securing reimbursement  obligations,  not to exceed
         $100,000 in the  aggregate  at any time  outstanding,  with  respect to
         commercial  letters  of  credit  which  encumber  documents  and  other
         property  relating to such  letters of credit and products and proceeds
         thereof;

                  (18) Liens  encumbering  deposits  made to secure  obligations
         arising   from   statutory,   regulatory,   contractual   or   warranty
         requirements of Abraxas or any Restricted Subsidiary,  including rights
         of offset and setoff;

                  (19)  statutory  Liens on  pipeline  or  pipeline  facilities,
         hydrocarbons  or  properties  and assets of  Abraxas or any  Restricted
         Subsidiary  which arise out of operation of law and are not voluntarily
         granted;

                  (20) royalties,  overriding  royalties,  net profit interests,
         reversionary   interests,   operating   agreements  and  other  similar
         interests,  properties,  arrangements and agreements, all as ordinarily
         exist  with  respect  to  properties  of  Abraxas  and  its  Restricted
         Subsidiaries  or otherwise as are customary in the Oil and Gas Business
         and all as relate to mineral  leases and mineral  interests  of Abraxas
         and its Restricted Subsidiaries;

                  (21) Liens pursuant to documents  governing  Permitted Farmout
         Agreements;

                  (22) any (a) interest or title of a lessor or sublessor  under
         any mineral lease or operating  lease,  (b)  restriction or encumbrance
         that the interest or title of such lessor or  sublessor  may be subject
         to (including,  without limitation, ground leases or other prior leases
         of the demised premises, mortgages,  mechanics' Liens, builders' Liens,
         tax Liens, and easements) that,  individually or in the aggregate,  are
         not interfering in any material respect with the ordinary course of the
         business of Abraxas or any Restricted  Subsidiary or (c)  subordination


                                      150


         of the  interest  of the  lessee or  sublessee  under such lease to any
         restrictions or encumbrance referred to in the preceding clause (b);

                  (23)  Liens in favor of  collecting  or payor  banks  having a
         right of  setoff,  revocation,  refund  or  chargeback,  subject  to an
         account  control  agreement  constituting a Collateral  Document,  with
         respect to money or instruments of Abraxas or any Restricted Subsidiary
         on deposit with or in possession of such bank;

                  (24) judgment and attachment Liens not giving rise to an Event
         of Default;

                  (25) Liens  incurred  in the  ordinary  course of  business of
         Abraxas or any Restricted  Subsidiary securing  Indebtedness of Abraxas
         or such Restricted  Subsidiary  permitted by the terms of the Indenture
         in an aggregate  principal amount at any time outstanding not exceeding
         the sum of $250,000 in the aggregate; and

                  (26) Liens  pursuant  to the  documents  governing  Production
         Payments  and Reserved  Sales on the property to which such  Production
         Payments and Reserved  Sales relate and with respect to which the Liens
         of the Collateral  Documents have been released in compliance  with the
         terms of the Indenture or the Intercreditor Agreement.

     "Permitted  Prior Lien" means (a) Liens described in clauses (1), (3), (5),
(6), (7) (to the extent  securing  obligations  of not more than $250,000 in the
aggregate), (8) (to the extent securing obligations of not more than $200,000 in
the aggregate),  (9), (10), (14) (to the extent securing obligations of not more
than $250,000 in the aggregate),  (16), (18) (to the extent securing obligations
of not more than $50,000 in the  aggregate),  (23) and (25) of the definition of
Permitted  Liens  and (b)  Liens  which  arise by  operation  of law and are not
consensually  granted,  to the  extent  entitled  by law to  priority  over  the
security interests created by the Collateral Documents.

     "Person" means any  individual,  corporation,  limited  liability  company,
partnership,   joint  venture,   association,   joint  stock   company,   trust,
unincorporated organization or government or any agency or political subdivision
thereof.

     "Preferred  Stock" as applied to the  Capital  Stock of any  Person,  means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of  dividends  or  distributions,  or as to the  distribution  of
assets upon any voluntary or  involuntary  liquidation  or  dissolution  of such
Person, over shares of Capital Stock of any other class of such Person.

     "Production Payments and Reserve Sales" means the grant and transfer to any
Person  of  a  Dollar-Denominated   Production  Payment,  Volumetric  Production
Payment,  royalty,  overriding  royalty,  net profits  interest,  master limited
partnership   interest  or  other  similar  interest  in  oil  and  natural  gas
properties,  reserves or the right to receive all or a portion of the production
or the proceeds from the sale of production attributable to such properties.

     "PV-10" means estimated future net revenue, discounted at a rate of 10% per
annum, before income taxes and with no price or cost escalation or de-escalation
in accordance with guidelines promulgated by the SEC.

     "Qualified  Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.

     "Qualified  Equity  Offering" means a public or private sale for cash by us
of Qualified  Capital Stock of Abraxas other than public  offerings with respect
to our common stock, options, warrants or rights registered on Form S-4 or S-8.

     "Redeemable  Capital  Stock"  means any Capital  Stock that,  either by its
terms, by the terms of any security into which it is convertible or exchangeable
or by contract or otherwise, is, or upon the happening of an event or passage of
time would be,  required  to be  redeemed  (other  than for shares of  Qualified


                                      151


Capital Stock) prior to the date that is 91 days after the final Stated Maturity
of the Notes or is redeemable (other than for shares of Qualified Capital Stock)
at the option of the holder  thereof,  in whole or in part, at any time prior to
such date, or at any time prior to such date is convertible into or exchangeable
for anything  other than  Qualified  Capital Stock or securities or  instruments
evidencing  Indebtedness  that is  permitted  to be Incurred by the terms of the
Indenture.

     "Refinancing   Indebtedness"   means   Indebtedness   under  any  renewals,
substitutions,  refinancings or replacements  Incurred in compliance with clause
(9) or (10) of the definition of Permitted Indebtedness.


     "Related Revolving Indebtedness" means (i) Indebtedness related to any fees
and expenses incurred by Abraxas or any of its Subsidiaries (including,  but not
limited to,  those owed to any Person not an  Affiliate of Abraxas or any of its
Subsidiaries)  in  connection  with any amendment  (including  any amendment and
restatement  thereof),  supplement,  replacement,   restatement,   substitution,
renewal or other  modification from time to time,  including any agreements (and
related  instruments  and  documents)  extending  the maturity of,  refinancing,
replacing,  substituting,  renewing or other restructuring of all or any portion
of the  Indebtedness  under the  Revolving  Credit  Facility or any successor or
replacement  agreements  (and related  instruments  and  documents) and (ii) any
capitalized interest,  fees, or other expenses incurred by Abraxas or any of its
Subsidiaries  whether or not charged to a loan  account or any  similar  account
created under the Revolving Credit Facility.

     "Restricted  Subsidiary" means any Subsidiary of Abraxas,  whether existing
on or after the date of the Indenture,  unless such  Subsidiary of Abraxas is an
Unrestricted  Subsidiary or is designated as an Unrestricted Subsidiary pursuant
to the terms of the Indenture.

     "Revolving  Credit  Facility"  means that certain senior secured  revolving
credit facility,  to be dated as of the Closing Date, with an initial  aggregate
commitment of $15.0 million among Abraxas,  certain Subsidiaries of Abraxas, the
Revolving  Credit  Facility Agent and the lenders named  therein,  including any
related notes,  Guarantees,  Collateral  Documents,  instruments  and agreements
executed in  connection  therewith,  or any successor or  replacement  agreement
(together with any related notes, Guarantees,  Collateral Documents, instruments
and agreements executed in connection  therewith),  whether with the same or any
other lender, group of lenders or agent, in each case as the same may be amended
(including  any  amendment and  restatement  thereof),  modified,  supplemented,
extended,  restated,  substituted,  replaced,  renewed or  refinanced  (up to an
aggregate amount of Indebtedness  then permitted to be Incurred under clause (1)
of the  definition  of Permitted  Indebtedness)  from time to time in accordance
with its terms and the applicable terms of the Intercreditor Agreement.

     "Revolving  Credit  Facility   Administrative   Agent"  means  Wells  Fargo
Foothill,  Inc., as  administrative  agent under the Revolving  Credit Facility,
together with its successors in such capacity.

     "Revolving Credit Facility  Obligations" means all Obligations,  including,
without limitation,  Related Revolving Indebtedness,  under the Revolving Credit
Facility.

     "S&P" means Standard and Poor's Ratings Service, a division of McGraw-Hill,
Inc., and its successors.

     "Sale-Leaseback  Transaction"  means any  transaction  or series of related
transactions  whereby Abraxas or a Restricted  Subsidiary sells or transfers any
of its assets or properties (the "Sold Assets") and, as part of such transaction
or series of related  transactions,  either (1) leases (as lessee or  sublessee)
back such assets or properties (or any part thereof) or (2) leases (as lessee or
sublessee)  any other assets or  properties  (or any part  thereof) (the "Leased
Assets")  from the same Person (or group of Persons) or from an Affiliate of the
same  Person (or group of  Persons)  to whom the Sold  Assets are sold and which
Leased Assets are intended to be used by Abraxas and the Restricted Subsidiaries
for  substantially  the same purpose or purposes as the Sold Assets were used by
Abraxas and the Restricted Subsidiaries (and in the case of mineral leases, such
mineral  leases  constituting  Leased  Assets  are  in  substantially  the  same
geographic location as the mineral leases constituting Sold Assets).

     "Sale of Collateral"  means any Asset Sale to the extent involving  assets,
rights or other  property  that  constitutes  Collateral  under  the  Collateral
Documents.

     "Secured  Obligations" means,  collectively,  the Revolving Credit Facility
Obligations, the Note Obligations and the Bridge Loan Obligations.

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         "Six-Month LIBOR" means the rate determined in accordance with the
following provisions:

                  (1) On each Interest Determination Date, the Calculation Agent
         will  determine the Six-Month  LIBOR rate,  which shall be the rate for
         deposits  in the  London  interbank  market  in U.S.  dollars  having a
         six-month  maturity  commencing on the  succeeding  Interest Reset Date
         immediately following such Interest Determination Date which appears on
         the  Designated  LIBOR  Page as of 11:00  a.m.,  London  time,  on such
         Floating Determination Date.

                  (2) With respect to an Interest  Determination  Date for which
         no such rate appears,  the Calculation Agent will request the principal
         London  offices  of each of four  major  reference  banks in the London
         interbank   market,   as  selected  by  the  Calculation  Agent  (after
         consultation  with Abraxas),  to provide the Calculation Agent with its
         offered  quotation  for  deposits  in U.S.  dollars  having a six-month
         maturity  commencing on the Interest Reset Date  immediately  following
         such Interest Determination Date to prime banks in the London interbank
         market at  approximately  11:00 a.m.,  London  time,  on such  Interest
         Determination Date and in a principal amount not less than $1.0 million
         that is representative for a single transaction in U.S. dollars in such
         market at such time. If at least two such quotations are provided,  the
         Six-Month  LIBOR rate on such Interest  Determination  Date will be the
         arithmetic  mean of such  quotations.  If fewer than two quotations are
         provided,   the  Six-Month  LIBOR  rate  determined  on  such  Interest
         Determination  Date will be the arithmetic  mean of the rates quoted at
         approximately  11:00  a.m.,  New  York  City  time,  on  such  Interest
         Determination  Date by  three  major  banks  in The  City  of New  York
         selected by the Calculation Agent (after consultation with Abraxas) for
         loans in U.S.  dollars to leading  European  banks,  having a six-month
         maturity  and in a principal  amount not less than $1.0 million that is
         representative  for a single transaction in U.S. dollars in such market
         at such time.  However,  if the banks so  selected  by the  Calculation
         Agent are not quoting as mentioned above, the Six-Month LIBOR rate with
         respect to such Interest Determination Date will be the Six-Month LIBOR
         rate in effect immediately prior to such Interest Determination Date.

     "Stated  Maturity"  means,  when  used  with  respect  to any  Note  or any
installment  of interest  thereon,  the date specified in such Note as the fixed
date on which the principal of such Note or such  installment of interest is due
and  payable,  and,  when used with  respect  to any other  Indebtedness  or any
installment  of interest  thereon,  means the date  specified in the  instrument
evidencing  or  governing  such  Indebtedness  as the  fixed  date on which  the
principal  of such  Indebtedness  or such  installment  of  interest  is due and
payable.

     "Subordinated  Indebtedness"  means Indebtedness of Abraxas or a Restricted
Subsidiary  which is expressly  subordinated  in right of payment or security to
the Notes or a Subsidiary Guarantee.

     "Subsidiary"  means,  with  respect  to any  Person,  (1) a  corporation  a
majority of whose Voting Stock is at the time, directly or indirectly,  owned by
such Person,  by one or more  Subsidiaries  of such Person or by such Person and
one or  more  Subsidiaries  thereof  or  (2)  any  other  Person  (other  than a
corporation)  including,  without  limitation,  a joint  venture,  in which such
Person,  one or  more  Subsidiaries  thereof  or  such  Person  and  one or more
Subsidiaries  thereof,  directly  or  indirectly,  at the date of  determination
thereof,  have at least  majority  ownership  interest  entitled  to vote in the
election of directors, managers or trustees thereof (or other Persons performing
similar functions).

     "Subsidiary  Guarantee"  means any Guarantee of the Notes by any Subsidiary
Guarantor  in  accordance  with  the  provisions  set  forth  in   "--Subsidiary
Guarantees of Notes."

     "Subsidiary   Guarantor"   means  (1)  initially  the  several   Restricted
Subsidiaries  named in the Indenture as a party  thereto,  (2) each of the other
Restricted  Subsidiaries,  if any,  executing a  supplemental  indenture  to the
Indenture  in  compliance  with the  provisions  described  under  "--Subsidiary
Guarantees  of Notes" and (3) any Person that  becomes a successor  guarantor of
the  Notes in  compliance  with the  provisions  described  under  "--Subsidiary
Guarantees of Notes."

     "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.

                                      153


     "Trust Monies" means, subject to the Intercreditor  Agreement, all cash and
Cash Equivalents received by the Collateral Agent:

                  (1) upon the release of Collateral from the Collateral Agent's
         Liens;

                  (2) pursuant to the Collateral Documents;

                  (3) as proceeds of any sale or other disposition of all or any
         part of the Collateral by or on behalf of the  Collateral  Agent or any
         collection, recovery, receipt, appropriation or other realization of or
         from all or any part of the Collateral pursuant to the Indenture or any
         of the Collateral Documents or otherwise; or

                  (4) for application as provided in the relevant  provisions of
         the Indenture or any Collateral  Document for which  disposition is not
         otherwise  specifically  provided  for  in  the  Indenture  or  in  the
         Intercreditor Agreement or any other Collateral Document;

provided,  however,  that Trust  Monies  shall in no event  include any property
deposited  with the Trustee for any  redemption,  Legal  Defeasance  or Covenant
Defeasance of the Notes,  for the satisfaction and discharge of the Indenture or
to pay the purchase price of Notes pursuant to a Change of Control Offer.

     "Unrestricted Subsidiary" means:

     o   Grey Wolf  Exploration  Inc., an Alberta  corporation,  and each of its
         Subsidiaries  (whether  or not  existing on the  Closing  Date)  unless
         otherwise designated as a Restricted  Subsidiary in compliance with the
         provisions of this definition;

     o   any  Subsidiary  of  Abraxas  that  at the  time  of  determination  is
         designated  an  Unrestricted  Subsidiary  by the Board of  Directors of
         Abraxas as provided below; and

     o   any Subsidiary of an Unrestricted Subsidiary.

     The Board of Directors of Abraxas may designate  any  Subsidiary of Abraxas
as an Unrestricted Subsidiary so long as:

                  (a) neither Abraxas nor any Restricted  Subsidiary is directly
         or indirectly  liable pursuant to the terms of any Indebtedness of such
         Subsidiary;

                  (b) no  default  with  respect  to any  Indebtedness  of  such
         Subsidiary  would permit (upon notice,  lapse of time or otherwise) any
         holder  of  any  other   Indebtedness  of  Abraxas  or  any  Restricted
         Subsidiary to declare a default on such other Indebtedness or cause the
         payment  thereof  to be  accelerated  or  payable  prior to its  Stated
         Maturity;

                  (c) neither Abraxas nor any Restricted  Subsidiary has made an
         Investment  in such  Subsidiary  (other than  Investments  made in such
         Subsidiary by Abraxas and any Restricted Subsidiary (i) in an aggregate
         amount  that  would  be  permitted  to be  made  on the  date  of  such
         designation pursuant to, and in accordance with, the covenant described
         under "--Certain  Covenants--Limitation on Restricted Payments" or (ii)
         in the  ordinary  course of the Oil and Gas  Business as  described  in
         clause (4) of the definition of Permitted Investments); and

                  (d) such  designation  shall  not  result in the  creation  or
         imposition of any Lien on any of the properties or assets of Abraxas or
         any  Restricted  Subsidiary  (other than any Permitted Lien or any Lien
         the creation or imposition of which is in compliance  with the covenant
         described under "Limitation on Liens");

         provided,  however,  that with  respect  to clause  (a),  Abraxas  or a
         Restricted Subsidiary may be liable for Indebtedness of an Unrestricted
         Subsidiary if (x) such liability  constituted a Permitted Investment or


                                      154


         a  Restricted   Payment  permitted  by  the  covenant  described  under
         "--Certain  Covenants--Limitation on Restricted Payments," in each case
         at the time of  incurrence,  or (y) the liability  would be a Permitted
         Investment  at  the  time  of  designation  of  such  Subsidiary  as an
         Unrestricted Subsidiary. Any such designation by the Board of Directors
         of Abraxas  shall be  evidenced  to the  Trustee by delivery of a Board
         Resolution to the Trustee giving effect to such designation.

         The Board of  Directors  of  Abraxas  may  designate  any  Unrestricted
Subsidiary as a Restricted  Subsidiary  if,  immediately  after giving effect to
such designation,  (1) no Default or Event of Default shall have occurred and be
continuing,  (2) Abraxas could Incur $1.00 of additional Indebtedness (excluding
Permitted   Indebtedness)  in  compliance  with  the  covenant  described  under
"--Certain  Covenants--Limitation  on Incurrence of Indebtedness and Issuance of
Disqualified Stock", (3) if any of the properties or assets of Abraxas or any of
its Restricted  Subsidiaries  would upon such designation  become subject to any
Lien (other than a Permitted  Lien),  the  creation or  imposition  of such Lien
shall have been in  compliance  with the  covenant  described  under  "--Certain
Covenants--Limitation  on Liens,"  (4) it takes  such  actions  described  under
"--Subsidiary  Guarantees  of Notes" in  respect of an  Unrestricted  Subsidiary
becoming a Restricted  Subsidiary and (5) such Restricted  Subsidiary takes such
actions  described  under   "--Security--Collateral;   After-Acquired  Property;
Permitted  Liens,"  if  applicable,  as are  necessary  to  cause  a  valid  and
enforceable  perfected first priority  security  interest  (subject to Permitted
Prior Liens) in the Collateral owned by such Restricted Subsidiary to be created
in favor of the Collateral Agent as security for the Note  Obligations.  Without
limiting  the  foregoing  sentence,  Grey  Wolf is not  permitted  to  become  a
Restricted Subsidiary until 91 days after all of the Bridge Loan Obligations are
repaid in full and the Bridge Loan is terminated.

         "Unsubordinated  Indebtedness"  means any  Indebtedness of Abraxas or a
Restricted Subsidiary which is not Subordinated Indebtedness.

         "Volumetric  Production  Payments" means production payment obligations
recorded  as  deferred  revenue  in  accordance  with  GAAP,  together  with all
undertakings and obligations in connection therewith.

         "Voting  Stock" means any class or classes of Capital Stock pursuant to
which  the  holders  thereof  have  the  general  voting  power  under  ordinary
circumstances  to elect at least a majority of the board of directors,  managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have,  voting power by reason of
the happening of any contingency).

         "Wholly-owned Restricted Subsidiary" means any Restricted Subsidiary to
the extent (1) all of the Capital  Stock or other  ownership  interests  in such
Restricted  Subsidiary,  other than any directors' qualifying shares mandated by
applicable  law,  is  owned  directly  or  indirectly  by  Abraxas  or (2)  such
Restricted  Subsidiary is organized in a foreign jurisdiction and is required by
the applicable law and regulations of such foreign  jurisdiction to be partially
owned by the government of such foreign  jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Restricted Subsidiary to
transact business in such foreign jurisdiction,  provided that Abraxas, directly
or indirectly,  owns the remaining  Capital Stock or ownership  interest in such
Restricted Subsidiary and, by contract or otherwise, controls the management and
business of such  Restricted  Subsidiary  and derives the  economic  benefits of
ownership of such Restricted  Subsidiary to substantially  the same extent as if
such Restricted Subsidiary were a wholly-owned Subsidiary.



                                      155


                   EXCHANGE AND REGISTRATION RIGHTS AGREEMENT

     Abraxas,  the  initial  subsidiary  guarantors  and the  initial  purchaser
entered into an exchange and registration  rights agreement,  referred to as the
registration rights agreement, concurrently with the issuance of the outstanding
notes. Under that agreement,  Abraxas and such subsidiary guarantors have agreed
to:

         o    file with the SEC no later than December 27, 2004, a  registration
              statement  on  an  appropriate  form  under  the  Securities  Act,
              referred  to  as  the  Series  A/B  exchange  offer   registration
              statement,  relating  to a  registered  offer,  referred to as the
              Series A/B exchange offer,  to exchange the outstanding  notes and
              guarantees thereof for the exchange notes and guarantees thereof;

         o    use reasonable best efforts to cause the Series A/B exchange offer
              registration   statement  to  be  declared   effective  under  the
              Securities Act no later than April 26, 2005;

         o    as soon as practicable  after the  effectiveness of the Series A/B
              exchange  offer  registration  statement,   offer  to  holders  of
              transfer  restricted  securities,  as defined  below,  who are not
              prohibited by any law or policy of the SEC from  participating  in
              the Series A/B exchange  offer,  the opportunity to exchange their
              transfer restricted securities for the exchange notes; and

         o    use  reasonable  best  efforts to complete the Series A/B exchange
              offer by June 6, 2005 and to keep the  Series A/B  exchange  offer
              open  for  not  less  than 30  days,  or  longer  if  required  by
              applicable  law,  after the date on which notice of the Series A/B
              exchange offer is mailed to the holders of the notes.

         If:

         o    Abraxas is not  permitted to effect the Series A/B exchange  offer
              as contemplated by this prospectus because of any change in law or
              applicable interpretations of the law by the staff of the SEC;

         o    for  any  other  reason  the  Series  A/B  exchange  offer  is not
              consummated by June 6, 2005;

         o    the initial  purchaser  so requests  with respect to notes held by
              the initial  purchaser  that are not eligible to be exchanged  for
              exchange notes in the Series A/B exchange offer;

         o    any applicable law or interpretation does not permit any holder of
              notes to participate in the Series A/B exchange offer; or

         o    any holder of notes that  participates  in the Series A/B exchange
              offer  does not  receive  freely  transferable  exchange  notes in
              exchange for tendered notes,

then Abraxas will file with the SEC as promptly as practicable,  but in no event
more than the later of 60 days  after so  required  or  requested  no later than
April  26,  2005,  which  is  referred  to as the  shelf  filing  date,  a shelf
registration  statement to cover  resales of transfer  restricted  securities by
those  holders who satisfy  various  conditions  relating  to the  provision  of
information in connection with the shelf registration statement.

         For purposes of the above, "transfer restricted securities" means each
note, until the earliest to occur of:

         o    the  date on which  that  note  has  been  exchanged  for a freely
              transferable exchange note in the Series A/B exchange offer;

         o    the date on which the  resale  of that  note has been  effectively
              registered  under the Securities Act and disposed of in accordance
              with the shelf registration statement; or

         o    the date on which that note is distributed to the public  pursuant
              to Rule 144 under the  Securities  Act or may be sold  under  Rule
              144(k) under the Securities Act.

     Abraxas  will  use its  reasonable  best  efforts  to have the  Series  A/B
exchange offer registration statement or, if applicable,  the shelf registration
statement  declared  effective by the SEC as promptly as practicable after it is
filed.  Unless the Series A/B exchange offer would not be permitted by policy of
the SEC, Abraxas will use its reasonable best efforts to commence the Series A/B
exchange offer and will  consummate the Series A/B exchange offer as promptly as


                                      156


practicable, and in any event no later than June 6, 2005. If applicable, Abraxas
will  use its  reasonable  efforts  to keep  the  shelf  registration  statement
effective  for a period  ending on the  earlier  of two years  after the date of
issuance  of the notes or the date all  transfer  restricted  securities  become
eligible  for  resale  without  volume  restrictions  under  Rule 144  under the
Securities Act.

     If any of the  following  events  occur,  each of which is referred to as a
registration default:

     o   the Series A/B exchange offer registration  statement is not filed with
         the SEC by December 27, 2004 or the shelf registration statement is not
         filed with the SEC on or before the shelf filing date;

     o   the Series A/B exchange  offer  registration  statement is not declared
         effective by April 26, 2005 or the shelf registration  statement is not
         declared effective within 60 days after the shelf filing date; or

     o   the Series A/B exchange offer is not consummated by June 6, 2005,

then the interest rate borne by the notes that are affected by the  registration
default will be increased by an  additional  0.5% per annum upon the  occurrence
and  during  the  continuation  of such  registration  default.  The  amount  of
additional interest will increase by an additional 0.5% per annum following each
90-day  period,  during which a registration  default is  continuing,  until all
registration  defaults  have been cured;  provided,  that the maximum  aggregate
increase in the interest rate pursuant to this paragraph will in no event exceed
1.5% per annum.

     Upon

     o   the filing of the  Series A/B  exchange  offer  registration  statement
         after December 27, 2004;

     o   the  effectiveness  of  the  Series  A/B  exchange  offer  registration
         statement after April 26, 2005;

     o   the consummation of the Series A/B exchange offer after June 6, 2005;

     o   the effectiveness of the shelf registration statement; or

     o   the date on which all  exchange  notes are  saleable  pursuant  to Rule
         144(k) under the Securities Act or any successor provision,

the interest  rate on the notes will be reduced to the interest  rate that would
then be in effect if a registration default had not occurred.  If after any such
reduction in interest  rate,  a different  event  specified  above  occurs,  the
interest rate will again be increased pursuant to the foregoing provisions.

     If the shelf  registration  statement  is  unusable  by the holders for any
reason for more than 30 days,  then the interest rate borne by the notes will be
increased  by 0.5% per annum for the first  90-day  period (or portion  thereof)
beginning  on the 31st day that the shelf  registration  statement  ceased to be
usable.  This interest rate will be increased by an additional 0.5% per annum at
the  beginning  of each  subsequent  90-day  period;  provided  that the maximum
aggregate  increase in the interest rate pursuant to this  paragraph  will in no
event exceed 1.5% per annum.  Any amount  payable under this paragraph will also
be  deemed  "additional  interest"  for  purposes  of  the  registration  rights
agreement.  Upon the shelf registration statement once again becoming usable and
Abraxas and the subsidiary  guarantors  otherwise  being in compliance  with the
terms of the registration rights agreement, the interest rate borne by the notes
will be reduced to the  interest  rate that would then be in effect if the shelf
registration statement had not become unusable.

     Additional  interest  will be computed  based on the actual  number of days
elapsed in each  90-day  period in which a  registration  default  exists or the
shelf registration statement is unusable, as the case may be.

     The exchange and registration rights agreement also provides that Abraxas:

     o   make available, for a period of 180 days after the] consummation of the
         Series A/B exchange offer, a prospectus meeting the requirements of the
         Securities  Act to any  broker-dealer  for use in  connection  with any
         resale of any exchange notes; and

                                      157


     o   pay all expenses  incident to the Series A/B exchange offer,  including
         the  expense  of one  counsel to the  holders  of the  notes,  and will
         indemnify  certain holders of the notes,  including any  broker-dealer,
         against some  liabilities,  including  liabilities under the Securities
         Act.

     A broker-dealer that delivers a prospectus to purchasers in connection with
resales of the exchange notes will be subject to certain of the civil  liability
provisions  under the  Securities Act and will be bound by the provisions of the
registration rights agreement, including indemnification rights and obligations.

     Each holder of notes who wishes to exchange its notes for exchange notes in
the Series A/B  exchange  offer is required to make  representations,  including
representations that:

     o   any exchange note to be received by it will be acquired in the ordinary
         course of its business;

     o   it has no arrangement or  understanding  with any person to participate
         in the distribution of the exchange notes; and

     o   it is not an  "affiliate,"  as defined in Rule 405 under the Securities
         Act, of ours,  or if it is an  affiliate,  that it will comply with the
         registration and prospectus delivery requirements of the Securities Act
         to the extent applicable.

     If the holder is not a  broker-dealer,  it is required to represent that it
is not  engaged  in, and does not intend to engage in, the  distribution  of the
exchange  notes.  If the holder is a  broker-dealer  that will receive  exchange
notes for its own account in exchange  for notes that were  acquired as a result
of  market-making  activities  or other  trading  activities,  it is required to
acknowledge  that it will deliver a prospectus in connection  with any resale of
its exchange notes.

     Holders of the notes are required to make  representations  to Abraxas,  as
described above, to participate in the Series A/B exchange offer.  They are also
required  to  deliver  information  to be  used in  connection  with  the  shelf
registration  statement  in order to have  their  notes  included  in the  shelf
registration  statement  and benefit from the  provisions  regarding  additional
interest  set  forth in the  preceding  paragraphs.  A holder  who  sells  notes
pursuant to the shelf  registration  statement  generally will be required to be
named as a selling  security  holder in the related  prospectus and to deliver a
prospectus  to  purchasers,  will be subject  to certain of the civil  liability
provisions  under the Securities Act in connection  with these sales and will be
bound by the provisions of the registration rights agreement that are applicable
to such a holder, including rights and indemnification obligations.

     For so  long as the  notes  are  outstanding,  Abraxas  and the  subsidiary
guarantors  are  required  to continue to provide to holders of the notes and to
prospective  purchasers of the notes the information required by Rule 144A(d)(4)
under the Securities Act.

     The above  description of the  registration  rights  agreement is a summary
only.  It is not complete and does not  describe  all of the  provisions  of the
registration rights agreement.




                                      158



                          BOOK-ENTRY; DELIVERY AND FORM

     Holders of certificated  outstanding notes  participating in the Series A/B
Exchange  Offer  will  be  issued   exchange  notes  in  fully   registered  and
certificated  form, to be delivered to each tendering  noteholder and registered
in the name of such  noteholder in  accordance  with such  noteholder's  written
instructions in the letter of transmittal.  Principal and cash interest payments
made on certificated  exchange notes and any additional  notes issued in lieu of
cash  interest  payments  will be made by  Abraxas  or  through  a paying  agent
directly  to the  registered  holders  of such  notes.  Under  the  terms of the
indenture for the notes, Abraxas and the trustee will treat the persons in whose
names  the  notes  and any  additional  notes  issued  in lieu of cash  interest
payments are registered as the owners of such notes for the purpose of receiving
payments of principal  and interest and any  additional  notes issued in lieu of
cash interest on such notes and for all other purposes whatsoever.

     The  exchange  notes  issued  to  tendering   noteholders  who  held  their
outstanding notes in book-entry form through DTC will be issued only in the form
of a global  certificate  deposited with, or on behalf of, the  depositary,  and
registered in the name of Cede & Co., as the depositary's nominee.

     Except as set forth below,  the global  certificate may be transferred,  in
whole and not in part,  only by the depositary to its nominee to such depositary
or another  nominee of the  depositary or by the  depositary or its nominee to a
successor of the depositary or a nominee of such successor.

     Book-Entry Procedures for the Global Notes

     The  descriptions  of the operations  and procedures of DTC,  Euroclear and
Clearstream  set forth  below are  provided  solely as a matter of  convenience.
These  operations  and  procedures  are  solely  within  the  control  of  these
settlement  systems and are subject to change by them from time to time. Neither
we nor the initial  purchaser take any  responsibility  for these  operations or
procedures,  and  investors  are urged to  contact  the  relevant  system or its
participants directly to discuss these matters.

     DTC has advised us that it is:

     o   a limited  purpose trust company  organized under the laws of the State
         of New York;

     o   a "banking  organization"  within the  meaning of the New York  Banking
         Law;

     o   a member of the Federal Reserve System;

     o   a "clearing  corporation"  within the meaning of the Uniform Commercial
         Code, as amended; and

     o   a "clearing  agency"  registered  under  Section 17A of the  Securities
         Exchange Act of 1934.

     DTC was created to hold securities for its participants and facilitates the
clearance and  settlement of securities  transactions  between its  participants
through electronic book-entry changes to the accounts of its participants, which
eliminates the need for physical  transfer and delivery of  certificates.  DTC's
participants include securities brokers and dealers;  banks and trust companies;
clearing  corporations  and some other  organizations.  Indirect access to DTC's
system is also available to other entities such as banks,  brokers,  dealers and
trust  companies;  these  indirect  participants  clear  through  or  maintain a
custodial relationship with a participant in DTC, either directly or indirectly.
Investors who are not DTC  participants  may beneficially own securities held by
or on behalf of DTC only through participants or indirect participants in DTC.

     Abraxas expects that pursuant to procedures established by DTC:

     o   upon  deposit  of a  global  note,  DTC will  credit  the  accounts  of
         participants  in  DTC  designated  by the  initial  purchaser  with  an
         interest in the global note; and

     o   ownership  of the notes will be shown on, and the transfer of ownership
         of the notes will be effected only through,  records maintained by DTC,
         with respect to the interests of  participants  in DTC, and the records


                                      159


         of  participants  and  indirect  participants,   with  respect  to  the
         interests of persons other than participants in DTC.

     The  laws of  some  jurisdictions  may  require  that  some  purchasers  of
securities  take  physical  delivery  of  the  securities  in  definitive  form.
Accordingly,  the ability to transfer  interests in the notes  represented  by a
global note to these  persons may be limited.  In addition,  because DTC can act
only on behalf of its  participants,  who in turn act on behalf of  persons  who
hold interests through participants,  the ability of a person having an interest
in notes  represented  by a global note to pledge or transfer  that  interest to
persons or entities that do not  participate  in DTC's  system,  or to otherwise
take  actions in  respect of that  interest,  may be  affected  by the lack of a
physical definitive security in respect of the interest.

     So long as DTC or its nominee is the registered owner of a global note, DTC
or the nominee,  as the case may be, will be considered the sole owner or holder
of the  notes  represented  by the  global  note  for  all  purposes  under  the
indenture.  Except as provided below, owners of beneficial interests in a global
note:

     o   will not be  entitled  to have notes  represented  by the  global  note
         registered in their names;

     o   will not  receive  or be  entitled  to  receive  physical  delivery  of
         certificated notes; and

     o   will not be  considered  the owners or  holders of the notes  under the
         indenture for any purpose,  including with respect to the giving of any
         direction, instruction or approval to the trustee under the indenture.

     Accordingly, each holder owning a beneficial interest in a global note must
rely on the  procedures  of DTC and,  if the holder is not a  participant  or an
indirect  participant in DTC, on the procedures of the DTC  participant  through
which the holder owns its interest,  to exercise any rights of a holder of notes
under the indenture or the global note. Abraxas  understands that under existing
industry  practice,  if Abraxas  requests  any action of holders of notes,  or a
holder that is an owner of a  beneficial  interest  in a global note  desires to
take any action that DTC, as the holder of the global note, is entitled to take,
then  DTC  would  authorize  its   participants  to  take  the  action  and  the
participants  would  authorize  holders owning through  participants to take the
action, or would otherwise act upon the instruction of such holders.  Neither we
nor the trustee will have any  responsibility or liability for any aspect of the
records  relating  to or  payments  made on  account  of  notes  by DTC,  or for
maintaining, supervising or reviewing any records of DTC relating to the notes.

     Payments  with  respect to the  principal  of,  and  premium,  if any,  and
interest on, any notes  represented  by a global note  registered in the name of
DTC or its nominee on the applicable  record date will be payable by the trustee
to or at the  direction of DTC or its nominee in its capacity as the  registered
holder of the global note  representing  those notes under the indenture.  Under
the terms of the  indenture,  Abraxas  and the  trustee may treat the persons in
whose names the notes,  including the global notes, are registered as the owners
of the notes for the purpose of  receiving  payment on the notes and for any and
all other purposes  whatsoever.  Accordingly,  neither we nor the trustee has or
will have any  responsibility  or liability for the payment of amounts to owners
of beneficial interests in a global note, including principal,  premium, if any,
and interest.  Payments by the participants and the indirect participants in DTC
to the owners of  beneficial  interests  in a global  note will be  governed  by
standing   instructions  and  customary   industry  practice  and  will  be  the
responsibility of the participants or the indirect participants and DTC.

     Transfers  between  participants in DTC will be effected in accordance with
DTC's  procedures,  and will be settled in  same-day  funds.  Transfers  between
participants in Euroclear or Clearstream will be effected in the ordinary way in
accordance with their respective rules and operating procedures.

     Although DTC, Euroclear and Clearstream have agreed to the above procedures
to facilitate  transfers of interests in the global notes among  participants in
DTC,  Euroclear and  Clearstream,  they are under no obligation to perform or to


                                      160


continue to perform the  procedures,  and the procedures may be  discontinued at
any  time.  Neither  we nor the  trustee  will have any  responsibility  for the
performance by DTC, Euroclear or Clearstream or their respective participants or
indirect  participants  of their  respective  obligations  under  the  rules and
procedures governing their operations.

Certificated Notes

         If:

         o     DTC  notifies us that DTC is at any time  unwilling  or unable to
               continue  as a  depositary  or DTC ceases to be  registered  as a
               clearing agency under the Exchange Act and a successor depositary
               is not appointed within 90 days of such notice or cessation;

         o     Abraxas,  at its option,  notifies the trustee in writing that it
               elects to cause the  issuance of notes in  definitive  form under
               the indenture; or

         o     upon the  occurrence  of some  other  events as  provided  in the
               indenture,

then,  upon  surrender by DTC of the global  notes,  certificated  notes will be
issued to each person that DTC identifies as the  beneficial  owner of the notes
represented by the global notes.  Upon the issuance of certificated  notes,  the
trustee is  required  to  register  the  certificated  notes in the name of that
person or persons,  or their  nominee,  and cause the  certificated  notes to be
delivered thereto.

     Neither  we nor the  trustee  will be  liable  for any  delay by DTC or any
participant or indirect  participant in DTC in identifying the beneficial owners
of the related  notes and each of those  persons may  conclusively  rely on, and
will be  protected  in  relying  on,  instructions  from  DTC for all  purposes,
including  with respect to the  registration  and delivery,  and the  respective
principal amounts, of the notes to be issued.

                                      161


                 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

     The following  discussion  generally  describes  the material U.S.  federal
income tax  consequences  of the Series A/B  Exchange  Offer of the  outstanding
notes for the exchange  notes,  but of which are referred to collectively as the
notes.  This discussion is based on the Internal  Revenue Code of 1986 ("Code"),
as amended, applicable Treasury regulations,  administrative interpretations and
court  decisions as of the date of this  prospectus  all of which might  change,
possibly with retroactive effect.

     This  discussion  addresses  only  persons  who hold their notes as capital
assets  within the meaning of Section 1221 of the Code.  It does not address all
relevant  aspects of the U.S.  federal  income  taxation  in light of a holder's
particular  circumstance or to a holder of notes subject to special rules,  such
as:

     o   Financial Institutions or Insurance Companies;

     o   Tax-exempt Organizations;

     o   Dealers or Brokers in securities or currencies;

     o   Individual Retirement or other Tax-Deferred Accounts;

     o   A note  holder  that  holds its  notes as part of a hedge,  appreciated
         financial   position,    straddle,    constructive   sale,   conversion
         transaction, or integrated transaction;

     o   A note holder who acquired notes as compensation;

     o   Persons liable for alternative minimum tax;

     o   United States Holders (as defined below) whose "functional currency" is
         not the U.S. dollar; and

     o   Traders  in  securities  that elect to use a  mark-to-market  method of
         accounting for their securities holdings.

Importantly,  the following summary does not address state,  local or non-United
States tax consequences or United States federal tax consequences  (e.g., estate
or gift tax) other than those pertaining to the income tax.

     Furthermore,  the following discussion is a summary of certain U.S. federal
income tax  consequences  of the purchase of the notes that may be relevant to a
U.S.  Holder.  It does not consider all of the possible U.S.  federal income tax
consequences.  For  purposes of this  summary,  the term "U.S.  Holder"  means a
beneficial owner of a note that is:

                  (i)      a citizen or resident  of the United  States for U.S.
                           federal income tax purposes,

                  (ii)     a   corporation   (or  other  entity   treated  as  a
                           corporation  for U.S.  federal  income tax  purposes)
                           created  or  organized  under the laws of the  United
                           States,   any  state   thereof  or  the  District  of
                           Columbia,

                  (iii)    an  estate,  the  income of which is  subject to U.S.
                           federal income tax without regard to its source or

                  (iv)     a trust,  if (a) a court within the United  States is
                           able  to  exercise   primary   supervision  over  the
                           administration  of the  trust  and one or  more  U.S.
                           persons have the authority to control all substantial
                           decisions  of the  trust or (b) the trust has a valid
                           election in effect under the applicable U.S. Treasury
                           regulations to be treated as a U.S. person.

A "Non-U.S. Holder" is any beneficial owner of a note that it not a U.S. Holder.

                                      162


     We have not sought nor will we seek any ruling  from the  Internal  Revenue
Service  (the "IRS") with  respect to  statements  or  conclusions  made in this
discussion.  Although the following represents our best judgment, it does not in
any way bind the IRS or the courts or in any way  constitute  an assurance  that
the U.S.  federal  income tax  consequences  will be  accepted by the IRS or any
court.

     ACCORDINGLY,  EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH REGARD TO
THE PROSPECTUS AND THE  APPLICATION OF UNITED STATES FEDERAL INCOME TAX LAWS, AS
WELL AS THE LAWS OF ANY STATE, LOCAL OR NON-U.S.  TAXING  JURISDICTIONS,  TO ITS
PARTICULAR SITUATION.

Federal Income Tax Consequences to U.S. Holders

     Tax  Consequences of the Series A/B Exchange Offer. In general,  the Series
A/B exchange offer will not  constitute an exchange for U.S.  federal income tax
purposes  because  the  outstanding  notes do not differ  materially  in kind or
extent from the exchange notes. Instead, the exchange notes will be treated as a
continuation of the outstanding notes.

         As a result:


                  (1)      the  beneficial  owner  would not  recognize  taxable
                           income on the Series A/B exchange offer,


                  (2)      the holding period of the exchange notes will include
                           the holding period of the outstanding notes exchanged
                           for the exchange notes, and

                  (3)      the adjusted tax bases of the exchange  notes will be
                           the same as the adjusted tax bases it wielded  before
                           the Series A/B  exchange  offer,  of the  outstanding
                           notes exchanged for the exchange notes.

     EACH  EXCHANGING  HOLDER  SHOULD  CONSULT  WITH HIS OR HER  INDIVIDUAL  TAX
ADVISOR  CONCERNING ANY FOREIGN,  STATE OR LOCAL TAX  CONSEQUENCES OF THE SERIES
A/B EXCHANGE OFFER AS WELL AS TO THE EFFECT OF HIS OR HER  PARTICULAR  FACTS AND
CIRCUMSTANCES ON THE MATTERS DISCUSSED HEREIN.

     Payment of Interest.  Interest on a note  generally  will be  includable in
your income as ordinary  income at the time the interest is received or accrued,
in accordance  with your regular  method of accounting for United States federal
income tax purposes.

     We are  obligated  to pay  additional  interest on the notes under  certain
circumstances   described  in  "Exchange  and  Registration  Rights  Agreement."
Although the matter is not free from doubt,  the additional  interest  should be
taxable as ordinary  income at the time it is received or accrued in  accordance
with your regular  method of  accounting  for United States  federal  income tax
purposes. It is possible,  however, that the IRS might take a different position
from  that  described  above,  in which  case the  timing  and  amount of income
inclusion may be different  from that described  above.  You should consult your
own tax advisor about payments of additional interest.

     Disposition of the Notes. Upon the sale, exchange,  redemption,  retirement
or other taxable  disposition of a note,  you generally  will recognize  capital
gain or loss equal to the difference between:

                  (1) the sum of the amount of cash proceeds and the fair market
         value of any property  received on the sale,  exchange,  redemption  or
         retirement (except to the extent this amount is attributable to accrued
         interest income, which is taxable as ordinary income); and

                  (2) your adjusted tax basis in the note.

                                      163


     Your adjusted tax basis in a note  generally will equal the amount you paid
for the note, less any principal payments received by you. The gain or loss will
be  long-term  capital gain or loss if you held the note for more than one year.
Long-term capital gains of individuals,  estates, and trusts are generally taxed
at a maximum  rate of 15%.  The  deductibility  of capital  losses is subject to
certain limitations.

     Backup Withholding and Information  Reporting. A U.S. Holder may be subject
to backup withholding at the rate of 28% with respect to "reportable  payments,"
which  include  payments  in  respect of  interest  or  accrued  original  issue
discount,  and the  proceeds  of a sale,  exchange or  redemption  of the notes.
Abraxas will be required to deduct and withhold the prescribed amount if:

                  (a)      the  U.S.   Holder   fails  to   furnish  a  taxpayer
                           identification  number  ("TIN")  to  Abraxas  in  the
                           manner required,

                  (b)      the IRS notifies  Abraxas  that the TIN  furnished by
                           the U.S. Holder is incorrect,

                  (c)      there  has  been a  failure  of the  U.S.  Holder  to
                           certify under penalty of perjury that the U.S. Holder
                           is  not   subject  to   withholding   under   Section
                           3406(a)(1)(C) of the Code, or

                  (d)      the U.S. Holder is notified by the IRS that he or she
                           failed to report  properly  payments of interest  and
                           dividends and the IRS has notified Abraxas that he or
                           she is subject to backup withholding.

     Amounts paid as backup  withholding do not constitute an additional tax and
will be credited against the U.S.  Holder's U.S. federal income tax liabilities,
so long as the required  information is provided to the IRS. Abraxas will report
to U.S. Holders and to the IRS the amount of any "reportable  payments" for each
calendar year and the amount of tax  withheld,  if any, with respect to payments
on such notes to any noncorporate U.S. Holder other than an "exempt recipient."

     THE  FEDERAL  TAX  DISCUSSION  SET  FORTH  ABOVE IS  INCLUDED  FOR  GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE  DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION.  HOLDERS  SHOULD  CONSULT  THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES  TO THEM OF THE PURCHASE,  OWNERSHIP AND  DISPOSITION OF THE NOTES,
INCLUDING THE TAX CONSEQUENCES  UNDER STATE,  LOCAL,  FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.

Federal Income Tax Consequences to Non-U.S. Holders

     Non-U.S.  Holders. As used in this tax discussion,  a Non-U.S. Holder means
any beneficial  owner of a note that is not a U.S.  Holder.  The rules governing
the United States federal income taxation of a Non-U.S.  Holder are complex, and
no attempt will be made herein to provide  more than a general  summary of those
rules. Special rules may apply to a Non-U.S. Holder that is a controlled foreign
corporation,  passive foreign  investment  company or foreign  personal  holding
company and therefore subject to special treatment under the Code.

     NON-U.S.  HOLDERS  SHOULD  CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE EFFECT OF  FEDERAL,  STATE,  LOCAL AND  FOREIGN  TAX LAWS WITH  REGARD TO AN
INVESTMENT IN THE NOTES, INCLUDING ANY REPORTING REQUIREMENTS.

     Payment of Interest. Generally, subject to the following discussion in this
prospectus under "--Information  Reporting and Backup Withholding Tax," payments
of interest on a note will qualify for the "portfolio  interest"  exemption and,
therefore,  will  not  be  subject  to  United  States  federal  income  tax  or
withholding tax, provided that this interest income is not effectively connected
with a United States trade or business conducted by you and provided that:


                                      164


         o    you do not  actually  or  constructively  own  10% or  more of the
              combined  voting  power of all  classes of our stock  entitled  to
              vote;

         o    you are not, for United  States  federal  income tax  purposes,  a
              controlled  foreign   corporation  related  to  us  through  stock
              ownership;

         o    you are not a bank  receiving  interest on a loan  entered into in
              the ordinary course of your business within the meaning of Section
              881(c)(3)(A) of the Code; and

         o    you appropriately certify as to your foreign status.

     You can  generally  meet  the  certification  requirement  by  providing  a
properly  executed IRS Form W-8BEN or appropriate  substitute form to us, or our
paying  agent.  If you hold the notes through a financial  institution  or other
agent  acting  on  your  behalf,  you may be  required  to  provide  appropriate
certifications  to the agent.  Your agent will then  generally  be  required  to
provide appropriate certifications to us or our paying agent, either directly or
through  other  intermediaries.  Special  rules  apply to foreign  partnerships,
estates  and  trusts,  and in certain  circumstances,  certifications  as to the
foreign  status  of  partners,  trust  owners  or  beneficiaries  may have to be
provided  to us or our  paying  agent.  In  addition,  special  rules  apply  to
qualified intermediaries that enter into withholding agreements with the IRS.

     Except to the  extent  that an  applicable  treaty  otherwise  provides,  a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest  if the  interest  income is  effectively  connected  with a
United  States  trade or business  (or in the case of an  applicable  treaty,  a
permanent establishment) of the Non-U.S. Holder.  Effectively connected interest
received  by a  corporate  non-United  States  Holder  may also,  under  certain
circumstances,  be subject to an additional  "branch  profits tax" at a 30% rate
(or, if applicable, a lower treaty rate). Even though this effectively connected
interest is subject to income tax, and may be subject to the branch profits tax,
it  is  not  subject  to  withholding   tax  (unless   derived  through  certain
partnerships)  if the  non-United  States  Holder  delivers  IRS Form W-8ECI (or
successor form) to us or our agent.

     Interest income of a Non-U.S. Holder that is not effectively connected with
a United  States trade or business (or in the case of an  applicable  treaty,  a
permanent  establishment)  and that does not qualify for the portfolio  interest
exemption  described  above will generally be subject to a withholding  tax at a
28% rate (or, if applicable, a lower treaty rate).

         Disposition of the Notes. You will generally not be subject to United
States federal income tax or withholding tax on any gain realized on the sale,
exchange, redemption, retirement or other disposition of a note unless:

         o    the gain is  effectively  connected  with your conduct of a United
              States  trade  or  business  or in the case of an  applicable  tax
              treaty, attributable to your permanent establishment in the United
              States;

         o    you are an  individual  who has been present in the United  States
              for a period or periods  aggregating  183 days or more  during the
              taxable year of the  disposition,  and certain other  requirements
              are met; or

         o    you are  subject to tax  pursuant  to the  provisions  of the Code
              applicable to certain United States expatriates.

     Information Reporting and Backup Withholding Tax. Payments of interest on a
note,  and  amounts  withheld  from such  payments,  if any,  generally  will be
required to be reported to the IRS and to you. United States backup  withholding
tax generally  will not apply to payments of interest and principal on a note to
a Non-U.S.  Holder if the statement described in "--Payment of Interest" is duly
provided by the holder (e.g.,  the Non-U.S.  Holder provides an IRS Form W-8BEN)
or the holder otherwise  establishes an exemption,  provided that we do not have
actual  knowledge or reason to know that the holder is a United States person or
does not qualify for the portfolio interest exemption.

                                      165



     Information  reporting  requirements  and backup  withholding tax generally
will not apply to the  payment of the  proceeds  of the sale of a note  effected
outside  the United  States by a foreign  office of a foreign  broker.  However,
information reporting  requirements (but not backup withholding,  unless we have
actual  knowledge  or reason to know that you are a United  States  person) will
apply to the payment of the  proceeds of a sale of a note  effected  outside the
United States by a foreign office of a broker, if the broker:


         o    is a United States person,

         o    derives  50% or more of its  gross  income  from all  sources  for
              certain  periods  from the  conduct  of a United  States  trade or
              business,

         o    is a controlled  foreign  corporation  for United  States  federal
              income tax purposes, or

         o    is a  foreign  partnership  in  which  one or more  United  States
              persons,  in the  aggregate,  own more  than 50% of the  income or
              capital interests or is a foreign partnership that is engaged in a
              trade or business in the United States,

unless in any such case the broker has documentary  evidence in its records that
the beneficial owner is a Non-U.S.  Holder and certain other conditions are met,
or the beneficial owner otherwise establishes an exemption.

     Payment of the proceeds of a sale of a note by a United  States office of a
broker  will be subject to both  information  reporting  and backup  withholding
requirements,  unless the  beneficial  owner of the note  provides the statement
described  in  "--Payment  of  Interest"  (e.g.,  on an IRS Form W-8BEN) and the
broker  does not have  actual  knowledge  or  reason to know that the payee is a
United States person, or otherwise establishes an exemption.

     Any amounts  withheld  under the backup  withholding  rules may be credited
against the Non-U.S. Holder's United States federal income tax liability and any
excess may be refundable,  provided that the required information is provided to
the IRS.

THE FEDERAL TAX DISCUSSION  SET FORTH ABOVE IS INCLUDED FOR GENERAL  INFORMATION
ONLY AND MAY NOT BE APPLICABLE  DEPENDING UPON A HOLDER'S PARTICULAR  SITUATION.
HOLDERS SHOULD  CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX  CONSEQUENCES
TO THEM OF THE PURCHASE,  OWNERSHIP AND DISPOSITION OF THE NOTES,  INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.



                                      166

                              PLAN OF DISTRIBUTION

Based on  interpretations by the staff of the SEC set forth in no-action letters
issued to third  parties in similar  transactions,  we believe that the exchange
notes  issued in the Series A/B Exchange  Offer in exchange for the  outstanding
notes may be offered for resale,  resold and  otherwise  transferred  by holders
without compliance with the registration and prospectus  delivery  provisions of
the  Securities  Act,  provided  that the  exchange  notes are  acquired  in the
ordinary  course of such  holders'  business and the holders are not engaged in,
and do not intend to engage in, and have no  arrangement or  understanding  with
any person to participate in, a distribution  of exchange  notes.  This position
does not apply to any holder that is (1) an  "affiliate"  of Abraxas  within the
meaning of Rule 405 under the Securities Act, (2) a  broker-dealer  who acquired
exchange notes directly from Abraxas or (3) broker-dealers who acquired exchange
notes  as  a  result  of   market-making  or  other  trading   activities.   Any
broker-dealers or participating  broker-dealers  receiving exchange notes in the
Series A/B Exchange Offer are subject to a prospectus delivery  requirement with
respect  to  resales  of the  exchange  notes.  To date,  the SEC has  taken the
position that participating  broker-dealers  may, for a limited period,  fulfill
their prospectus delivery requirements with respect to transactions involving an
exchange of  securities  such as the exchange  notes  pursuant to the Series A/B
Exchange Offer with this prospectus.

Each  broker-dealer that receives exchange notes for its own account pursuant to
the Series A/B exchange offer must acknowledge that it will deliver a prospectus
in connection with any resale of such exchange notes. This prospectus, as it may
be amended or supplemented  from time to time, may be used by a broker-dealer in
connection  with resales of exchange notes received in exchange for  outstanding
notes where such  outstanding  notes were acquired as a result of  market-making
activities or other trading activities. Abraxas has agreed that, for a period of
180 days after the  expiration  of the Series A/B exchange  offer,  it will make
this prospectus, as amended or supplemented,  available to any broker-dealer for
use in  connection  with any such resale.  In addition,  until  _______________,
2005, all dealers  effecting  transactions in the exchange notes may be required
to deliver a prospectus.

Abraxas  will not  receive  any  proceeds  from any  sale of  exchange  notes by
broker-dealers.  Exchange notes received by broker-dealers for their own account
pursuant to the Series A/B  exchange  offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange  notes or a  combination  of such
methods of resale,  at market prices prevailing at the time of resale, at prices
related to such  prevailing  market  prices or at  negotiated  prices.  Any such
resale may be made directly to  purchasers  or to or through  brokers or dealers
who may receive  compensation in the form of commissions or concessions from any
such   broker-dealer   or  the  purchasers  of  any  such  exchange  notes.  Any
broker-dealer  that resells  exchange notes that were received by it for its own
account  pursuant to the Series A/B exchange offer and any broker or dealer that
participates  in a  distribution  of such exchange  notes may be deemed to be an
"underwriter"  within the  meaning of the  Securities  Act and any profit on any
such resale of exchange notes and any commission or concessions  received by any
such persons may be deemed to be underwriting  compensation under the Securities
Act.  The Letter of  Transmittal  states  that,  by  acknowledging  that it will
deliver and by delivering a prospectus,  a broker-  dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.


For a period of 180 days after the expiration of the Series A/B exchange  offer,
Abraxas  will  promptly  send  additional  copies  of  this  prospectus  and any
amendment or supplement to this  prospectus to any  broker-dealer  that requests
such  documents  in the  Letter of  Transmittal.  Abraxas  has agreed to pay all
expenses  incident to the Series A/B exchange  offer  (including the expenses of
one counsel for the holders of the outstanding  notes) other than commissions or
concessions  of  any  broker-dealers  and  will  indemnify  the  holders  of the
outstanding notes (including any  broker-dealers)  against certain  liabilities,
including liabilities under the Securities Act.




                                      167

                                  LEGAL MATTERS


     Certain legal matters related to the exchange notes will be passed upon for
Abraxas by Cox Smith Matthews Incorporated, San Antonio, Texas.

                                     EXPERTS

     The  consolidated  financial  statements of Abraxas as of December 31, 2003
and for the year ended December 31, 2003,  included in this prospectus have been
audited by BDO Seidman,  LLP, independent  registered public accounting firm, as
stated in their report  appearing  herein (which report expresses an unqualified
opinion and includes a paragraph  referring to a change in  accounting  method),
and have been so included  in  reliance  upon the report of such firm given upon
their authority as experts in accounting and auditing.

     The consolidated  financial  statements of Abraxas as of December 31, 2002,
and for each of the two years in the period ended December 31, 2002, included in
this  prospectus  have  been  audited  by  Deloitte  & Touche  LLP,  independent
registered  public  accounting  firm,  as stated in their report dated March 10,
2003,  July 18, 2003 as to Note 19 and the first  paragraph  of "New  Accounting
Pronouncements"   in  Note  1,  appearing  herein  (which  report  expresses  an
unqualified  opinion  and  includes  two  explanatory  paragraphs  referring  to
subsequent events described in Note 2 and the restatement described in Note 19),
and have been so included  in  reliance  upon the report of such firm given upon
their authority as experts in accounting and auditing.

     The historical reserve information prepared by DeGolyer and MacNaughton and
McDaniel and Associates  Consultants  Ltd.  included in this prospectus has been
included  herein in reliance  upon the  authority  of such firm as experts  with
respect to matters contained in such reserve reports.

                       WHERE YOU CAN FIND MORE INFORMATION

     Abraxas  and the  guarantors  of the  notes  have  filed  the  registration
statement  regarding the exchange notes with the SEC. This  prospectus  does not
contain all of the  information  included  in the  registration  statement.  Any
statement made in this prospectus  concerning the contents of any other document
is not necessarily  complete.  If we have filed any other document as an exhibit
to the registration  statement,  you should read the exhibit for a more complete
understanding  of the document or matter.  Each  statement  regarding  any other
document does not necessarily contain all of the information important to you.

     Abraxas files annual,  quarterly and special reports,  proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's website at  http://www.sec.gov.  You may also read and
copy any document  Abraxas files at the SEC's public reference room at 450 Fifth
Street,  N.W.,  Washington,  D.C.  20549.  You  may  obtain  information  on the
operation of the SEC's public reference room in Washington,  D.C. by calling the
SEC at 1-800-SEC-0330.



                                      168

                                GLOSSARY OF TERMS

         Unless otherwise indicated in this prospectus, natural gas volumes are
stated at the legal pressure base of the State or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
NGLs.

     The following  definitions  shall apply to the technical terms used in this
prospectus.

Terms used to describe quantities of natural gas and crude oil

                  "Bbl" -- barrel or barrels.

                  "Bcf" -- billion cubic feet.

                  "Bcfe" -- billion cubic feet equivalent.

                  "BoE" -- barrels of

                  "MBbl" -- thousand barrels.

                  "Mcf" -- thousand cubic feet.

                  "Mcfe" -- thousand cubic feet equivalent.

                  "MMBbls" -- million barrels.

                  "MMBTU" -- million British Thermal Units.

                  "MMcf" -- million cubic feet.

                  "MMcfe" -- million cubic feet equivalent.

                  "MMcfpd" -- million cubic feet per day.

Terms used to describe our interests in wells and acreage

                  "Developed  acreage"  means  acreage  which  consists of acres
         spaced or assignable to productive wells.

                  "Gross"  natural  gas and crude oil wells or "gross"  wells or
         acres is the number of wells or acres in which we have an interest.

                  "Net"  natural  gas and  crude  oil  wells or "net"  acres are
         determined  by  multiplying  "gross"  wells  or  acres  by our  working
         interest in such wells or acres.

                  "Productive"  well means an exploratory or a development  well
         that is not a dry hole.

                  "Undeveloped  acreage"  means leased acres on which wells have
         not  been  drilled  or  completed  to a point  that  would  permit  the
         production  of  commercial  quantities  of  natural  gas and crude oil,
         regardless whether or not such acreage contains proved reserves.

Terms used to assign a present value to or to classify our reserves

                  "PV-10" means  estimated  future net revenue,  discounted at a
         rate of 10% per annum,  before  income  taxes and with no price or cost
         escalation or de-escalation  in accordance with guidelines  promulgated
         by the SEC.

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

                                      169


                  "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.

Terms used to describe costs

                  "DD&A" means depletion, depreciation and amortization.

                  "LOE" means lease operating expenses and production taxes.

Terms used to describe types of wells

                  "Development well" means a well drilled within the proved area
         of a natural gas or crude oil  reservoir to the depth of  stratigraphic
         horizon  (rock  layer  or  formation)  known to be  productive  for the
         purpose of extraction of proved natural gas or crude oil reserves.

                  "Dry hole" means an exploratory  or development  well found to
         be  incapable  of  producing  either  crude  oil or  gas in  sufficient
         quantities to justify completion as a natural gas or crude oil well.

                  "Exploratory  well"  means a well  drilled to find and produce
         natural gas or crude oil in an unproved  area,  to find a new reservoir
         in a field previously found to be producing natural gas or crude oil in
         another reservoir, or to extend a known reservoir.

                  "Productive  wells" mean producing  wells and wells capable of
         production.

                  "Service Well" is a well used for water injection in secondary
         recovery projects or for the disposal of produced water.

Other terms

                  "Charge" means an encumbrance,  lien,  claim or other interest
         in property securing payment or performance of an obligation.

                  "EBITDA"  means  earnings from before  income taxes,  interest
         expense, DD&A and other non-cash charges.

                  "NGL" means natural gas liquid.

                  "NYMEX" means the New York Mercantile Exchange.





                                      170




                                                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                                                      Page

                                                                                                      
Report of BDO Seidman, LLP, Independent Registered Public Accounting Firm..............................F-2

Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.........................F-3

Consolidated Balance Sheets,
         December 31, 2002 and 2003....................................................................F-4

Consolidated Statements of Operations,
         Years Ended December 31, 2001, 2002 and 2003..................................................F-6

Consolidated Statements of Stockholders' Deficit,
         Years Ended December 31, 2001, 2002 and 2003 .................................................F-7

Consolidated Statements of Cash Flows,
         Years Ended December 31, 2001, 2002 and 2003..................................................F-9

Consolidated Statements of Other Comprehensive Income (loss),
         Years Ended December 31, 2001, 2002 and 2003.................................................F-11

Notes to Consolidated Financial Statements............................................................F-12

Condensed Consolidated Balance Sheets,
         September 30, 2004 and December 31, 2003.....................................................F-50

Condensed Consolidated Statements of Operations,
         Three and Nine Months Ended September 30, 2004 and 2003......................................F-52

Condensed Consolidated Statements of Cash Flows,
         Nine Months Ended September 30, 2004 and 2003................................................F-53

Notes to Condensed Consolidated Financial Statements..................................................F-54



                                      F-1





             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation

We have audited the accompanying consolidated balance sheet of Abraxas Petroleum
Corporation   (the   "Company")  as  of  December  31,  2003,  and  the  related
consolidated statements of operations, stockholders' deficit, and cash flows and
other comprehensive income for the year ended December 31, 2003. 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 audit in  accordance  with  auditing  standards of the Public
Company Accounting  Oversight Board (United States of America).  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
audit provides a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial  position of Abraxas Petroleum  Corporation at
December 31, 2003,  and the results of its operations and its cash flows for the
year ended December 31, 2003 in conformity with accounting  principles generally
accepted in the United States of America.

As discussed in Note 1 to the consolidated  financial statements,  as of January
1, 2003,  the Company  changed  its method of  accounting  for asset  retirement
obligations.


/s/BDO Seidman, LLP
Dallas, Texas
February 13, 2004


                                      F-2



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation


We have audited the accompanying consolidated balance sheet of Abraxas Petroleum
Corporation  and  Subsidiaries  (the "Company") as of December 31, 2002, and the
related consolidated  statements of operations,  stockholders' deficit, and cash
flows and other  comprehensive  income  for each of the two years in the  period
ended December 31, 2002. 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 the standards of the Public  Company
Accounting Oversight Board (United States). 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,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial position of the Company at December 31, 2002,
and the results of its  operations  and its cash flows for each of the two years
in the period ended December 31, 2002 in conformity with  accounting  principles
generally accepted in the United States of America.

As discussed in Note 2 to the  financial  statements,  on January 23, 2003,  the
Company  sold  all  of  the  outstanding   common  stock  of  two   wholly-owned
subsidiaries,  Canadian  Abraxas  Petroleum  Limited and Grey Wolf  Exploration,
Inc.,  repaid certain debt, and also entered into an agreement to exchange cash,
new debt and common stock of the Company for certain other debt.

As discussed in Note 19 to the financial  statements,  the accompanying 2001 and
2002 financial statements have been restated.




/s/DELOITTE & TOUCHE LLP
San Antonio, Texas
March 10, 2003 (July 18, 2003, as to Note 19 and the first paragraph of "New
Accounting Pronouncements" in Note 1)

                                      F-3




                          ABRAXAS PETROLEUM CORPORATION

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                                                December 31
                                                                   --------------------------------------
                                                                         2002                2003
                                                                   ------------------ -------------------
                                                                          (Dollars in thousands)

Current assets:
                                                                                             
   Cash ...................................................           $       4,882      $         493
   Accounts receivable:
       Joint owners .......................................                   2,215              1,360
       Oil and gas production sales .......................                   7,466              5,873
       Other ..............................................                     364              1,090
                                                                   ------------------ -------------------
                                                                             10,045              8,323
   Equipment inventory ....................................                   1,014                782
   Other current assets ...................................                   1,240                572
                                                                   ------------------ -------------------
     Total current assets..................................                  17,181             10,170

Property and equipment:
     Oil and gas properties, full cost method of accounting:
       Proved .............................................                 521,995            325,222
       Unproved, not subject to amortization ..............                   7,052              4,304
     Other property and equipment .........................                  44,189              4,540
                                                                   ------------------ -------------------
           Total ..........................................                 573,236            334,066
      Less accumulated depreciation, depletion, and
       amortization .......................................                 422,842            222,503
                                                                   ------------------ -------------------
       Total property and equipment - net .................                 150,394            111,563

Deferred financing fees net ...............................                   5,671              4,410
Deferred income taxes......................................                   7,820                  -
Other assets ..............................................                     359                294
                                                                   ------------------ -------------------
   Total assets ...........................................           $     181,425      $     126,437
                                                                   ================== ===================




           See accompanying notes to consolidated financial statements


                                      F-4




                          ABRAXAS PETROLEUM CORPORATION

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND STOCKHOLDERS' DEFICIT


                                                                                December 31
                                                                   --------------------------------------
                                                                         2002                2003
                                                                   ------------------ -------------------
                                                                          (Dollars in thousands)

Current liabilities:
                                                                                             
   Accounts payable ..........................................        $       9,687      $       6,756
   Joint interest oil and gas production payable .............                2,432              2,290
   Accrued interest ..........................................                6,009              2,340
   Other accrued expenses ....................................                1,162              1,228
   Current maturities of long-term debt ......................               63,500                  -
                                                                   ------------------ -------------------
     Total current liabilities................................               82,790             12,614

Long-term debt ...............................................              236,943            184,649

Future site restoration  .....................................                3,946              1,377

Stockholders' equity (deficit):
   Common stock, par value $.01 per share - authorized
     200,000,000 shares; issued 30,145,280 and 36,024,308
     at December 31, 2002 and 2003 respectively............                     301                360
   Additional paid-in capital ................................              136,830            141,835
   Receivables from stock sale................................                  (97)               (97)
   Accumulated deficit ......................................              (269,621)          (213,701)
   Treasury stock, at cost, 165,883 shares....................                 (964)              (964)
   Accumulated other comprehensive income (loss)..............               (8,703)               364
                                                                   ------------------ -------------------
Total stockholders' deficit...................................             (142,254)           (72,203)
                                                                   ------------------ -------------------
   Total liabilities and stockholders' deficit................        $     181,425      $     126,437
                                                                   ================== ===================



           See accompanying notes to consolidated financial statements


                                      F-5





                          ABRAXAS PETROLEUM CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                             Year Ended December 31
                                                            ----------------------------------------------------------
                                                                     2001              2002               2003
                                                            ----------------------------------------------------------
                                                                       (In thousands except per share data)
Revenues:
                                                                                                       
   Oil and gas production revenues .........................     $      73,201      $      50,862     $      38,105
   Gas processing revenues..................................             2,438              2,420               133
   Rig revenues ............................................               756                635               663
   Other  ..................................................               848                403               118
                                                              --------------------------------------------------------
                                                                          77,243             54,320            39,019
Operating costs and expenses:
   Lease operating and production taxes ....................            18,616             15,240             9,599
   Depreciation, depletion, and amortization ...............            32,484             26,539            10,803
   Proved property impairment ..............................             2,638            115,993                 -
   Rig operations ..........................................               702                567               609
   General and administrative ..............................             6,445              6,884             5,360
   Stock-based compensation.................................            (2,767)                 -             1,106
                                                              --------------------------------------------------------
                                                                        58,118            165,223            27,477
                                                              --------------------------------------------------------
Operating income (loss).....................................            19,125           (110,903)           11,542

Other (income) expense:
   Interest income .........................................               (78)               (92)              (30)
   Amortization of deferred financing fees .................             2,268              2,095             1,678
   Interest expense ........................................            31,523             34,150            16,955
   Financing costs..........................................                 -                967             4,406
   Loss on sale of equity investment .......................               845                  -                 -
   Gain on sale of foreign subsidiaries.....................                 -                  -           (68,933)
   Other ...................................................               207                201               774
                                                              --------------------------------------------------------
                                                                        34,765             37,321           (45,150)
                                                              --------------------------------------------------------
Income (loss) before cumulative effect of accounting change
   and taxes................................................           (15,640)          (148,224)           56,692

Income tax expense (benefit):
   Current .................................................               505                  -                 -
   Deferred ................................................             1,897            (29,697)              377
Minority interest in income of foreign subsidiary (2001
   prior to purchase).......................................             1,676                  -                 -
Cumulative effect of accounting change......................                 -                  -               395
                                                              --------------------------------------------------------
Net income (loss)........................................        $     (19,718)     $    (118,527)    $      55,920
                                                              ========================================================

Basic earnings (loss)per common share:
   Net earnings (loss)...................................        $      (0.76)      $       (3.95)    $        1.59
   Cumulative effect of accounting change................                    -                  -             (0.01)
                                                              --------------------------------------------------------
Net income (loss) per common share - basic ..............        $      (0.76)      $       (3.95)    $        1.58
                                                              ========================================================

Diluted earnings (loss) per common share:
   Net earnings (loss)...................................        $      (0.76)      $       (3.95)    $        1.56
   Cumulative effect of accounting change................                    -                  -             (0.01)
                                                              --------------------------------------------------------
Net income (loss) per common share  - diluted............        $      (0.76)      $      (3.95)     $        1.55
                                                              ========================================================

           See accompanying notes to consolidated financial statements


                                      F-6




                          ABRAXAS PETROLEUM CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                       (In thousands except share amounts)


                                                                                             
                                                                                             
                                    Common Stock         Treasury Stock        Additional    
                                --------------------------------------------   Paid-In 
                                  Shares     Amount    Shares     Amount        Capital      
                                ----------- -------------------------------------------------
                                                                       
Balance at December 31, 2000 .   22,759,852  $   227    165,883   $  (964)     $   130,409
   Comprehensive income (loss)
   Net loss ....................        --        --        --        --               --      
     Other comprehensive
       income:
       Hedge loss ..............        --        --        --        --               --      
       Foreign currency
         translation adjustment.        --        --        --        --               --      
         adjustment

   Comprehensive income       
     (loss)....................                                                           
   Stock-based compensation
     expense ..................         --        --        --        --           (2,767)
   Issuance of common stock
     for contingent value
     rights ...................    3,383,488      34        --        --              (34)   
   Issuance of common stock
     and stock options for
     acquisition of
     minority interest in ....     
     Old Grey Wolf
     Exploration, Inc. .......     3,990,565      40        --        --            9,206    
   Stock options exercised ...         8,375      --        --        --               16   
                                  ---------- --------- ---------  -----------   ------------
Balance at December 31, 2001 .    30,145,280 $   301   165,883    $ (964)     $   136,830
   Comprehensive income
     (loss):
   Net loss ..................          --        --      --          --               --   
     Other comprehensive
       income:
       Hedge income ..........          --        --      --          --               --   
       Foreign currency
         translation .........          --        --      --          --               --   
         adjustment
   Comprehensive income (loss) 
                                  ----------   ------- ---------  -----------   ------------ 
Balance at December 31, 2002..    30,145,280 $   301   165,883   $   (964)    $   136,830






                                                 
                                                  Accumulated      
                                                     Other          Recivables
                                   Accumuated    Comprehensive         From
                                    Deficit       Income (loss)     Stock Sale      Total
                                  -------------  --------------   -------------  ----------
                                                                            
Balance at December 31, 2000 .    $  (131,376)   $     (4,799)     $     (97)     $(6,600)
   Comprehensive income (loss):
   Net loss ....................      (19,718)             --             --      (19,718)
     Other comprehensive
       income:
       Hedge loss ..............           --            (566)            --         (566)
       Foreign currency
         translation adjustment.           --          (8,196)            --       (8,196)
         adjustment
                                                                                  ---------
   Comprehensive income (loss)..                                                  (24,480)
   Stock-based compensation
     expense .................             --              --             --       (2,767)
   Issuance of common stock 
     for contingent value          
     rights ..................             --              --             --           --
   Issuance of common stock
     and stock options for
     acquisition of
     minority interest in 
     Old Grey Wolf
     Exploration, Inc. ........            --              --             --        9,246
   Stock options exercised ...             --              --             --           16
   
                                   -------------  --------------   -------------  ----------
Balance at December 31, 2001 .      $(151,094)    $   (13,561)      $    (97)   $ (28,585)
   Comprehensive income
     (loss):
   Net loss ................. .      (118,527)             --             --     (118,527)
     Other comprehensive
       income:
       Hedge income ..........             --             566             --          566
       Foreign currency
         translation .........          
         adjustment                     --              4,292             --        4,292
                                                                                 -----------
   Comprehensive income (loss)                                                   (113,669)
                                   -------------  --------------   -------------  ----------   
Balance at December 31, 2002. .    $(269,621)     $    (8,703)      $    (97)   $(142,254)

                                      F-7



                        ABRAXAS PETROLEUM CORPORATIONRIES

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (continued)
                       (In thousands except share amounts)



                                      Common Stock         Treasury Stock        Additional    
                                --------------------------------------------   Paid-In 
                                  Shares     Amount    Shares     Amount        Capital      
                                ----------- --------- ---------- ----------- -----------------
                                                                      
Balance at December 31, 2002..   30,145,280   $  301    165,883  $  (964)       $136,830
   Comprehensive income
     (loss):
   Net  income .............             --       --         --       --              --
     Other comprehensive
       income (loss):
       Foreign currency
         translation
         adjustment ........             --       --         --       --              --


   Comprehensive income ....       
   Stock-based compensation
     expense ...............             --       --         --       --           1,106

   Stock options exercised .        129,352        1         --       --              84
   Stock issued for
     acquisition of Wind ...      
     River Resources
   Stock issued in                  106,977        1         --       --              91
     connection with    
     exchange offer               5,642,699       57         --       --           3,724

                                 ----------- --------- ---------- ----------- -----------------
Balance at December 31, 2003.   $36,024,308   $  360    165,883  $  (964)      $ 141,835
                                 =========== ========= ========== =========== =================






                                                  Accumulated      
                                                     Other          Recivables
                                   Accumuated    Comprehensive         From
                                    Deficit       Income (loss)     Stock Sale      Total
                                  -------------  --------------   -------------  ----------
                                                                            
Balance at December 31, 2002.     $ (269,621)     $  (8,703)         $ (97)     $ (142,254)
   Comprehensive income
     (loss):
   Net  income ..........             55,920             --             --          55,920
     Other comprehensive
       income (loss):
       Foreign currency
         translation         
         adjustment ........              --          9,067             --           9,067
                                                                                 ----------
   Comprehensive income ....                                                        64,987
   Stock-based compensation
     expense ...............              --             --             --           1,106
   Stock options exercised .              --             --             --              85
   Stock issued for
     acquisition of Wind ...           
     River Resources                      --             --             --              92
   Stock issued in
     connection with      
     exchange offer.........              --             --             --           3,781
                                  -------------  --------------   -------------  ----------
Balance at December 31, 2003      $ (213,701)     $     364           $(97)     $  (72,203)
                                  =============  ==============   =============  ==========



          See accompanying notes to consolidated financial statements.


                                      F-8





                          Abraxas Petroleum Corporation

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                     Years Ended December 31
                                                                 ----------------------------------------------------------------
                                                                           2001                 2002                  2003
                                                                 ----------------------------------------------------------------
                                                                                           (In thousands)
       Operating Activities
                                                                                                                   
       Net income (loss) ...................................           $     (19,718)       $    (118,527)        $      55,920
       Adjustments to reconcile net income (loss) to net cash
          provided by (used in) operating activities:
            Minority interest in income of foreign subsidiary                  1,676                    -                     -
            Loss on sale of equity investment................                    845                    -                     -
            (Gain) on sale of foreign subsidiaries...........                      -                    -               (68,933)
            Depreciation, depletion, and
               amortization ................................                  32,484               26,539                10,803
            Non-cash interest and financing cost............                       -                    -                16,422
            Proved property impairment .....................                   2,638              115,993                     -
            Deferred income tax expense (benefit)...........                   1,897              (29,697)                  377
            Amortization of deferred financing fees.........                   2,268                2,095                 1,678
            Stock-based compensation .......................                  (2,767)                   -                 1,106
            Changes in operating assets and liabilities:
               Accounts receivable .........................                  12,693               (2,247)               (1,446)
               Equipment inventory .........................                     (76)                 201                    78
               Other  ......................................                    (106)                 126                   295
               Accounts payable ............................                 (14,848)              (2,775)                3,417
               Accrued expenses ............................                    (723)                 (44)                4,133
                                                                    ------------------   ------------------    ------------------
       Net cash provided by (used) in operations............                  16,263               (8,336)               23,850

       Investing Activities
       Capital expenditures, including purchases
          and development of properties ....................                 (57,056)             (38,912)              (18,349)
       Proceeds from sale of oil and gas
          properties........................................                  28,938               33,876                     -
       Acquisition of minority interest.....................                  (2,679)                   -                     -
       Proceeds from sale of  foreign subsidiaries..........                       -                    -                85,810
                                                                    ------------------   ------------------    ------------------
       Net cash provided by (used ) in investing activities.                 (30,797)              (5,036)               67,461



                                      F-9





                          ABRAXAS PETROLEUM CORPORATION

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


                                                                                     Years Ended December 31
                                                                 ----------------------------------------------------------------
                                                                          2001                 2002                  2003
                                                                 ----------------------------------------------------------------
                                                                                           (In thousands)
       Financing Activities
                                                                                                              
       Proceeds from issuance of common stock...............                      16                    -                   177
       Proceeds from long-term borrowings ..................                  29,995               20,551                43,342
       Payments on long-term borrowings ....................                  (9,326)              (8,176)             (138,544)
       Deferred financing fees .............................                       -               (1,539)                 (597)
                                                                    ------------------   ------------------    ------------------
       Net cash (used in) provided by financing activities..                  20,685               10,836               (95,622)
                                                                    ------------------   ------------------    ------------------
       Increase (decrease) in cash .........................                   6,151               (2,536)               (4,311)
       Effect of exchange rate changes on cash..............                    (550)                (187)                  (78)
                                                                   ------------------   ------------------    ------------------

       Increase (decrease) in cash .........................                   5,601               (2,723)               (4,389)
       Cash at beginning of year ...........................                   2,004                7,605                 4,882
                                                                    ------------------   ------------------    ------------------
       Cash at end of year..................................           $       7,605        $       4,882         $         493
                                                                    ==================   ==================    ==================

       Supplemental Disclosures
       Supplemental disclosures of cash flow information:
            Interest paid ..........................                   $      31,752        $      34,154         $       4,279
                                                                    ==================   ==================    ==================
            Taxes paid..............................                   $         505        $           -         $           -
                                                                    ==================   ==================    ==================

       Supplemental schedule of non-cash investing and
       financing activities:

       In May 2001 the Company issued 3,386,488 shares of common stock upon the
       expiration of the CVRs issued in connection with the December 1999
       exchange.

       In September 2001 the Company issued 3,990,565
       shares of common stock and options and paid
       $2,679,000 million in cash in connection with the
       acquisition of the minority interest in Old Grey
       Wolf. (See Note 4.)
       Decrease in oil and gas properties and other assets..           $      (2,925)
       Decrease in deferred income tax liability............           $       1,091
                                                                    ==================
       Increase in stockholders equity......................           $      (9,246)
                                                                   ==================
       Decrease in minority interest in foreign subsidiary..           $      13,759
                                                                    ==================



                                     See accompanying notes to consolidated financial statements.



                                      F-10





                          ABRAXAS PETROLEUM CORPORATION

          CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)


                                                                                        Years Ended December 31,
                                                                               2001               2002               2003
                                                                       ---------------------------------------------------------
                                                                                             (In thousands)
                                                                                                                    
   Net  income (loss)............................................        $       (19,718)   $       (118,527)    $        55,920
   Other Comprehensive income (loss):
   Hedging derivatives (net of tax) - See Note 16                                   (566)                  -                   -
     Reclassification adjustment for settled hedge contracts,
     net of taxes................................................                      -               2,556                   -
     Change in fair market value of outstanding hedge positions
     net of taxes ...............................................                      -              (1,990)                  -
                                                                        ------------------- ------------------ ------------------
                                                                                    (566)                566                   -
   Foreign currency translation adjustment
     Reclassification of foreign currency translation adjustment
       relating to the sale of foreign subsidiaries..............                 (8,196)              4,292               4,632
     Effect of change in exchange rate...........................                      -                   -               4,435
                                                                        ------------------- ------------------ ------------------
Other comprehensive income (loss)................................                 (8,762)              4,858               9,067
                                                                        ------------------- ------------------ ------------------
Comprehensive income (loss)......................................       $         (28,480) $        (113,669)   $         64,987
                                                                        =================== ================== ==================






                                     See accompanying notes to consolidated financial statements.



                                      F-11


                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


               
1.  Organization and Significant Accounting Policies

     Nature of Operations

     Abraxas   Petroleum   Corporation   (the  "Company"  or  "Abraxas")  is  an
independent  energy company engaged in the exploration for and the  acquisition,
development,  and  production of crude oil and natural gas  primarily  along the
Texas Gulf Coast,  in the Permian Basin of western Texas and in western  Canada.
The consolidated  financial  statements  include the accounts of the Company and
its wholly owned subsidiaries.  All intercompany  accounts and transactions have
been eliminated in consolidation.

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned  foreign subsidiary,  Grey Wolf Exploration Inc. ("New Grey
Wolf").  In  January  2003,  the  Company  sold all of the  common  stock of its
wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited ("Canadian
Abraxas") and Grey Wolf Exploration Inc. ("Old Grey Wolf").  Certain oil and gas
properties  were  retained  and  transferred   into  New  Grey  Wolf  which  was
incorporated  in January 2003. The  operations of Canadian  Abraxas and Old Grey
Wolf are included in the consolidated  financial  statements through January 23,
2003.

     New Grey Wolf's assets and  liabilities  are translated to U.S.  dollars at
period-end  exchange  rates.  Income and expense items are translated at average
rates of exchange  prevailing  during the period.  Translation  adjustments  are
accumulated as a separate component of shareholders' equity.


     Use of Estimates

     The  preparation of  consolidated  financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
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  consolidated  financial  statements  and  the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results  could  differ  from those  estimates.  Management  believes  that it is
reasonably  possible that estimates of proved crude oil and natural gas revenues
could significantly change in the future.

     Concentration of Credit Risk

     Financial instruments,  which potentially expose the Company to credit risk
consist  principally  of trade  receivables  and crude oil and natural gas price
swap  agreements.   Accounts   receivable  are  generally  from  companies  with
significant  oil and gas  marketing  activities.  The Company  performs  ongoing
credit evaluations and, generally, requires no collateral from its customers.

     Cash and Equivalents

     Cash and  cash  equivalents  includes  cash on hand,  demand  deposits  and
short-term investments with original maturities of three months or less.

     Accounts Receivable

     Accounts  receivable are reported net of an allowance for doubtful accounts
of   approximately   $77,000  and  $11,000  at  December   31,  2002  and  2003,
respectively.  The  allowance for doubtful  accounts is determined  based on the
Company's  historical losses, as well as a review of certain accounts.  Accounts
are charged off when  collection  efforts  have failed and the account is deemed
uncollectible.

                                      F-12


     Equipment Inventory

     Equipment inventory principally consists of casing, tubing, and compression
equipment and is carried at cost.

     Oil and Gas Properties

     The Company  follows the full cost method of  accounting  for crude oil and
natural gas properties. Under this method, all direct costs and certain indirect
costs  associated  with  acquisition  of  properties  and  successful as well as
unsuccessful   exploration   and   development   activities   are   capitalized.
Depreciation,  depletion,  and amortization of capitalized crude oil and natural
gas  properties  and estimated  future  development  costs,  excluding  unproved
properties, are based on the unit-of-production method based on proved reserves.
Net capitalized  costs of crude oil and natural gas properties,  as adjusted for
asset  retirement  obligations,  less related  deferred taxes,  are limited,  by
country,  to the lower of unamortized  cost or the cost ceiling,  defined as the
sum of the present value of estimated  future net revenues from proved  reserves
based  on  unescalated  prices  discounted  at 10  percent,  plus  the  cost  of
properties not being amortized, if any, plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any, less
related  income taxes.  Excess costs are charged to proved  property  impairment
expense. No gain or loss is recognized upon sale or disposition of crude oil and
natural gas properties, except in unusual circumstances.

     Unproved properties represent costs associated with properties on which the
Company  is  performing  exploration  activities  or intends  to  commence  such
activities.  These costs are reviewed  periodically for possible  impairments or
reduction in value based on geological and  geophysical  data. If a reduction in
value has occurred,  costs being amortized are increased.  The Company  believes
that  the  unproved  properties  will  be  substantially  evaluated  in  six  to
thirty-six months and it will begin to amortize these costs at such time. During
2001, 2002 and 2003 the Company  capitalized  $164,000,  $152,000 and $49,000 of
interest expense  respectively,  based on the cost of major development projects
in progress.

     Other Property and Equipment

     Other   property  and   equipment  are  recorded  on  the  basis  of  cost.
Depreciation  of other  property and  equipment is provided  over the  estimated
useful lives using the straight-line  method. Major renewals and betterments are
recorded as additions to the property and  equipment  accounts.  Repairs that do
not improve or extend the useful lives of assets are expensed.

     Hedging

     The Company periodically enters into agreements to hedge the risk of future
crude oil and natural gas price  fluctuations.  Such agreements are primarily in
the  form of  price  floors  and  collars,  which  limit  the  impact  of  price
fluctuations  with respect to the  Company's  sale of crude oil and natural gas.
The Company  does not enter into  speculative  hedges.  Gains and losses on such
hedging activities are recognized in oil and gas production revenues when hedged
production is sold. The net cash flows related to any recognized gains or losses
associated with these hedges are reported as cash flows from operations.  If the
hedge is terminated prior to expected maturity, gains or losses are deferred and
included in income in the same period as the physical production required by the
contract is delivered.

     Statement of Financial Accounting Standards,  ("SFAS") No. 133, "Accounting
for  Derivative  Instruments  and Hedging  Activities,"  was  effective  for the
Company on January 1, 2001.  SFAS 133, as amended and  interpreted,  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts,  and for hedging activities.
All  derivatives,  whether  designated in hedging  relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated a fair-value  hedge,  the changes in the fair value of the derivative
and the  hedged  item will be  recognized  in  earnings.  If the  derivative  is
designated a cash-flow  hedge,  changes in the fair value of the derivative will
be recorded in other  comprehensive  income (OCI) and will be  recognized in the
income  statement  when the hedged item affects  earnings.  SFAS 133 defines new


                                      F-13


requirements for designation and documentation of hedging  relationships as well
as ongoing  effectiveness  assessments in order to use hedge  accounting.  For a
derivative  that does not  qualify  as a hedge,  changes  in fair  value will be
recognized in earnings.

     Stock-Based Compensation

     The Company accounts for stock-based compensation using the intrinsic value
method  prescribed  in  Accounting  Principles  Board  Opinion  ("APB")  No. 25,
"Accounting   for  Stock  Issued  to  Employees,"   (APB  No.  25)  and  related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess,  if any, of the quoted  market price of the  Company's  stock at the
date of the grant over the amount an employee must pay to acquire the stock.

     Effective July 1, 2000, the Financial  Accounting  Standards Board ("FASB")
issued  FIN  44,   "Accounting   for  Certain   Transactions   Involving   Stock
Compensation,"  an  interpretation  of APB No.  25.  Under  the  interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998,  and were not exercised  prior to July 1, 2000,  require that
the awards be accounted for as variable until they are exercised,  forfeited, or
expired.  In March 1999, the Company  amended the exercise price to $2.06 on all
options  with an  existing  exercise  price  greater  than  $2.06.  The  Company
recognized a credit of $2.8 million during 2001 as stock-based compensation. The
credit  for the  year  ended  December  31,  2001  was due to a  decline  in the
Company's common stock price. There was no stock based compensation for the year
ended December 31, 2002. In January 2003, in connection  with the  restructuring
(see note 2), the Company amended the exercise price to $0.66 on certain options
with an existing  exercise  price  greater  than $0.66.  The Company  recognized
stock-based compensation expense of approximately $1.1 million during 2003.

     Pro forma  information  regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, "Accounting for Stock-Based  Compensation,  (SFAS
123)" which also requires that the  information  be determined as if the Company
has accounted for its employee stock options granted  subsequent to December 31,
1995 under the fair value method  prescribed by SFAS No. 123. The fair value for
these  options was estimated at the date of grant using a  Black-Scholes  option
pricing model with the following weighted-average assumptions for 2001, 2002 and
2003, risk-free interest rates of 3.5%, 1.50% and 1.5%,  respectively;  dividend
yields of -0-%; volatility factors of the expected market price of the Company's
common stock of .35, and a  weighted-average  expected life of the option of ten
years.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma information follows:


                                                                                    Year Ended December 31
                                                                 ----------------------------------------------------------------
                                                                         2001                   2002                  2003
                                                                  -------------------     -----------------     -----------------
                                                                                                                
Net income (loss) as reported                                 $          (19,718)     $       (118,527)     $         55,920
Add: Stock-based  employee  compensation expense included in
   reported net income, net of related tax effects                        (2,767)                    -                 1,106
Deduct:  Total  stock-based  employee  compensation  expense
   determined  under fair value based method for all awards,
   net of related tax effects                                             (1,284)                 (670)                 (228)
                                                                  -------------------     -----------------     -----------------
Pro forma net income (loss)                                   $          (23,769)      $      (119,197)     $         56,798
                                                                  ===================     =================     =================

                                      F-14

Earnings (loss) per share:
   Basic - as reported                                        $            (0.76)      $         (3.95)     $           1.58
                                                                  ===================     =================     =================
   Basic - pro forma                                          $            (0.92)      $         (3.98)     $           1.61
                                                                  ===================     =================     =================

Diluted - as reported                                         $            (0.76)      $         (3.95)     $           1.55
                                                                  ===================     =================     =================
Diluted - pro forma                                           $           (0.92)      $          (3.98)     $           1.57
                                                                  ===================     =================     =================


     Foreign Currency Translation

     The functional currency for Canadian Abraxas and Grey Wolf (Old and New) is
the Canadian dollar ($CDN). The Company translates the functional  currency into
U.S.  dollars ($US) based on the current  exchange rate at the end of the period
for the  balance  sheet  and a  weighted  average  rate  for the  period  on the
statement of operations.  Translation  adjustments  are reflected as accumulated
other  comprehensive  income (loss) in the consolidated  financial  statement of
stockholders' deficit.

     Fair Value of Financial Instruments

     The Company  includes fair value  information in the notes to  consolidated
financial  statements  when  the  fair  value of its  financial  instruments  is
materially  different from the book value. The Company assumes the book value of
those financial  instruments  that are classified as current  approximates  fair
value  because  of the  short  maturity  of these  instruments.  For  noncurrent
financial  instruments,  the Company uses quoted market prices or, to the extent
that there are no available  quoted  market  prices,  market  prices for similar
instruments.

     Restoration, Removal and Environmental Liabilities

     The Company is subject to extensive Federal,  state and local environmental
laws and  regulations.  These laws 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  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 benefit are expensed.

     Liabilities  for  expenditures  of a noncapital  nature are  recorded  when
environmental  assessments and/or remediation is probable,  and the costs can be
reasonably  estimated.  Such liabilities are generally  undiscounted  unless the
timing of cash  payments for the  liability  or component  are fixed or reliably
determinable.

     Revenue Recognition

     The Company  recognizes crude oil and natural gas revenue from its interest
in producing wells as crude oil and natural gas is sold from those wells, net of
royalties.  Revenue  from the  processing  of natural gas is  recognized  in the
period the  service is  performed.  The  Company  utilizes  the sales  method to
account for gas  production  volume  imbalances.  Under this  method,  income is
recorded  based on the  Company's net revenue  interest in production  taken for
delivery. The Company had no material gas imbalances at December 31, 2003.

     Deferred Financing Fees

     Deferred financing fees are being amortized on a level yield basis over the
term of the related debt arrangements.

     Income Taxes

     The Company records deferred income taxes using the liability method. Under
this  method,  deferred  tax  assets and  liabilities  are  determined  based on

                                      F-15


differences  between financial reporting and tax bases of assets and liabilities
and are  measured  using the  enacted  tax rates and laws that will be in effect
when the differences are expected to reverse.

     New Accounting Pronouncements

     A  reporting  issue  has  arisen   regarding  the  application  of  certain
provisions  of SFAS No.  141 and SFAS No.  142 to  companies  in the  extractive
industries,  including oil and gas companies.  The issue is whether SFAS No. 142
requires registrants to classify the costs of mineral rights held under lease or
other  contractual  arrangement  associated  with  extracting  oil  and  gas  as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific  footnote  disclosures.  Historically,  the
Company has included the costs of such mineral rights associated with extracting
oil  and gas as a  component  of oil and  gas  properties.  If it is  ultimately
determined that SFAS No. 142 requires oil and gas companies to classify costs of
mineral rights held under lease or other contractual arrangement associated with
extracting oil and gas as a separate  intangible assets line item on the balance
sheet,  the Company would be required to reclassify  approximately  $3.1 million
and $4.2 million at December 31, 2002 and December 31, 2003,  respectively,  out
of oil and gas properties and into a separate  intangible  assets line item. The
Company's cash flows and results of operations  would not be affected since such
intangible  assets would  continue to be depleted and assessed for impairment in
accordance with full-cost accounting rules.

     In June  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for  Asset
Retirement  Obligations" (SFAS 143). SFAS 143 addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement  costs.  SFAS 143 is effective for us January 1,
2003.  SFAS 143  requires  that the fair  value of a  liability  for an  asset's
retirement  obligation be recorded in the period in which it is incurred and the
corresponding  cost capitalized by increasing the carrying amount of the related
long-lived  asset.  The  liability  is accreted to its then  present  value each
period,  and the  capitalized  cost is  depreciated  over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount,  a gain or loss  is  recognized.  For  all  periods  presented,  we have
included  estimated  future costs of abandonment and  dismantlement  in our full
cost  amortization base and amortize these costs as a component of our depletion
expense in the accompanying consolidated financial statements.

    The Company adopted SFAS 143 effective January 1, 2003. For the year ended
December 31, 2003 the Company recorded a charge of $395,341 for the cumulative
effect of the change in accounting principle and a liability of $1.3 million.
During 2003, the Company charged approximately $379,000 to expense related to
the accretion of the liability. The impact on each of the prior periods was not
material.

    The following table summarizes the Company's asset retirement obligation
transactions during the following years:


                                                                   2003                     2002                    2001
                                                          -----------------------    -------------------    ---------------------
                                                                                                                   
Beginning asset retirement obligation................         $          3,946           $     4,056            $         4,305
Additions related to new properties..................                      973                   196                          -
Deletions related to property disposals..............                   (3,921)                 (306)                      (249)
Accretion expense....................................                      379                     -                          -
                                                          -----------------------    -------------------    ---------------------
Ending asset retirement obligation...................         $          1,377           $     3,946            $         4,056
                                                          =======================    ===================    =====================


     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets" (SFAS 144).  Effective  January 1,
2002,  the  Company  adopted  SFAS 144.  SFAS 144  retains  the  requirement  to
recognize an impairment loss only where the carrying value of a long-lived asset
is not recoverable from its undiscounted  cash flows and to measure such loss as
the  difference  between the carrying  amount and fair value of the asset.  SFAS
144, among other things, changes the criteria that have to be met to classify an
asset as  held-for-sale  and requires that  operating  losses from  discontinued
operations be recognized in the period that the losses are incurred  rather than
as of the  measurement  date.  This new standard had no impact on the  Company's
consolidated financial statements for the year ended December 31, 2003.

                                      F-16

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires costs
associated  with exit of  disposal  activities  to be  recognized  when they are
incurred  rather than at the date of commitment to an exit or disposal plan. The
Company is currently evaluating the impact the standard will have on its results
of operations and financial  condition.  The effective date of this standard has
not been determined by the FASB.


     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative  Instruments and Hedging  Activities" (SFAS 149). SFAS 149 amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging  activities under SFAS No. 133,  "Accounting for Derivative  Instruments
and  Hedging   Activities."   SFAS  149,  among  other  things,   clarifies  the
circumstances  under which a contract with an initial net  investment  meets the
characteristic  of a derivative and amends the definition of an  "underlying" to
conform it to  language  used in FIN 45.  SFAS 149 is  effective  for  contracts
entered into or modified after June 30, 2003. The Company adopted this statement
effective  July 1, 2003.  Implementation  of this new  standard  did not have an
effect  on  the  Company's   consolidated   financial  position  or  results  of
operations.

     In  November  2002 the FASB  issued  FASB  Interpretation  No. 45 (FIN 45),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others."  FIN 45  elaborates  on the
disclosures  to be made by a guarantor  in its  financial  statements  about its
obligations  under  certain  guarantees  that  it  has  issued,  including  loan
guarantees  such as standby  letters of credit.  It also requires a guarantor to
recognize,  at the  inception of a guarantee,  a liability for the fair value of
the obligations it has undertaken in issuing the guarantee.  The  Interpretation
does not  specify  the  subsequent  measurement  of the  guarantor's  recognized
liability  over the term of the related  guarantee.  The guidance in FIN 45 does
not apply to certain  guarantee  contracts,  such as those  issued by  insurance
companies  or for a lessee's  residual  value  guarantee  embedded  in a capital
lease.  The  provisions  related to  recognizing a liability at inception of the
guarantee for the fair value of the guarantor's  obligations  would not apply to
product  warranties or to guarantees  accounted for as derivatives.  The initial
recognition and initial  measurement  provisions apply on a prospective basis to
guarantees  issued or  modified  after  December  31,  2002,  regardless  of the
guarantor's fiscal year-end.  FIN 45 specifies additional  disclosures effective
for financial  statements of interim or annual periods ending after December 15,
2002.  This new  standard did not have an effect on the  Company's  consolidated
financial position or results of operations.

     In  January  2003 the FASB  issued  FASB  Interpretation  No.  46 (FIN 46),
"Consolidation  of  Variable-Interest  Entities  (VIEs".) FIN 46 establishes the
definition  of  VIEs to  encompass  a  broader  group  of  entities  than  those
previously  considered  special-purpose  entities  (SPEs).  FIN 46 specifies the
criteria under which it is appropriate  for an investor to consolidate  VIEs; in
order for an  investor  to  consolidate  a VIE,  the entity must fall within the
definition  of VIE and the investor  must fall within the  definition of primary
beneficiary,  both newly  defined terms under this  interpretation.  The revised
effective  date  of  FIN 46 for  public  companies  with  VIEs  meeting  certain
conditions  will be the end of the first  interim or annual  period ending after
December  15, 2003.  In December  2003 the FASB issued FASB  Interpretation  no.
46(R),  which expanded and clarified the guidelines of FIN 46. This new standard
did not have an effect  on the  Company's  consolidated  financial  position  or
results of operations.

     In May 2003, the FASB issued SFAS No. 150, entitled "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150).  This  statement is effective  for financial  instruments  entered into or
modified after May 31, 2003, and is otherwise  effective at the beginning of the
first interim period beginning after June 15, 2003. The Company has no financial
instruments  affected by SFAS 150,  therefore adoption by the Company as of July
1, 2003 will not impact the Company's financial statements.

2. Restructuring transactions

    In January 2003, the Company completed the following restructuring
transactions:

        o   The  closing of the sale of the capital  stock of  Canadian  Abraxas
            Petroleum  and Old  Grey  Wolf,  to a  Canadian  royalty  trust  for
            approximately $138 million.

                                      F-17

        o   The closing of a new senior  credit  agreement  consisting of a term
            loan facility of $4.2 million and a revolving  credit facility of up
            to $50 million with an initial  borrowing base of $49.9 million,  of
            which $42.5  million was used to fund the Series A/B exchange  offer
            described below and the remaining  availability will be used to fund
            the continued  development of our existing crude oil and natural gas
            properties.

        o   The closing of an exchange  offer,  pursuant to which  Abraxas  paid
            $264  in cash  and  issued  $610  principal  amount  of new 11 1/2 %
            Secured  Notes due 2007,  Series A, referred to herein as New Notes,
            and  31.36  shares  of  Abraxas  common  stock  for each  $1,000  in
            principal  amount of the  outstanding  11 1/2 % Senior Secured Notes
            due 2004,  Series A, and 11 1/2 % Senior  Notes due 2004,  Series D,
            issued by Abraxas and  Canadian  Abraxas,  which were  tendered  and
            accepted  in  the  Series  A/B  exchange   offer.  An  aggregate  of
            approximately  $179.9 million in principal  amount of the notes were
            tendered in the exchange  offer and the  remaining  $11.1 million of
            notes not tendered were redeemed.

        o   The  repayment of Abraxas' 12 7/8 % Senior  Secured  Notes due 2003,
            principal amount of $63.5 million, plus accrued interest.

        o   The repayment of Old Grey Wolf's senior secured credit facility with
            Mirant Canada Energy Capital Ltd.  (Mirant  Canada  Facility) in the
            amount of approximately $46.3 million.

     On February 23, 2004, the Company entered into an amendment to our existing
senior credit agreement  providing for two revolving credit facilities and a new
non-revolving credit facility as described below. Subject to earlier termination
on the occurrence of events of default or other events, the stated maturity date
for these  credit  facilities  is  February  1,  2007.  In the event of an early
termination,  we will be required  to pay a  prepayment  premium,  except in the
limited circumstances described in the amended senior credit agreement.

     First Revolving Credit Facility

     Lenders under the amended senior credit  agreement have provided  Abraxas a
revolving  credit  facility with a maximum  borrowing base of up to $20 million.
The Company's current borrowing base under this revolving credit facility is the
full $20.0 million,  subject to adjustments  based on periodic  calculations and
mandatory  prepayments  under the  senior  credit  agreement.  The  Company  has
borrowed $6.6 million under this revolving  credit  facility,  which was used to
refinance  principal and interest on advances under it's  preexisting  revolving
credit facility under the senior credit  agreement,  and to pay certain fees and
expenses relating to the transaction.  Outstanding  amounts under this revolving
credit  facility bear interest at the prime rate  announced by Wells Fargo Bank,
N.A. plus 1.125%.

     Second Revolving  Credit Facility 

     Lenders under the amended  senior credit  agreement  have provided a second
revolving credit facility,  with a maximum borrowing of up to $30 million.  This
revolving  credit  facility is not subject to a borrowing  base. The Company has
borrowed $30.0 million under this revolving credit  facility,  which was used to
refinance  principal and interest on advances  under our  preexisting  revolving
credit facility,  and to pay certain transaction fees and expenses.  Outstanding
amounts  under this  revolving  credit  facility bear interest at the prime rate
announced by Wells Fargo Bank, N.A. plus 3.00%.

     Non-Revolving  Credit  Facility

     The Company has borrowed $15.0 million  pursuant to a non-revolving  credit
facility,  which was used to repay the  preexisting  term loan under it's senior
credit  agreement,  to refinance  principal  and interest on advances  under the
preexisting  revolving credit facility,  and to pay certain transaction fees and
expenses. This non-revolving credit facility is not subject to a borrowing base.
Outstanding  amounts under this credit  facility bear interest at the prime rate
announced by Wells Fargo Bank, N.A. plus 8.00%.

                                      F-18


     Covenants 

     Under the amended  senior  credit  agreement,  we are subject to  customary
covenants and reporting requirements.  Certain financial covenants require us to
maintain minimum ratios of consolidated EBITDA (as defined in the amended senior
credit  agreement) to adjusted fixed charges  (which  includes  certain  capital
expenditures), minimum ratios of consolidated EBITDA to cash interest expense, a
minimum level of unrestricted  cash and revolving credit  availability,  minimum
hydrocarbon   production  volumes  and  minimum  proved  developed   hydrocarbon
reserves.  In addition,  if on the day before the end of each fiscal quarter the
aggregate amount of our cash and cash equivalents  exceeds $2.0 million,  we are
required to repay the loans  under the amended  senior  credit  agreement  in an
amount equal to such excess.  The amended senior credit  agreement also requires
us to enter into hedging agreements on not less than 40% or more than 75% of our
projected  oil and gas  production.  We are also  required to establish  deposit
accounts at financial institutions acceptable to the lenders and we are required
to direct our customers to make all payments into these accounts. The amounts in
these accounts will be transferred to the lenders upon the occurrence and during
the  continuance  of an  event  of  default  under  the  amended  senior  credit
agreement.

     In addition to the foregoing  and other  customary  covenants,  the amended
senior credit agreement contains a number of covenants that, among other things,
restrict our ability to:

        o   incur additional indebtedness;

        o   create or permit to be created liens on any of our properties;

        o   enter into change of control transactions;

        o   dispose of our assets;

        o   change our name or the nature of our business;

        o   make guarantees with respect to the obligations of third parties;

        o   enter into forward sales contracts;

        o   make  payments  in  connection  with  distributions,   dividends  or
            redemptions relating to our outstanding securities, or

        o   make investments or incur liabilities.

     Security

     The  obligations  of Abraxas  under the  amended  senior  credit  agreement
continue to be secured by a first lien security interest in substantially all of
Abraxas' assets, including all atural gas and crude oil  properties.

     Guarantees

     The  obligations  of Abraxas  under the  amended  senior  credit  agreement
continue to be guaranteed  by Abraxas'  subsidiaries,  Sandia Oil & Gas,  Sandia
Operating,  Wamsutter,  Grey Wolf,  Western Associated Energy and Eastside Coal.
The guarantees under the amended senior credit agreement  continue to be secured
by a first  lien  security  interest  in  substantially  all of the  guarantors'
assets, including all natural gas and crude oil  properties.

     Events of Default

     The amended senior credit agreement  contains  customary events of default,
including  nonpayment  of  principal  or  interest,   violations  of  covenants,

                                      F-19

inaccuracy  of  representations  or warranties  in any material  respect,  cross
default  and cross  acceleration  to  certain  other  indebtedness,  bankruptcy,
material  judgments and liabilities,  change of control and any material adverse
change in our financial condition.

     The following  presents the summarized  results of operations for the years
ended  December 31, 2001,  2002,  and for the period ended January 23, 2003, for
the Canadian properties which were not retained after the transaction in January
2003.



                                                       Year ended December 31,
                                                    2001        2002        2003
                                                  --------    --------    --------
                                                                      
Total revenue .................................    $ 41,468    $ 32,013    $  3,275
                                                   ========    ========    ========
 Income (loss) from operations before income tax       (102)    (87,378)      1,250
 Income tax expense (benefit) ..................      1,897     (29,697)        377
 Minority interest in income ...................     (1,676)         --          --
                                                   --------    --------    --------
Income (loss) from operations .................    $ (3,675)   $(57,681)   $    873
                                                   ========    ========    ========


         Assets and liabilities related to the Canadian properties which were
         not retained after the January 2003 transaction:
                                                             December 31,
                                                                2002
                                                              --------
         Assets:
           Cash............................................     $  4,325
           Accounts receivable.............................        4,016
           Net property and equipment......................       54,468
           Other...........................................       11,438
                                                              --------
                                                              $ 74,247
                                                              --------
         Liabilities:
           Accounts payable and accrued liabilities........     $  7,320
           Long-tern debt..................................       45,964
           Other...........................................        3,413
                                                              --------
                                                              $ 56,697
                                                              --------

     Included in the loss from  operations  shown  above is interest  expense of
$7.6 million and $9.5 million,  and general and  administrative  expense of $1.5
million  and $1.7  million  for the  years  ended  December  31,  2001 and 2002,
respectively.  The interest  expense  represents the amounts  relating to an Old
Grey Wolf  senior  credit  facility  which was  repaid in  conjunction  with the
transactions  described  above and the amounts related to the balance of certain
notes  (approximately  $52.6 million) which had  historically  been reflected by
Canadian Abraxas.

3. Long-Term Debt

     As described in Note 2, the First Lien Notes were redeemed in January 2003.
The Old Notes and the Second Lien Notes were either  redeemed or  exchanged  for
cash, common stock and New Notes in January 2003. Additionally,  the 9.5% Mirant
Canada Energy  Capital,  Ltd.  credit  facility,  with a balance  outstanding at
December 31, 2002 of $45.9  million,  was repaid in connection  with the sale of
the common stock of Old Grey Wolf in January 2003.

                                      F-20


The following is a brief description of the Company's debt as of December 31,
2002 and 2003, respectively:



                                                                                December 31
                                                                      --------------------------------
                                                                            2002            2003
                                                                      --------------------------------
                                                                              (in thousands)
                                                                                        
  11.5% Senior Notes due 2004 ("Old Notes") .........................    $       801     $        -
  12.875% Senior Secured Notes due 2003 ("First Lien Notes") ........         63,500              -
  11.5% Second Lien Notes due 2004 ("Second Lien Notes").............        190,178              -
  9.5% Senior Credit Facility ("Grey Wolf Facility") providing for
       borrowings up to approximately US $96 million (CDN $150
       million).  Secured by the assets of Old Grey Wolf and
       non-recourse to Abraxas.......................................         45,964              -
  11.5% Secured Notes due 2007 ("New Notes").........................              -        137,258 (a)
  Senior Credit Agreement ...........................................              -         47,391
                                                                      ---------------------------------
                                                                             300,443        184,649
  Less current maturities ...........................................         63,500              -
                                                                      ---------------------------------
                                                                         $   236,943      $ 184,649
                                                                      =================================


(a)  After  the  transactions  described  in Note  2,  for  financial  reporting
purposes,  the New Notes were reflected at the carrying value of the Second Lien
Notes and Old Notes  prior to the  exchange of $191.0  million,  net of the cash
offered  in the  exchange  of $47.5  million  and net of the fair  market  value
related to equity of $3.8 million offered in the exchange transaction.  The face
amount of the New Notes is $120.5 million at December 31, 2003  including  $10.8
million in new notes issued for interest.

     Old Notes 

     Interest on the Old Notes was payable semi-annually in arrears on May 1 and
November  1 of each year at the rate of 11.5%  per  annum.  The Old  Notes  were
redeemable, in whole or in part, at the option of the Company.

     First  Lien   Notes 

     Interest  on the First Lien Notes was payable  semi-annually  in arrears on
March 15 and September 15 of each year at the rate of 12.875% per annum.

     Second  Lien  Notes 

     Interest on the Second Lien Notes was payable  semi-annually  in arrears on
May 1 and November 1, commencing May 1, 2000 at the rate of 11.5% per annum.

     New Notes - 11 1/2% Secured Notes. 

     The New Notes accrue interest from the date of issuance,  at a fixed annual
rate of 11 1/2%,  payable in cash  semi-annually  on each May 1 and  November 1,
commencing May 1, 2003, provided that, if we fail, or are not permitted pursuant
to our new  senior  secured  credit  agreement  or the  intercreditor  agreement
between the trustee  under the indenture for the New Notes and the lenders under
the new senior secured credit agreement,  to make such cash interest payments in
full, we will pay such unpaid interest in kind by the issuance of additional New
Notes with a  principal  amount  equal to the amount of accrued  and unpaid cash
interest  on the New  Notes  plus an  additional  1%  accrued  interest  for the
applicable period. Upon an event of default, the New Notes accrue interest at an
annual rate of 16.5%.

     The New Notes are  secured by a second lien or charge on all of our current
and  future  assets,  including,  but not  limited  to, all of our crude oil and
natural gas properties. All of Abraxas' current subsidiaries,  Sandia Oil & Gas,
Sandia Operating (a wholly-owned subsidiary of Sandia Oil & Gas), Wamsutter, New
Grey Wolf,  Western  Associated  Energy and Eastside Coal, are guarantors of the
New Notes, and all of Abraxas' future subsidiaries will guarantee the New Notes.

                                      F-21

If  Abraxas  cannot  make  payments  on the New  Notes  when  they are due,  the
guarantors must make them instead.

         The New Notes and related guarantees

            o  are  subordinated  to the  indebtedness  under the senior  credit
               agreement;

            o  rank  equally  with all of  Abraxas'  current  and future  senior
               indebtedness; and

            o  rank  senior to all of Abraxas'  current and future  subordinated
               indebtedness, in each case, if any.

     The New Notes are subordinated to amounts  outstanding under the new senior
secured  credit  agreement  both in right of  payment  and with  respect to lien
priority and are subject to an intercreditor agreement.

     Abraxas may redeem the New Notes, at its option, in whole at any time or in
part from time to time, at redemption  prices  expressed as  percentages  of the
principal  amount set forth below.  If Abraxas  redeems all or any New Notes, it
must also pay all interest accrued and unpaid to the applicable redemption date.
The redemption prices for the New Notes during the indicated time periods are as
follows:

Period                                                             Percentage

From January 24, 2004 to June 23, 2004................................97.1674%
From June 24, 2004 to January 23, 2005................................98.5837%
Thereafter...........................................................100.0000%


     Under the indenture,  we are subject to customary  covenants  which,  among
other things, restrict our ability to:

        o   borrow money or issue preferred stock;

        o   pay dividends on stock or purchase stock;

        o   make other asset transfers;

        o   transact business with affiliates;

        o   sell stock of subsidiaries;

        o   engage in any new line of business;

        o   impair the security interest in any collateral for the notes;

        o   use assets as security in other transactions; and

        o   sell certain assets or merge with or into other companies.

     In  addition,  we are  subject to  certain  financial  covenants  including
covenants limiting our selling,  general and administrative expenses and capital
expenditures,  a covenant  requiring  Abraxas to maintain a  specified  ratio of
consolidated  EBITDA,  as  defined in the  agreements,  to cash  interest  and a
covenant  requiring Abraxas to permanently,  to the extent  permitted,  pay down
debt under the new senior secured credit  agreement and, to the extent permitted
by the new senior secured credit agreement,  the New Notes or, if not permitted,
paying indebtedness under the new senior secured credit agreement.

     The indenture contains customary events of default, including nonpayment of
principal or interest, violations of covenants, inaccuracy of representations or
warranties  in any material  respect,  cross default and cross  acceleration  to
certain other  indebtedness,  bankruptcy,  material  judgments and  liabilities,
change of control and any material adverse change in our financial condition.

                                      F-22

     Senior Credit Agreement

     In connection with the financial restructuring,  Abraxas entered into a new
senior credit  agreement  providing a term loan facility and a revolving  credit
facility which was amended in February 2004. A summary description of the senior
credit agreement as amended, is set forth in Note 2.

4. Acquisitions and Divestitures

     Acquisition of Minority Interest in Old Grey Wolf

     In September  2001,  the Company  completed a tender offer for the minority
interest in Old Grey Wolf, acquiring the approximately 52% of capital stock that
was not previously  owned by the Company.  The Company issued  3,990,565  common
shares and 588,916 stock options, valued together at approximately $9.2 million.
Additionally,  the Company incurred direct costs of  approximately  $2.7 million
related to the acquisition.  The elimination of the minority interest through an
acquisition  at a  purchase  price less than Old Grey  Wolf's  book value in the
Company's  consolidated  financial  statements  had the effect of  reducing  the
property and other assets  balances by $2.9 million and deferred income taxes by
$1.1 million.

5. Property and Equipment

     The major components of property and equipment, at cost, are as follows:



                                                         Estimated                 December 31
                                                                        ----------------------------------
                                                        Useful Life          2002              2003
                                                      ----------------- ---------------- -----------------
                                                           Years                 (In thousands)
                                                                                           
    Land, buildings, and improvements ..............         15            $       331      $       331
    Crude oil and natural gas properties ...........          -                529,047          329,526
    Natural Gas Processing..........................         18                 38,735                -
    Equipment and other ............................          7                  5,123            4,209
                                                                        ---------------- -----------------
                                                                           $   573,236      $   334,066
                                                                        ================ =================


6.  Stockholders' Equity

     Common Stock

     In 1994,  the Board of Directors  adopted a  Stockholders'  Rights Plan and
declared a dividend of one Common Stock Purchase Right ("Rights") for each share
of common stock. The Rights are not initially exercisable.  Subject to the Board
of Directors'  option to extend the period,  the Rights will become  exercisable
and will  detach  from the  common  stock ten days after any person has become a
beneficial owner of 20% or more of the common stock of the Company or has made a
tender offer or Exchange Offer (other than certain qualifying offers) for 20% or
more of the common stock of the Company.

     Once the Rights become exercisable,  each Right entitles the holder,  other
than the  acquiring  person,  to  purchase  for $40 a number  of  shares  of the
Company's  common stock  having a market value of two times the purchase  price.
The  Company  may redeem  the  Rights at any time for $.01 per Right  prior to a
specified  period of time after a tender or  Exchange  Offer.  The  Rights  will
expire in November 2004, unless earlier exchanged or redeemed.

     Treasury Stock

     In March 1996,  the Board of Directors  authorized the purchase in the open
market of up to 500,000 shares of the Company's  outstanding  common stock,  the
aggregate  purchase  price  not to  exceed  $3,500,000.  During  the year  ended
December  31,  2000,  38,800  shares  with an  aggregate  cost of  $78,000  were
purchased.  During the years ended December 31, 2001, 2002 and 2003, the Company
did not purchase any shares of its common stock for treasury stock.


                                      F-23

7.  Stock Option Plans and Warrants

     Stock Options

     The Company grants options to its officers,  directors, and other employees
under various stock option and incentive plans.

     During  2001,  the  Company's  stockholders  approved an  amendment  to the
Abraxas  Petroleum  Corporation  1994 Long Term  Incentive  Plan to increase the
number of shares of Abraxas common stock reserved for issuance under the plan to
5,000,000 shares.  The additional shares were necessary to accommodate the grant
of  Abraxas  options to Old Grey Wolf  option  holders  in  connection  with the
acquisition  of the minority  interest in Old Grey Wolf in  September  2001 (see
Note 4),  and for the  re-issuance  of  outstanding  options  granted  under the
Abraxas  Petroleum   Corporation  2000  Long  Term  Incentive  Plan,  which  was
terminated in 2001.  The options were  re-issued at the same exercise  price and
term as the original issuances.

     The  Company's  various  stock  option plans have  authorized  the grant of
options to  management,  employees  and directors  for up to  approximately  5.7
million shares of the Company's  common stock. All options granted have ten year
terms  and  vest and  become  fully  exercisable  over  three  to four  years of
continued  service at 25% to 33% on each anniversary  date. At December 31, 2003
approximately 2.3 million options remain available for grant.

         A summary of the Company's stock option activity, and related
information for the three years ended December 31, follows:



                                       2001                           2002                           2003
                           -----------------------------  -----------------------------  -----------------------------
                                      Weighted-Average               Weighted-Average               Weighted-Average
                            Options    Exercise Price      Options    Exercise Price     Options     Exercise Price
                            (000s)                         (000s)           (1)           (000s)
                           ---------- ------------------  ---------- ------------------  ---------  ------------------

Outstanding-beginning of
                                                                                            
   year ...................   4,042       $    3.37          4,942       $    3.28          3,305     $      1.85
Granted ...................     918            2.81            521            0.68            360            0.68
Exercised .................      (8)           1.95              -              -            (129)           0.66
Forfeited/Expired .........     (10)           1.79         (2,158)           4.84           (172)           1.61
                           ----------                     ----------                     ---------

Outstanding-end of year ...   4,942       $    3.28          3,305       $    1.85          3,364     $      0.90
                           ==========                     ==========                     =========

Exercisable at end of year    2,259       $    2.65          2,136       $    1.91          2,331     $      0.95
                           ==========                     ==========                     =========

Weighted-average fair
   value of options
   granted during the year                  $  1.19                      $    0.63                    $      0.38


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

(1)       In September 2001, the Abraxas  Petroleum  Corporation  2000 Long Term
          Incentive Plan was terminated, and options granted under the plan were
          reissued  under  the  Abraxas  Petroleum  Corporation  1994  Long Term
          Incentive Plan at the same option price and term.

                                      F-24

     The following table  represents the range of option prices and the weighted
average remaining life of outstanding options as of December 31, 2003:



                                             Options outstanding                                 Exercisable
                                -----------------------------------------------     --------------------------------------
                                     Weighted Weighted
                                                      average        average
                                     Number          remaining      exercise            Number         Weighted average
             Exercise price        outstanding          life          price           exercisable       exercise price
           --------------------- ------------------ --------------- ------------     ---------------- ---------------------
                                                                                              
              $0.50 - 0.97            2,761,160         6.0        $     0.71           1,886,043    $         0.69
              $1.01 - 1.63              259,900         7.8              1.22             123,050              1.40
              $2.06 - 2.21              311,958         2.1              2.07             305,979              2.06
              $3.39 - 4.83               31,407         6.9              4.77              16,406              4.71



     In January 2003, in connection with the financial  restructuring  discussed
in Note 2,  approximately  1.9 million  options with a strike price greater that
$0.66 were re-priced to $0.66.

     Stock Awards

     In addition to stock options granted under the plans described  above,  the
1994   Long-Term   Incentive  Plan  also  provides  for  the  right  to  receive
compensation in cash,  awards of common stock, or a combination  thereof.  There
were no awards in 2001, 2002 or 2003.

     The Company also has adopted the Restricted  Share Plan for Directors which
provides for awards of common stock to non-employee directors of the Company who
did  not,  within  the  year  immediately  preceding  the  determination  of the
director's  eligibility,  receive any award under any other plan of the Company.
There were no direct awards of common stock in 2001, 2002 or 2003.

     Stock Warrants

     In  2000,  the  Company  issued  950,000  warrants  in  conjunction  with a
consulting  agreement.  Each is exercisable  for one share of common stock at an
exercise  price of  $3.50  per  share.  These  warrants  have a  four-year  term
beginning July 1, 2000. The Company paid cash  compensation  of $191,000  during
2001 under the consulting agreement.

     At December  31, 2003,  the Company has  approximately  3.3 million  shares
reserved for future issuance for conversion of its stock options,  warrants, and
incentive plans for the Company's directors, employees and consultants.

8.  Income Taxes

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:



                                                                                       December 31
                                                                                ---------------------------
                                                                                    2002          2003
                                                                                ------------- -------------
                                                                                      (In thousands)
     Deferred tax liabilities:
                                                                                               
       U.S. full cost pool .....................................................  $      -      $  4,835
                                                                                ------------- -------------
     Total deferred tax liabilities ............................................         -         4,835
     Deferred tax assets:
       U.S. full cost pool......................................................     2,168             -
       Capital loss carryforward................................................         -        12,895
       Original issue discount on certain debt obligations......................         -        22,453
       Canadian full cost pool..................................................     9,787         2,971
      
                                      F-25

       Depletion ...............................................................     2,778         4,856
       Net operating losses  ("NOL")............................................    58,811        35,218
       Investment in foreign subsidiaries.......................................    32,038             -
       Other ...................................................................     1,364         2,575
                                                                                ------------- -------------
     Total deferred tax assets .................................................   106,946        80,968
     Valuation allowance for deferred tax assets ...............................   (99,126)      (76,133)
                                                                                ------------- -------------
     Net deferred tax assets ...................................................     7,820         4,835
                                                                                ------------- -------------
     Net deferred tax liabilities (assets) .....................................  $ (7,820)     $      -
                                                                                ============= =============


         Significant components of the provision (benefit) for income taxes are
as follows:



                                                                            2001          2002         2003
                                                                        -----------------------------------------
     Current:
                                                                                                 
       Federal..........................................................  $    505      $      -     $      -
       Foreign .........................................................         -             -            -
                                                                         ----------------------------------------
                                                                          $    505      $      -     $      -
                                                                        =========================================




     Deferred:
                                                                                                 
       Federal .........................................................  $     -        $      -     $     -
       Foreign .........................................................     1,897         26,697         377
                                                                        -----------------------------------------
                                                                          $   1,97       $ 26,697     $   377
                                                                        =========================================

     At December 31, 2003 the Company had,  subject to the limitation  discussed
below, $100.6 million of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire from 2003 through 2022 if not utilized.  In
connection  with the January 2003  transactions  described in Note 2, certain of
the loss carryforward may be utilized.

     At December 31, 2002, the Company was no longer permanently reinvested with
respect  to its  foreign  subsidiaries,  see Note 2. As a  result,  the  Company
recorded net deferred tax assets of $32.0 million  related to its  investment in
foreign  subsidiaries,  offset  by an  equivalent  valuation  allowance  due  to
uncertainties as to the future utilization of these amounts.

     In addition to the Section 382 limitations,  uncertainties  exist as to the
future  utilization of the operating loss  carryforwards  under the criteria set
forth under FASB  Statement No. 109.  Therefore,  the Company has  established a
valuation  allowance of $99.1  million and $71.3 million for deferred tax assets
at December 31, 2002 and 2003,  respectively. 

     The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:


                                                                           December 31
                                               ---------------------------------------------------------------------
                                                        2001                  2002                   2003
                                               -------------------------------------------- ------------------------
                                                                          (In thousands)
     Tax (expense) benefit at U.S.
                                                                                                  
       statutory rates (35%) ..............        $       5,318          $      51,878         $     (19,842)
     (Increase) decrease in deferred tax
       asset valuation allowance ..........               (4,907)               (59,456)               22,993
     Write-down of non-tax basis assets....               (2,194)                (7,009)                    -
     Higher effective rate of foreign
       operations..........................                 (136)                 7,349                (2,835)
     Percentage depletion .................                  596                    683                     -
      Investment in foreign subsidiaries ..                    -                 35,604                     -
     Other ................................               (1,079)                   648                  (693)
                                               -------------------------------------------- ------------------------
                                                   $      (2,402)         $      29,697         $        (377)
                                               ============================================ ========================

                                      F-26



9. Related Party Transactions

     Accounts receivable - Other includes  approximately  $51,211 and $35,558 as
of  December  31,  2002 and 2003,  respectively,  representing  amounts due from
officers relating to advances made to employees.

     On July 29,  2003 the  Company  acquired  all of the shares of the  capital
stock of Wind River  Resources  Corporation  which owned an  airplane.  The sole
shareholder of Wind River was the Company's President. The consideration for the
purchase  was  106,977  shares of  Abraxas  common  stock and  $35,000  in cash.
Simultaneously  with this  transaction,  the airplane was sold. The airplane had
previously been made available to Abraxas' employees for business use.

     The Company paid Wind River a total of  $314,000,  $345,000 and $132,000 in
2001, 2002 and 2003, through July 29,  respectively,  for Wind River's operating
cost associated with the Company's use of the plane.

10.  Commitments and Contingencies

Operating Leases

     During  the  years  ended  December  31,  2001,  2002 and 2003 the  Company
incurred rent expense  related to leasing  office  facilities  of  approximately
$519,000, $236,000 and $464,000 respectively. Future minimum rental payments are
as follows at December 31, 2003.

     2004.............................................   $    416,000
     2005.............................................        412,000
     2006.............................................        223,000
     2007.............................................        161,000
     Thereafter.......................................        161,000
                                                       ------------------
                                                         $  1,373,000
                                                       ==================

Litigation and Contingencies


     In 2001 the Company and a partnership were named in a lawsuit filed in U.S.
District Court in the District of Wyoming. The claim asserts breach of contract,
fraud  and   negligent   misrepresentation   by  the  Company   related  to  the
responsibility  for year  2000 ad  valorem  taxes on crude oil and  natural  gas
properties sold by the Company and the Partnership.  In February 2002, a summary
judgment was granted to the plaintiff in this matter and a final judgment in the
amount of $1.3 million was entered. The Company has filed an appeal. The Company
believes these charges are without merit.  The Company has established a reserve
in the amount of  $845,000,  which  represents  the  Company's  interest  in the
judgment.  In 2002 the Company recorded  $201,000 in other expense  representing
its share of the ongoing legal cost related to this matter.

     In 2003,  Abraxas and Leam  Drilling  Systems  each filed suit  against the
other  relating to certain  drilling  services  that Leam  contracted to provide
Abraxas. Abraxas believes that the services were provided in a grossly negligent
manner and that Leam committed  fraud.  Leam has asserted that Abraxas failed to
pay approximately $639,000 for services rendered. The cases are pending in Bexar
County and Ward County, Texas.

     Additionally,  from time to time,  the Company is  involved  in  litigation
relating  to  claims  arising  out of its  operations  in the  normal  course of
business.  At  December  31,  2003,  the  Company  was not  engaged in any legal
proceedings  that are  expected,  individually  or in the  aggregate,  to have a
material adverse effect on the Company.


                                      F-27


11. Earnings per Share

     Basic earnings  (loss) per share excludes any dilutive  effects of options,
warrants and  convertible  securities and is computed by dividing  income (loss)
available to common stockholders by the weighted average number of common shares
outstanding  for the  period.  Diluted  earnings  (loss) per share are  computed
similar to basic,  however  diluted  earnings  per share  reflects  the  assumed
conversion of all potentially dilutive securities.

    The following table sets forth the computation of basic and diluted earnings
per share:



                                                              2001               2002              2003
                                                       --------------------------------------------------------
Numerator:
                                                                                     
     Net income (loss) before effect of accounting
       change ......................................... $  (19,718,000)    $ (118,527,000)     $ 56,315,000
     Cumulative  effect of accounting change...........              -                  -          (395,000)
                                                       --------------------------------------------------------
                                                        $  (19,718,000)    $ (118,527,000)       55,920,000
Denominator:
     Denominator for basic earnings per share -
       weighted-average shares ........................     25,788,571         29,979,397        35,364,363
     Effect of dilutive securities:
       Stock options and  warrants.....................              -                  -           711,928
                                                       --------------------------------------------------------

     Dilutive potential common shares
       Denominator for diluted earnings per share
       - adjusted weighted-average shares and assumed
       conversions.....................................     25,788,571         29,979,397        36,076,291
                                                       ========================================================

   Basic earnings (loss) per share:
     Net income (loss) before cumulative effect of
     accounting change...............................   $        (0.76)    $        (3.95)      $      1.59
     Cumulative effect of accounting change..........                -                  -             (0.01)
                                                       --------------------------------------------------------
   Net income (loss) per common share................   $        (0.76)    $        (3.95)      $      1.58
                                                       ========================================================
   Diluted earnings (loss) per share:
     Net income (loss) before cumulative effect of
     accounting change................................  $        (0.76)    $        (3.95)      $      1.56
     Cumulative effect of accounting change..........               -                   -             (0.01)
                                                       --------------------------------------------------------
          Net income (loss) per common share - diluted. $        (0.76)    $        (3.95)      $      1.55
                                                       ========================================================


     For the year ended  December 31, 2001 and 2002,  4.3 million shares and 5.9
million  shares  respectively,  were  excluded from the  calculation  of diluted
earnings per share since their inclusion would have been anti-dilutive.

                                      F-28



                                     
12.  Quarterly Results of Operations (Unaudited)

     Selected  results of operations for each of the fiscal  quarters during the
years ended December 31, 2002 and 2003 are as follows:


                                                  1st              2nd               3rd              4th
                                                Quarter          Quarter           Quarter          Quarter
                                            ---------------- ----------------   --------------- ----------------
                                                           (In thousands, except per share data)
Year Ended December 31, 2002
                                                                                              
   Net revenue...........................      $   11,807       $   14,235        $    11,061      $   17,217
   Operating income (loss)...............            (735)        (115,879)               490           5,221
   Net income (loss).....................          (8,699)         (95,690)            (8,438)         (5,700)
   Net income (loss) per common share -
     basic and diluted...................      $    (0.29)      $    (3.19)       $     (0.28)     $    (0.19)
Year Ended December 31, 2003
   Net revenue...........................      $   13,111       $    8,430        $     8,430      $    9,048
   Operating income (loss)...............           5,646            1,927              2,694           1,275
   Net income (loss).....................          62,702           (2,346)            (2,702)         (1,734)
   Net income (loss) per common share -
     basic...............................      $     1.83       $    (0.07)       $     (0.08)     $    (0.05)
   Net income (loss) per common share -
     diluted.............................      $     1.82       $    (0.07)       $     (0.08)     $    (0.05)


     During  the  second  quarter  of  2002,  the  Company  incurred  a  ceiling
limitation write-down of approximately $116.0 million.

13.  Benefit Plans

     The Company has a defined  contribution plan (401(k)) covering all eligible
employees of the Company.  The Company did not contribute to the plan in 2002 or
2003. The employee  contribution  limitations are determined by formulas,  which
limit the upper  one-third of the plan members  from  contributing  amounts that
would cause the plan to be top-heavy.  The employee  contribution  is limited to
the lesser of 20% of the employee's  annual  compensation or $11,000 in 2002 and
$12,000 in 2003.

14.  Guarantor Condensed Consolidation Financial Statements

     The following  table  presents  condensed  consolidating  balance sheets of
Abraxas, as a parent company, and its significant subsidiaries, Canadian Abraxas
and  Old  Grey  Wolf,  as  of  December  31,  2002  and  2003  and  the  related
consolidating  statements  of  operations  and cash  flows for the  years  ended
December 31, 2001, 2002 and 2003.  Canadian Abraxas was a guarantor of the First
Lien Notes ($63.5 million) and jointly and severally liable with Abraxas for the
Second Lien Notes ($190.2 million) and the Old Notes  ($801,000).  Old Grey Wolf
was a non-guarantor with respect to the First Lien Notes and the Old Notes.

     The First Lien Notes and the Second Lien Notes were  retired in  connection
with the financial  restructuring  transactions  which occurred in January 2003.
New Grey  Wolf is a  guarantor  of the New  Notes,  there  are no  non-guarantor
subsidiaries, accordingly, condensed consolidating balance sheets of Abraxas, as
parent and its  subsidiary  New Grey Wolf are  presented as of December 31, 2003
and the related  consolidating  statements of operations  and cash flows for the
year ended December 31, 2003.

                                      F-29




     
               Condensed Consolidating Parent Company and Subsidiaries Balance Sheet
                                                December 31, 2003
                                                  (In thousands)


                                                      Abraxas                                        Abraxas
                                                     Petroleum                   Reclassifi-        Petroleum
                                                    Corporation     Subsidiary     cations         Corporation 
                                                    Inc. Parent     (New Grey        and               and
                                                     Company(1)       Wolf)      eliminations      Subsidiaries
                                                   ----------------------------------------------------------------
Assets:
                                                                                                  
   Cash ....................................          $      -     $       493    $          -       $         493
   Accounts receivable, less allowance for
     doubtful accounts......................            14,101             903          (6,681)              8,323
   Equipment inventory .....................               782               -               -                 782
   Other current assets ....................               418             154               -                 572
                                                   -----------------------------------------------------------------
          Total current assets..............            15,301           1,550          (6,681)             10,170
Property and equipment - net................            76,021          35,542               -             111,563
Deferred financing fees, net  ..............             4,410               -               -               4,410
Deferred income taxes and other assets .....            27,551               -         (27,257)                294
                                                   -----------------------------------------------------------------
   Total assets ............................       $   123,283     $    37,092    $    (33,938)     $      126,437
                                                   =================================================================
Liabilities and Stockholders' deficit:
Current liabilities:
   Accounts payable .............................  $     7,075     $     8,652    $     (6,681)     $        9,046
   Accrued interest .............................        2,340               -              -                2,340
   Other accrued expenses .......................        1,228               -              -                1,228
                                                   -----------------------------------------------------------------
     Total current liabilities...................       10,643           8,652          (6,681)             12,614
Long-term debt ..................................      184,649               -              -              184,649
Future site restoration  ........................          776             601              -                1,377
                                                   -----------------------------------------------------------------
                                                       196,068           9,253          (6,681)            198,640
Stockholders' equity (deficit)...................      (72,785)         27,839         (27,257)            (72,203)
                                                    -----------------------------------------------------------------
Total liabilities and stockholders' equity         
(deficit)........................................  $   123,283     $    37,092    $    (33,938)     $      126,437
                                                   =================================================================

         (1)    Includes amounts for insignificant U.S. subsidiaries, Sandia Oil
                and Gas, Sandia Operating, Western Energy Associates, East Side
                Coal and Wamsutter, which are guarantors of the New Notes.

                                      F-30




                Condensed Consolidating Parent Company, Restricted Subsidiaries and Non-Guarantor Balance Sheet
                                                       December 31, 2002
                                                        (In thousands)

                                                      Abraxas                        Non-                           Abraxas
                                                     Petroleum      Restricted    Guarantor     Reclassifi-        Petroleum
                                                     Corporation    Subsidiary    Subsidiary     cations           Corporation 
                                                     Inc. Parent   (Canadian      (Old Grey        and                and
                                                      Company(2)    Abraxas)        Wolf)       eliminations      Subsidiaries
                                                   -----------------------------------------------------------------------------
Assets:
Current assets:
                                                                                                           
   Cash ....................................          $    557     $     2,188       $   2,137  $         -          $   4,882
   Accounts receivable, less allowance for
     doubtful accounts......................             4,482           4,782          11,938      (11,157)            10,045
   Equipment inventory .....................               860             142              12             -             1,014
   Other current assets ....................               316             682             242             -             1,240
                                                   -----------------------------------------------------------------------------
          Total current assets..............             6,215           7,794          14,329      (11,157)            17,181

Property and equipment - net................            74,435          38,858          37,101             -           150,394
Deferred financing fees, net  ..............             2,970             688           2,013             -             5,671
Deferred income taxes and other assets .....           108,558               -           7,820     (108,199)             8,179
                                                   -----------------------------------------------------------------------------
   Total assets ............................       $   192,178         $47,340       $  61,263  $  (119,356)         $ 181,425    
                                                   =============================================================================
Liabilities and Stockholders' deficit:
Current liabilities:
   Accounts payable .............................  $    15,928     $       766       $   6,398  $   (10,973)         $  12,119
   Accrued interest .............................        5,000           1,009               -            -              6,009
   Other accrued expenses .......................        1,162               -               -            -              1,162
   Current maturities of long-term debt .........       63,500               -               -            -             63,500
                                                   -----------------------------------------------------------------------------
     Total current liabilities...................       85,590           1,775           6,398      (10,973)            82,790
Long-term debt ..................................      138,350          52,629          45,964            -            236,943
Future site restoration  ........................            -           3,171             775            -              3,946
                                                   -----------------------------------------------------------------------------
                                                       223,940          57,575          53,137      (10,973)           323,679
Stockholders' equity (deficit)...................      (31,762)        (10,235)          8,126     (108,383)          (142,254)
                                                   -----------------------------------------------------------------------------
Total liabilities and stockholders' equity         
(deficit)........................................  $   192,178     $    47,340       $  61,263  $  (119,356)         $ 181,425
                                                   =============================================================================


(2)               Includes amounts for insignificant U.S. subsidiaries, Sandia
                  Oil and Gas, Sandia Operating, Western Energy Associates, East
                  Side Coal and Wamsutter, which are guarantors of the First and
                  Second Lien Notes. Sandia is also a guarantor of the Old
                  Notes. Additionally, these subsidiaries are designated as
                  Restricted Subsidiaries along with Canadian Abraxas.


                                      F-31




                 Condensed Consolidating Parent Company and Subsidiary Statement of Operations
                                     For the year ended December 31, 2003
                                                (In thousands)

                                                      Abraxas                                        Abraxas
                                                     Petroleum                    Reclassifi-        Petroleum
                                                    Corporation     Subsidiary      cation           Corporation
                                                    Inc. Parent     (New Grey        and                and
                                                     Company(1)       Wolf)        eliminations    Subsidiaries
                                                   ------------------------------ ------------------------------
Revenues:
                                                                                              
   Oil and gas production revenues ...............    $    29,710    $     8,395    $         -     $    38,105
   Gas processing revenues........................              -            133              -             133
   Rig revenues ..................................            663              -              -             663
   Other  ........................................              7            111              -             118
                                                   ------------------------------ ------------------------------
                                                           30,380          8,639              -          39,019
Operating costs and expenses:
   Lease operating and production taxes ..........          8,342          1,257              -           9,599
   Depreciation, depletion, and amortization .....          7,608          3,195              -          10,803
   Rig operations ................................            609              -              -             609
   General and administrative ....................          3,995          1,365              -           5,360
   Stock-based compensation.......................          1,106             -               -           1,106
                                                   ------------------------------ -------- ----------------------
                                                           21,660          5,817              -          27,477
                                                   ------------------------------ ------------------------------
Operating income (loss)...........................          8,720          2,822              -          11,542

Other (income) expense:
   Interest income ...............................            (30)            -               -             (30)
   Amortization of deferred financing fees........          1,630             48              -           1,678
   Interest expense...............................         16,323            632              -          16,955
   Financing costs................................          4,406              -              -           4,406
   Gain on sale of foreign subsidiaries...........        (68,933)             -              -         (68,933)
   Other .........................................            100           674               -             774
                                                   ------------------------------ -----------------------------
                                                          (46,504)         1,354              -         (45,150)
                                                   ------------------------------ ------------------------------
Income (loss) before income tax and cumulative                                                -
   effect of accounting change....................         55,224          1,468                         56,692
Income tax expense (benefit)......................              -            377              -             377
Cumulative effect of accounting change............            395              -              -             395
                                                   ------------------------------ ------------------------------
Net  income (loss)................................    $    54,829    $     1,091    $         -     $    55,920
                                                   ============================== ==============================

                                      F-32



           Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
                                            For the year ended December 31, 2002
                                                       (In thousands)

                                                      Abraxas                        Non-                           Abraxas
                                                     Petroleum      Restricted    Guarantor     Reclassifi-        Petroleum
                                                     Corporation    Subsidiary    Subsidiary     cations           Corporation 
                                                     Inc. Parent   (Canadian      (Old Grey        and                and
                                                      Company(2)    Abraxas)        Wolf)       eliminations      Subsidiaries
                                                   -----------------------------------------------------------------------------
Revenues:
                                                                                                        
   Oil and gas production revenues ...............     $ 20,835      $  14,726      $ 15,301   $        -       $   50,862
   Gas processing revenues........................            -          1,955           465                         2,420
   Rig revenues ..................................          635              -             -            -              635
   Other  ........................................           71            152           180            -              403
                                                     ---------------------------------------------------------------------------
                                                         21,541         16,833        15,946            -           54,320
Operating costs and expenses:
   Lease operating and production taxes ..........        7,639          3,751         3,850            -           15,240
   Depreciation, depletion, and amortization .....        9,194         10,633         6,712            -           26,539
   Proved property impairment ....................       28,178         60,501        27,314            -          115,993
   Rig operations ................................          567              -             -            -              567
   General and administrative ...................         4,045          1,312         1,527            -            6,884
                                                   ---------------------------------------------------------------------------
                                                         49,623         76,197        39,403            -          165,223
                                                   ---------------------------------------------------------------------------
Operating income (loss)...........................      (28,082)       (59,364)      (23,457)           -         (110,903)

Other (income) expense:
   Interest income ...............................          (92)            -             -             -              (92)
   Amortization of deferred financing fees........        1,325            366          404             -            2,095
   Interest expense...............................       24,689          6,665        2,796             -           34,150
   Other .........................................        1,168             -             -             -            1,168
                                                   ---------------------------------------------------------------------------
                                                         27,090          7,031        3,200             -           37,321
                                                   ---------------------------------------------------------------------------
Income (loss) before income tax ..................      (55,172)       (66,395)     (26,657)            -         (148,224)
Income tax expense (benefit)......................            -        (18,522)     (11,175)            -          (29,697)
                                                   ------------------------------ --------------------------------------------
Net  income (loss)................................   $  (55,172)  $    (47,873    $ (15,482)   $        -       $ (118,527)
                                                   ===========================================================================

                                      F-33





           Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
                                            For the year ended December 31, 2001
                                                       (In thousands)

                                                      Abraxas                        Non-                           Abraxas
                                                     Petroleum      Restricted    Guarantor     Reclassifi-        Petroleum
                                                     Corporation    Subsidiary    Subsidiary     cations           Corporation 
                                                     Inc. Parent   (Canadian      (Old Grey        and                and
                                                      Company(2)    Abraxas)        Wolf)       eliminations      Subsidiaries
                                                   -----------------------------------------------------------------------------
Revenues:
                                                                                                         
   Oil and gas production revenues ...............    $  34,934   $     24,308    $   13,959     $      -          $ 73,201
   Gas processing revenues .......................            -          2,008           430            -             2,438
   Rig revenues ..................................          756              -             -            -               756
   Other  ........................................           85            471           292            -               848
                                                   ---------------------------------------------------------------------------
                                                         35,775         26,787        14,681            -            77,243
Operating costs and expenses:
   Lease operating and production taxes ..........        9,302          6,836         2,478            -            18,616
   Depreciation, depletion, and amortization .....       12,336         14,707         5,441            -            32,484
   Proved property impairment.....................            -          2,638             -            -             2,638
   Rig operations ................................          702              -             -            -               702
   General and administrative ....................        3,742          1,720           983            -             6,445
   General and administrative (Stock-based
     Compensation)................................       (2,767)             -             -            -            (2,767)
                                                   ---------------------------------------------------------------------------
                                                         23,315         25,901         8,902            -            58,118
                                                   ---------------------------------------------------------------------------
Operating income (loss)...........................       12,460            886         5,779            -            19,125

Other (income) expense:
   Interest income ...............................       (1,242)            -             -         1,164               (78)
   Amortization of deferred financing fees........        1,907            361            -             -             2,268
   Interest expense...............................       25,086          7,117          484        (1,164)           31,523
   Other .........................................        1,052            -             -              -             1,052
                                                   ---------------------------------------------------------------------------
                                                         26,803          7,478          484             -            34,765
                                                   ------------------------------ --------------------------------------------
Income (loss) before income tax ..................      (14,343)        (6,592)       5,295             -           (15,640)
Income tax expense (benefit)......................          505            (80)       1,977             -             2,402
Minority interest in income of consolidated
   foreign subsidiary.............................            -             -         1,676             -             1,676
                                                   ------------------------------ --------------------------------------------
Net  income (loss)................................   $  (14,848)  $     (6,512)   $   1,642      $      -          $(19,718)
                                                   ============================== ============================================


                                      F-34




                       Condensed Consolidating Parent and Subsidiary Statement of Cash Flow
                                       For the year ended December 31, 2003
                                                  (In thousands)

                                                      Abraxas                                         
                                                     Petroleum                      Reclassifi          Abraxas    
                                                    Corporation     Subsidiary      -cations           Petroleum 
                                                    Inc. Parent     (New Grey          and           Corporation and 
                                                     Company(1)       Wolf)        eliminations       Subsidiaries
                                                   ----------------------------------------------------------------
Operating Activities
                                                                                                 
Net income (loss) ...........................        $    54,829    $     1,091     $       -      $      55,920
Adjustments to reconcile net income (loss)
   to net cash provided by operating
   activities:
     Gain on sale of foreign subsidiaries....            (68,933)             -             -            (68,933)
     Depreciation, depletion, and
       amortization .........................              7,608          3,195             -             10,803
     Non-cash interest and financing costs...             16,422              -             -             16,422
     Deferred income tax (benefit) expense...                  -            377             -                377
     Amortization of deferred financing fees.              1,630             48             -              1,678
     Stock-based compensation................              1,106              -             -              1,106
     Changes in operating assets and
       liabilities:
         Accounts receivable ................             (7,850)           394         6,010             (1,446)
         Equipment inventory ................                 78              -             -                 78
         Other  .............................                295              -             -                295
         Accounts payables and accrued
           expenses .........................              6,294          7,266        (6,010)             7,550
                                                   -----------------------------------------------------------------
Net cash provided by (used in)operations.....             11,479         12,371             -             23,850

Investing Activities
Capital expenditures, including purchases
   and development of properties ............             (9,194)        (9,155)            -            (18,349)
Proceeds from sale of foreign subsidiaries...             85,810              -             -             85,810
                                                   -----------------------------------------------------------------
Net cash provided (used) by investing
   activities................................             76,616         (9,155)            -             67,461

Financing Activities 
Proceeds from issuance of common stock.......                177              -             -                177
Proceeds from long-term borrowings...........             43,051            291             -             43,342
Payments on long-term borrowings ............           (131,283)        (7,261)            -           (138,544)
Deferred financing fees......................               (597)             -             -               (597)
                                                   -----------------------------------------------------------------
Net cash provided  (used) by financing
   activities................................            (88,652)        (6,970)            -            (95,622)
Effect of exchange rate changes on cash .....                  -            (78)            -                (78)
                                                   -----------------------------------------------------------------
Increase (decrease) in cash .................               (557)        (3,832)            -             (4,389)
Cash at beginning of year ...................                557          4,325             -              4,882
                                                   ----------------------------------------------------------------
Cash at end of year..........................         $        -    $       493     $       -      $         493
                                                   ============================== ==================================


                                      F-35



                 Condensed Consolidating Parent, Restricted Subsidiary and Non-Guarantor Statement of Cash Flow
                                              For the year ended December 31, 2002
                                                         (In thousands)

                                                      Abraxas                        Non-                           Abraxas
                                                     Petroleum      Restricted    Guarantor     Reclassifi-        Petroleum
                                                     Corporation    Subsidiary    Subsidiary     cations           Corporation 
                                                     Inc. Parent   (Canadian      (Old Grey        and                and
                                                      Company(2)    Abraxas)        Wolf)       eliminations      Subsidiaries
                                                   -----------------------------------------------------------------------------
Operating Activities
                                                                                                            
Net income (loss) ...........................        $   (55,172)   $  (47,873)     $ (15,482)  $        -     $     (118,527)
Adjustments to reconcile net income (loss)
   to net cash provided by operating
   activities:
     Depreciation, depletion, and
       amortization .........................              9,194         10,633         6,712            -             26,539
     Proved property impairment .............             28,178         60,501        27,314            -            115,993
     Deferred income tax (benefit) expense...                  -        (18,522)      (11,175)           -            (29,697)
     Amortization of deferred financing fees.              1,325            366           404            -              2,095
     Changes in operating assets and
       liabilities:
         Accounts receivable ................             18,088         (3,187)        1,114      (18,262)            (2,247)
         Equipment inventory ................                201              -             -            -                201
         Other  .............................                381           (177)          (78)           -                126
         Accounts payables and accrued
           expenses .........................                (47)           479        (3,251)           -             (2,819)
                                                   ------------------------------------------------------------------------------
Net cash provided by (used in)operations.....              2,148          2,220         5,555      (18,262)            (8,336)

Investing Activities
Capital expenditures, including purchases
   and development of properties ............             (5,070)        (4,926)      (28,916)           -            (38,912)
Proceeds from sale of oil and gas
   properties................................              9,725         21,789         2,362            -             33,876
                                                   ------------------------------------------------------------------------------
Net cash provided (used) by investing
   activities................................              4,655         16,863       (26,554)           -             (5,036)
Financing Activities
Proceeds from long-term borrowings...........                  -              -        20,551            -             20,551
Payments on long-term borrowings ............             (8,176)       (18,262)            -       18,262             (8,176)
Deferred financing fees......................             (1,663)           146           (22)           -             (1,539)
                                                   ------------------------------------------------------------------------------
Net cash provided  (used) by financing
   activities................................             (9,839)       (18,116)       20,529       18,262             10,836
                                                   ------------------------------------------------------------------------------
Effect of exchange rate changes on cash .....                  -            (24)         (163)           -               (187)
                                                   ------------------------------------------------------------------------------
Increase (decrease) in cash .................             (3,036)           943          (630)           -             (2,723)
Cash at beginning of year ...................              3,593          1,245         2,767            -              7,605
                                                   ------------------------------------------------------------------------------
Cash at end of year..........................       $        557    $     2,188     $   2,137   $        -     $         4,882
                                                   ==============================================================================


                                      F-36



                 Condensed Consolidating Parent, Restricted Subsidiary and Non-Guarantor Statement of Cash Flow
                                              For the year ended December 31, 2001
                                                         (In thousands)

                                                      Abraxas                        Non-                           Abraxas
                                                     Petroleum      Restricted    Guarantor     Reclassifi-        Petroleum
                                                     Corporation    Subsidiary    Subsidiary     cations           Corporation 
                                                     Inc. Parent   (Canadian      (Old Grey        and                and
                                                      Company(2)    Abraxas)        Wolf)       eliminations      Subsidiaries
                                                   -----------------------------------------------------------------------------
Operating Activities
                                                                                                            
Net income (loss) ...........................        $   (14,848)   $    (6,512)    $   1,642    $       -      $     (19,718)
Adjustments to reconcile net income (loss)
   to net cash provided by operating
   activities:
     Minority interest in income of foreign
       subsidiary............................                  -              -         1,676            -              1,676
     Loss on sale of equity investment.......                845              -             -            -                845
     Depreciation, depletion, and
       amortization .........................             12,336         14,707         5,441            -             32,484
     Proved property impairment..............                  -          2,638             -                           2,638
     Deferred income tax (benefit) expense...                  -            (80)        1,977            -              1,897
     Amortization of deferred financing fees.              1,907            361             -            -              2,268
     Stock-based compensation ...............             (2,767)             -             -            -             (2,767)
     Changes in operating assets and
       liabilities:
         Accounts receivable ................             28,804         (9,721)       (6,390)           -             12,693
         Equipment inventory ................                (76)             -             -            -                (76)
         Other  .............................               (281)             -           175            -               (106)
         Accounts payables and accrued
           expenses .........................            (12,915)        (2,254)         (402)           -            (15,571)
                                                   ------------------------------------------------------------------------------
Net cash provided (used) by operating
   activities ...............................             13,005           (861)        4,119            -             16,263
Investing Activities
Capital expenditures, including purchases
   and development of properties ............            (19,126)       (15,313)      (22,617)           -            (57,056)
Proceeds from sale of oil and gas
   properties................................              9,677         15,882         3,379            -             28,938
Acquisition of minority interest ............             (2,679)             -            -             -             (2,679)
                                                   ------------------------------------------------------------------------------
Net cash provided (used) by investing
   activities................................            (12,128)           569       (19,238)           -            (30,797)
                                                   ------------------------------------------------------------------------------
Financing Activities
Proceeds form issuance of common stock.......                 16              -             -            -                 16
Proceeds from long-term borrowings ..........             11,700              -        18,295            -             29,995
Payments on long-term borrowings ............             (9,326)             -             -            -             (9,326)
                                                   ------------------------------------------------------------------------------
Net cash provided (used) by financing                    
   activities                                              2,390              -        18,295            -             20,685
                                                   ------------------------------------------------------------------------------
                                                           3,267           (292)        3,176            -              6,151
Effect of exchange rate changes on cash .....                  -           (141)         (409)           -               (550)
                                                   ------------------------------------------------------------------------------
Increase (decrease) in cash .................              3,267           (433)        2,767            -              5,601
Cash at beginning of year ...................                326          1,678             -            -              2,004
                                                   ------------------------------------------------------------------------------
Cash at end of year..........................        $     3,593    $     1,245     $   2,767    $       -      $       7,605
                                                   ==============================================================================


 
                                      F-37


15. Business Segments

     The Company conducts its operations  through two geographic  segments,  the
United States and Canada,  and is engaged in the acquisition,  development,  and
production  of  crude  oil  and  natural  gas in  each  country.  The  Company's
significant operations are located in the Texas Gulf Coast, the Permian Basin of
western  Texas,  and Canada.  Identifiable  assets are those  assets used in the
operations  of the  segment.  Corporate  assets  consist  primarily  of deferred
financing  fees and other  property and  equipment.  The Company's  revenues are
derived primarily from the sale of crude oil,  condensate,  natural gas liquids,
and natural gas to  marketers  and refiners  and from  processing  fees from the
custom  processing  of  natural  gas.  As a general  policy,  collateral  is not
required for  receivables;  however,  the credit of the  Company's  customers is
regularly  assessed.  The  Company is not aware of any  significant  credit risk
relating to its  customers  and has not  experienced  significant  credit losses
associated with such receivables.

     In 2003, three customers  accounted for  approximately  67% of consolidated
oil  and  natural  gas  production   revenue.   Three  customers  accounted  for
approximately  80% of United  States  revenue and three  customer  accounted for
approximately  91% of revenue in Canada.  In 2002, four customers  accounted for
approximately 79% of consolidated oil and natural gas production revenue.  Three
customers  accounted  for  approximately  77% of United  States  revenue and one
customer  accounted for  approximately  80% of revenue in Canada. In 2001, three
customers  accounted  for  approximately  41% of oil and natural gas  production
revenues.  Three  customers  accounted  for  approximately  76% of United States
revenue and five customers accounted for approximately 76% of revenue in Canada.

Business segment information about the Company's 2001 operations in different
geographic areas is as follows:



                                                       U.S.               Canada              Total
                                                 ------------------  ------------------ -------------------
                                                                      (In thousands)
                                                                                            
Revenues ...................................        $      35,775       $      41,468     $       77,243
                                                 ==================  ================== ===================
Operating profit............................        $      13,795       $       6,665     $       20,460
                                                 ==================  ==================
General corporate ...............................................................                 (1,335)
Net interest expense and amortization of
   deferred financing fees ......................................................                (33,713)
Other expense....................................................................                 (1,052)
                                                                                        -------------------
Loss before income taxes.........................................................         $      (15,640)
                                                                                        ===================

Identifiable assets at December 31, 2001 ...        $     124,993       $     174,063     $      299,056
                                                 ==================  ==================
Corporate assets ...........................                                                       4,560
                                                                                        -------------------
   Total assets ............................                                              $      303,616
                                                                                        ===================
                                      F-38



Business segment information about the Company's 2002 operations in different
geographic areas is as follows:
                                                       U.S.               Canada              Total
                                                 ------------------  ------------------ -------------------
                                                                      (In thousands)
Revenues ...................................        $      21,541       $      32,779     $       54,320
                                                 ==================  ================== ===================
Operating loss..............................        $     (23,677)      $     (82,821)    $     (106,498)
                                                 ==================  ==================
General corporate ...............................................................                 (4,405)
Net interest expense and amortization of
   deferred financing fees ......................................................                (36,153)
Other expense....................................................................                 (1,168)
                                                                                        -------------------
Loss before income taxes.........................................................         $     (148,224)
                                                                                        ===================

Identifiable assets at December 31, 2002....        $      81,025       $      94,059     $      175,084
                                                 ==================  ==================
Corporate assets ...........................                                                       6,341
                                                                                        -------------------
   Total assets ............................                                              $      181,425
                                                                                        ===================

Business segment information about the Company's 2003 operations in different
geographic areas is as follows:

                                                       U.S.               Canada              Total
                                                 ------------------  ------------------ -------------------
                                                                      (In thousands)
Revenues ...................................        $      30,380       $       8,639     $       39,019
                                                 ==================  ================== ===================
Operating income............................        $      14,001       $       2,822     $       16,823
                                                 ==================  ==================
General corporate ...............................................................                 (5,281)
Net interest expense, financing cost and
   amortization of deferred financing fees ......................................                (23,009)
Gain on sale of foreign subsidiaries.............................................                 68,933
Other income (expense) - net.....................................................                   (774)
Cumulative effect of accounting change...........................................                   (395)
                                                                                        -------------------
Income before income taxes.......................................................         $       56,297
                                                                                        ===================

Identifiable assets at December 31, 2003....        $      84,228       $      37,092     $      121,320
                                                 ==================  ==================
Corporate assets ...........................                                                       5,117
                                                                                        -------------------
   Total assets ............................                                              $      126,437
                                                                                        ===================


16.  Hedging Program and Derivatives

     On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging  Activities" SFAS 133 as amended by SFAS 137 "Accounting
for Derivative  Instruments  and Hedging  Activities - Deferral of the Effective
Date of FASB 133" and SFAS 138  "Accounting for Certain  Derivative  Instruments
and Certain Hedging Activities.  Gains and losses on hedging instruments related
to accumulated  Other  Comprehensive  Income (Loss) and  adjustments to carrying
amounts on hedged production are included in natural gas or crude oil production
revenue in the period that the related production is delivered.  The Company has
not elected hedge accounting for the floors that are in place as of December 31,
2003,  accordingly,  adjustments  to the carrying value of the  instruments  are
recognized in oil and gas income in the current period.

     Under the terms of the Company's  senior credit  agreement,  the Company is
required to maintain  hedging  agreements  with respect to not less than 25% nor
more than 75% of it crude oil and natural gas production for a rolling six month
period.  The  credit  agreement  was  amended  in  February  2004,  see  Note 2,

                                      F-39


increasing the minimum hedged position to 40% of our estimated production. As of
December 31, 2003 the Company's hedging positions were as follows:

          Time Period                   Notional Quantities         Price
--------------------------------- ---------------------------- ----------------
March  1,  2003 -  February  29,  5,000 MMBtu of natural gas   Floor of $4.50
2004                              production per day

March 1, 2004 - April 30, 2004    2,000 MMBtu of natural gas   Floor of $4.00
                                  production per day
March 1, 2004 - April 30, 2004    500 Bbl of crude oil         Floor of $22.00
                                  production per day
May 2004                          2,000 MMbtu of natural gas   Floor of $4.00
                                  production per day
May 2004                          500 Bbls of crude oil        Floor of $22.00
                                  production per day
June 2004                         800 Bbls of crude oil        Floor of $22.00
                                  production per day
July 2004                         2,000 MMbtu of natural gas   Floor of $4.00
                                  production per day
July 2004                         500 Bbl of crude oil         Floor of $22.00
                                  production per day

     All hedge transactions are subject to the Company's risk management policy,
approved  by  the  Board  of  Directors.  The  Company  formally  documents  all
relationships  between hedging instruments and hedged items, as well as its risk
management  objectives  and strategy  for  undertaking  the hedge.  This process
includes  specific  identification  of the  hedging  instrument  and the  hedged
transaction,   the  nature  of  the  risk  being  hedged  and  how  the  hedging
instrument's  effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis,  the Company  assesses whether the derivatives that are
used in hedging  transactions are effective in offsetting  changes in cash flows
of hedged items.

     The fair value of the hedging  instrument was determined  based on the base
price of the hedged item and NYMEX  forward  price  quotes.  As of December  31,
2003, a commodity  price  increase of 10% would have resulted in an  unfavorable
change in the fair market value of  approximately  $2,000 and a commodity  price
decrease of 10% would have  resulted in a favorable  change in fair market value
of approximately $2,000.

17.  Proved Property Impairment

     In accordance with SEC  requirements,  the estimated  discounted future net
cash flows from proved  reserves are  generally  based on prices and costs as of
the end of the year, or  alternatively,  if prices  subsequent to that date have
increased,  a price near the  periodic  filing date of the  Company's  financial
statements.  As of December 31, 2001, the Company's net capitalized costs of oil
and gas properties  exceeded the present value of its estimated  proved reserves
by $71.3 million ($38.9 million on the U.S.  properties and $32.4 million on the
Canadian  properties).  These amounts were calculated  considering 2001 year-end
prices of $19.84  per barrel  for oil and $2.57 per Mcf for gas as  adjusted  to
reflect  the  expected  realized  prices  for each of the full cost  pools.  The
Company did not adjust its  capitalized  costs for its U.S.  properties  because
subsequent  to  December  31,  2001,  oil and gas  prices  increased  such  that
capitalized  costs for its U.S.  properties  did not exceed the present value of
the estimated proved oil and gas reserves for its U.S.  properties as determined
using increased  realized prices on March 22, 2002 of $24.16 per Bbl for oil and
$2.89 per Mcf for gas.  During the second  quarter of 2002,  the  Company  had a
ceiling limitation  write-down of approximately  $116.0 million. At December 31,
2003, the net  capitalized  cost of crude oil and natural gas properties did not
exceed the present value of our estimated  reserves,  as such, no write-down was
recorded.







                                      F-40


18.  Supplemental Oil and Gas Disclosures (Unaudited)

     The accompanying table presents information  concerning the Company's crude
oil and natural gas  producing  activities as required by Statement of Financial
Accounting   Standards  No.  69,   "Disclosures  about  Oil  and  Gas  Producing
Activities."  Capitalized costs relating to oil and gas producing activities are
as follows:



                                                                  Years Ended December 31
                                         -----------------------------------------------------------------------------------------
                                                           2002                                         2003
                                         -----------------------------------------------------------------------------------------
                                             Total          U.S.         Canada         Total                U.S.        Canada
                                         -----------------------------------------------------------------------------------------
                                                                            (In thousands)
                                                                                                           
                                                                                     
     Proved crude oil and natural
       gas properties ............       $    521,995  $    279,401   $    242,594   $    325,222      $    288,559    $    36,663
     Unproved properties .........              7,052            -           7,052          4,304                -           4,304
                                         ------------- ------------- --------------- --------------    -------------- -------------
       Total...........................       529,047       279,401        249,646        329,526           288,559         40,967
     Accumulated depreciation,
       depletion, and
       amortization, and
       impairment ................           (420,344)     (205,181)      (215,163)      (219,404)         (212,609)        (6,795)
                                        --------------    -------------- ------------- -------------   -------------- ------------
         Net capitalized costs ...       $    108,703  $     74,220  $      34,483   $    110,122      $     75,950    $    34,172
                                         ============= ============= =============== ==============    ============== =============


                                      F-41


         Cost incurred in oil and gas property acquisitions, exploration and
development activities are as follows:



                                                                    Years Ended December 31
                               ---------------------------------------------------------------------------------------------------
                                              2001                           2002                              2003
                                --------------------------------   --------------------------------   ----------------------------
                                  Total       U.S.     Canada       Total       U.S.      Canada (1)    Total     U.S.      Canada
                                ---------  --------   --------     --------  ---------    ---------   ---------  --------   ------
                                                                                            (In thousands)

   Property acquisition costs:
                                                                                                     
     Proved ...................  $     -   $   -      $    -       $   -     $    -       $    -      $    -     $    -       $   -
     Unproved .................        -       -           -           -          -            -           -          -           -
                                ---------  --------   --------     --------  ---------    ---------   ---------  --------   ------

                                 $     -   $   -      $    -       $   -     $    -       $    -      $    -     $    -       $   -
                                =========  ========   ========     ========  =========    =========   =========  ========   ======
   Property development and
     exploration costs ........  $ 56,694  $ 18,867   $ 37,827     $ 38,560  $  4,944     $ 33,616    $ 18,313   $ 9,158   $ 9,155
                                =========  ========   ========     ========  =========    =========   =========  ========   ======


         (1) Canadian costs in 2002 were primarily for exploratory purposes.


                                      F-42




         The results of operations for oil and gas producing activities for the
three years ending December 31, 2001, 2002 and 2003, respectively are as
follows:



                                                                      Years Ended December 31
                               ---------------------------------------------------------------------------------------------------
                                              2001                           2002                              2003
                                --------------------------------   --------------------------------   ----------------------------
                                  Total       U.S.     Canada       Total       U.S.      Canada (1)    Total     U.S.      Canada
                                ---------  --------   --------     --------  ---------    ---------   ---------  --------   ------
                                                                        (In thousands)

                                                                                                    
   Revenues ...................   $ 73,201   $ 34,934   $  38,267  $   50,862   $ 20,835  $  30,027  $ 38,105  $  29,710   $ 8,395
   Production costs ...........    (18,616)    (9,302)     (9,314)    (15,240)    (7,639)    (7,601)   (9,599)    (8,342)   (1,257)
   Depreciation, depletion,
     and amortization .........    (32,124)   (11,976)    (20,148)    (26,224)    (8,879)   (17,345)   (9,410)    (7,428)   (1,982)
   Proved property impairment .     (2,638)        -       (2,638)   (115,993)   (28,178)   (87,815)        -          -         -
   General and administrative .     (1,565)    (1,073)       (492)     (1,836)    (1,011)      (825)   (1,339)      (998)     (341)
   Income taxes (expense)
     benefit...................     (2,419)        -       (2,419)          -         -           -      (377)        -       (377)
                                  ---------  --------   --------     --------  ---------    ---------   ---------  --------   ------

   Results of operations from oil
    and gas producing activities
   (excluding corporate overhead
    and interest costs) ......... $ 15,839   $ 12,583   $   3,256  $ (108,431)  $(24,872) $ (83,559) $  17,380  $  12,942   $ 4,438
                                 ==========  ========   =========  ==========  =========   =========-  ========= =========  =======
   Depletion rate per barrel
     of oil equivalent, before
     impact of impairment .....   $    8.81  $   6.96   $   10.45  $     8.52   $   7.55  $    8.94  $    7.13  $    7.24   $   6.74
                                 ==========  ========   =========  ==========  =========   =========-  ========= =========  =======



                                      F-43


Estimated Quantities of Proved Oil and Gas Reserves

     The following table presents the Company's estimate of its net proved crude
oil and  natural gas  reserves as of December  31,  2001,  2002,  and 2003.  The
Company's management  emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas  properties.  Accordingly,  the  estimates are expected to change as
future  information  becomes  available.  The  estimates  have been  prepared by
independent petroleum reserve engineers.



                                                              Total                    United States                Canada
                                                     -----------------------------------------------------------------------------
                                                        Liquid      Natural         Liquid       Natural       Liquid      Natural
                                                      Hydrocarbons   Gas          Hydrocarbons     Gas       Hydrocarbons   Gas
                                                     -----------------------------------------------------------  ----------------
                                                         (Barrels)   (Mcf)        (Barrels)       (Mcf)        (Barrels)    (Mcf)
                                                                                              (In Thousands)
     Proved developed and undeveloped reserves:
                                                                                                          
       Balance at January 1, 2001...................    8,844        191,327           6,081      114,908         2,763     76,419
         Revisions of previous estimates ...........     (628)         2,944            (688)       3,318            60       (374)
         Extensions and discoveries ................    1,064         26,329             354        4,886           710     21,443
         Production ................................     (732)       (17,495)           (416)      (7,823)         (316)    (9,672)
         Sale of minerals in place .................   (1,746)       (14,348)           (924)      (6,821)         (822)    (7,527)
                                                     -----------------------------------------------------------------------------
       Balance at December 31, 2001.................    6,802        188,757           4,407      108,468         2,395     80,289
         Revisions of previous estimates ...........     (798)       (29,701)            (63)     (15,248)         (735)   (14,453)
         Extensions and discoveries ................      522         19,166               -            -           522     19,166
         Production ................................     (534)       (15,453)           (264)      (5,472)         (270)    (9,981)
         Sale of minerals in place .................   (1,387)       (23,937)           (843)      (9,553)         (544)   (14,384)
                                                     ------------------------------------------------------------------------------
       Balance at December 31, 2002 ................    4,605        138,832           3,237       78,195         1,368     60,637
         Revisions of previous estimates ...........      310          5,564             268        6,760            42     (1,196)
         Extensions and discoveries ................      654          4,474              44           28           610      4,446
         Production ................................     (288)        (6,190)           (229)      (4,781)          (59)    (1,409)
         Sale of minerals in place .................   (1,146)       (46,396)              -            -        (1,146)   (46,396)
                                                     ------------------------------------------------------------------------------
       Balance at December 31, 2003.................    4,135         96,284           3,320       80,202           815     16,082
                                                     ==============================================================================


                                      F-44




Estimated Quantities of Proved Oil and Gas Reserves (continued)



                                                               Total                    United States                Canada
                                                     -----------------------------------------------------------------------------
                                                        Liquid      Natural         Liquid       Natural       Liquid      Natural
                                                      Hydrocarbons   Gas          Hydrocarbons     Gas       Hydrocarbons   Gas
                                                     -----------------------------------------------------------  ----------------
                                                         (Barrels)   (Mcf)        (Barrels)       (Mcf)       (Barrels)    (Mcf)
     Proved developed reserves:
                                                                                                           
       December 31, 2001 ...........................    5,047       111,243        2,892         40,514        2,155        70,729
                                                    ==============================================================================

       December 31, 2002............................    3,004        90,374        1,754         34,776        1,250        55,598
                                                    ==============================================================================

       December 31, 2003............................    2,314        52,398        1,887         39,371          427        13,027
                                                    ==============================================================================








                                      F-45




Standardized  Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves

     The following  disclosures  concerning the  standardized  measure of future
cash flows from proved  crude oil and natural gas are  presented  in  accordance
with SFAS No. 69. The  standardized  measure does not purport to  represent  the
fair market value of the Company's proved crude oil and natural gas reserves. An
estimate of fair market value would also take into account, among other factors,
the recovery of reserves not classified as proved, anticipated future changes in
prices and costs, and a discount factor more representative of the time value of
money and the risks inherent in reserve estimates.

     Under the  standardized  measure,  future cash  inflows  were  estimated by
applying  period-end  prices  at  December  31,  2003  adjusted  for  fixed  and
determinable escalations,  to the estimated future production of year-end proved
reserves.  Future cash inflows were reduced by estimated  future  production and
development  costs based on year-end  costs to determine  pre-tax cash  inflows.
Future  income  taxes were  computed by applying the  statutory  tax rate to the
excess of pre-tax cash inflows over the tax basis of the  properties.  Operating
loss  carryforwards,  tax  credits,  and  permanent  differences  to the  extent
estimated  to be  available  in the future  were also  considered  in the future
income tax calculations, thereby reducing the expected tax expense.

     Future net cash  inflows  after income  taxes were  discounted  using a 10%
annual discount rate to arrive at the Standardized Measure.

     Set forth below is the Standardized  Measure relating to proved oil and gas
reserves for the three years ending December 31, 2001, 2002 and 2003.



                                                                     Years Ended December 31
                              ----------------------------------------------------------------------------------------------------
                                               2001                          2002                             2003
                              -----------------------------------------------------------------------------------------------------
                                  Total        U.S.     Canada       Total      U.S.     Canada       Total      U.S.    Canada
                              -----------------------------------------------------------------------------------------------------
                                                                                         (In thousands)

                                                                                                    
   Future cash inflows .....    $ 607,375   $ 313,640  $ 293,735  $ 686,055  $ 389,061  $296,994  $  621,290  $  512,797  $108,493
   Future production and
     development costs .....     (220,613)   (138,296)   (82,317)  (225,068)  (158,507)  (66,561)   (204,537)   (179,036)  (25,498)
   Future income tax expense            -           -         -            -          -       -            -           -         -
                              ------------------------------------------------------------------------------------------------------
   Future net cash flows ...      386,762     175,344    211,418    460,987    230,554   230,433     416,756     333,761    82,995
   Discount ................     (177,096)    (98,157)   (78,939)  (206,134)  (120,238)  (85,896)   (199,933)   (172,177)  (27,756)
                              ------------------------------------------------------------------------------------------------------
   Standardized Measure of
     discounted future net
     cash relating to proved  
     reserves ..............  $  209,666    $  77,187  $ 132,479  $ 254,853  $  110,316  $144,537 $  216,823  $  161,584  $ 55,239
                              ======================================================================================================


                                      F-46


Changes in Standardized  Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves.

         The following is an analysis of the changes in the Standardized
Measure:




                                                               Year Ended December 31
                                                       ------------------------------------
                                                             2001         2002         2003
                                                        ---------    ---------    ---------
                                                                     (In thousands)

Standardized Measure, beginning
                                                                               
  of year ............................................  $ 775,534    $ 209,666    $ 254,853
Sales and transfers of oil and gas
  produced, net of production costs ..................    (54,585)     (35,622)     (28,506)
Net changes in prices and development
  and production costs from prior year ...............   (613,325)     111,087       62,074
Extensions, discoveries, and improved
  recovery, less related costs .......................     39,982       46,803       21,819
Sales of minerals in place ...........................    (96,096)     (33,808)    (120,150)
Revision of previous quantity estimates ..............     (2,474)     (36,007)       9,061
Change in future income tax expense ..................    230,987           --           --
Other ................................................   (147,910)     (28,232)      (7,813)
Accretion of discount ................................     77,553       20,966       25,485
                                                        ---------    ---------    ---------
  Standardized Measure, end of year ..................  $ 209,666    $ 254,853    $ 216,823
                                                        =========    =========    =========


19.    Restatement

     In January 2003, the Company sold its wholly owned  Canadian  subsidiaries,
Old Grey Wolf and Canadian  Abraxas as part of a series of transactions  related
to a financial  restructuring - see Note 2 for additional  information regarding
an  exchange  offer,  redemption  of certain  notes and a new credit  agreement.
Subsequent to the issuance of its consolidated financial statements for the year
ended December 31, 2002,  the Company's  management  determined  that the wholly
owned  Canadian  subsidiaries  should not have been  presented  as  discontinued
operations.  As a result,  the  accompanying  consolidated  balance sheets as of
December 31, 2002, and the related  consolidated  statements of operations,  and
cash flows for each of the two years in the period ended  December 31, 2002 have
been restated to present the assets and liabilities,  results of operations, and
cash flows as components of continuing operations.

                                      F-47


A summary of the significant effects of the restatement is as follows (In
thousands):



                                                            For the years ended December 31,
                                           --------------------------------------------------------------------
                                                         2001                               2002
                                           ---------------------------------- ---------------------------------
                                             As Previously     As Restated     As Previously     As Restated
                                               Reported                           Reported
                                           ------------------- -------------- ---------------- ----------------
   Revenues:
                                                                                               
       Oil and gas production revenue       $        34,934   $       73,201  $        21,601  $        50,862
       Gas processing revenue                             -            2,438                -            2,420
       Rig revenue                                      756              756              635              635
       Other                                             85              848               71              403
                                               -------------     ------------    -------------    -------------
                                                     35,775           77,243           22,307           54,320
   Operating costs and expenses:
       Lease operating and
        production taxes                              9,302           18,616            7,910           15,240
       Depreciation, depletion and
        amortization                                 12,336           32,484            9,654           26,539
       Proved property impairment                         -            2,638           32,850          115,993
       Rig operations                                   702              702              567              567
       General and administrative                     4,937            6,445            5,082            6,884
       General and administrative
       (Stock-based compensation)                    (2,767)          (2,767)               -                -
                                               -------------     ------------    -------------    -------------
                                                     24,510           58,118           56,063          165,223
                                               -------------     ------------    -------------    -------------
   Operating income (loss)                           11,265           19,125          (33,756)        (110,903)
   Other (income) expense: 
       Interest income                                  (78)             (78)             (92)             (92)
       Amortization of deferred 
         financing fees                               1,907            2,268            1,325            2,095
       Interest expense                              23,922           31,523           24,689           34,150
       Financing costs                                    -                -              967              967
       (Gain) loss on sale of equity
         investment                                     845              845                -                -
       Other                                            207              207              201              201
                                               -------------     ------------    -------------    -------------
                                                     26,803           34,765           27,090           37,321
                                               -------------     ------------    -------------    -------------
   Income (loss) before income tax                  (15,538)         (15,640)          (60,846)        (148,224)
   Income tax expense (benefit):
       Current                                          505              505                -                -
       Deferred                                           -            1,897                -          (29,697)
   Minority interest in income of
   consolidated foreign
   subsidiary                                             -            1,676                -                -
   Loss from discontinued operations                (3,675)              -            (57,681)               -
                                               -------------     ------------    -------------    -------------
   Net income (loss)                        $      (19,718)   $      (19,718) $      (118,527)  $     (118,527)
                                               =============     ============    =============    =============


                                      F-48




                                                                December 31, 2002
                                                        ----------------------------------
                                                         As Previously        As Restated
                                                            Reported
                                                        -----------------     ------------
Current Assets:
                                                                                
Cash                                                 $               557   $        4,882
Accounts receivable:
    Joint owners                                                     516            2,215
    Oil and gas production sales                                   5,292            7,466
    Other                                                            221              364
                                                        -----------------     ------------
                                                                   6,029           10,045
Equipment inventory                                                1,021            1,014
Other current assets                                                 316            1,240
                                                          -----------------     ------------
                                                                   7,923           17,181
Assets held for sale                                              74,247                -
                                                        -----------------     ------------
    Total current assets                                          82,170           17,181
Property and equipment:
    Oil and gas properties:
         Proved                                                  298,972          521,995
        Unproved                                                   7,052            7,052
    Other property and equipment                                   2,713           44,189
                                                        -----------------     ------------
          Total                                                  308,737          573,236
    Less accumulated depreciation, depletion
     and amortization                                            212,811          422,842
                                                        -----------------     ------------
        Total property and equipment - net                        95,926          150,394
Deferred financing fees                                            2,970            5,671
Deferred income taxes                                                  -            7,820
Other                                                                359              359
                                                        -----------------     ------------
    Total assets                                     $           181,425   $      181,425
                                                        =================     ============


Current Liabilities:
Accounts payable                                     $             4,171   $        9,687
Joint interest oil and gas production payable                      1,637            2,432
Accrued interest                                                   5,000            6,009
Other accrued expenses                                             1,162            1,162
Hedge liability                                                        -                -
Current maturities of long-term debt                              63,500           63,500
                                                        -----------------     ------------
                                                                  75,470           82,790
Liabilities related to assets held for sale                       56,697                -
                                                        -----------------     ------------
    Total current liabilities                                    132,167           82,790
Long-term debt                                                   190,979          236,943
Deferred income taxes                                                  -                -
Future site restoration                                              533            3,946
Stockholders' equity (deficit)                                  (142,254)        (142,254)
                                                        -----------------     ------------
    Total liabilities and stockholders' deficit     $            181,425  $      181,425
                                                        =================     ============


                                      F-49



                          Abraxas Petroleum Corporation
                      Condensed Consolidated Balance Sheets

                                                              September 30,
                                                                  2004              December 31,
                                                               (Unaudited)              2003
                                                             ----------------     ----------------
                                                                         (in thousands)
                                                                                      
Assets:
Current assets:
   Cash............................................       $           3,601  $              493
   Accounts receivable, less allowances for
     doubtful accounts:
       Joint owners................................                     463               1,360
       Oil and gas production......................                   3,951               5,873
       Other.......................................                     390               1,090
                                                             ---------------      ----------------
                                                                      4,804               8,323

   Equipment inventory                                                  694                 782
   Other current assets............................                     588                 572
                                                             ---------------      ----------------
      Total current assets.........................                   9,687              10,170

Property and equipment:
   Oil and gas properties, full cost method of accounting:
     Proved........................................                 340,793             325,222
     Unproved, not subject to amortization.........                   2,715               4,304
   Other property and equipment....................                   3,024               4,540
                                                             ---------------      ----------------
        Total......................................                 346,532             334,066
     Less accumulated depreciation, depletion, and
     amortization..................................                 232,299             222,503
                                                             ---------------      ----------------
     Total property and equipment--net.............                 114,233             111,563

Deferred financing fees, net.......................                   4,853               4,410

Other assets.......................................                     294                 294
                                                             ---------------      ----------------
     Total assets..................................       $         129,067  $          126,437
                                                             ===============      ================


         See accompanying notes to condensed consolidated financial statements



                                   F-50




                          Abraxas Petroleum Corporation
                Condensed Consolidated Balance Sheets (continued)

                                                                      September 30,         December 31,
                                                                           2004
                                                                       (unaudited)              2003
                                                                     -----------------    -----------------
                                                                                (in thousands)
                                                                                               
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable...........................................       $          3,557     $           6,756
Oil and gas production payable.............................                  2,263                 2,290
Accrued interest...........................................                  5,492                 2,340
Other accrued expenses.....................................                  1,862                 1,228
                                                                     -----------------    -----------------
     Total current liabilities.............................                 13,174                12,614

Long-term debt.............................................                190,516               184,649

Future site restoration....................................                  1,764                 1,377
                                                                     -----------------    -----------------
     Total liabilities.....................................                205,454               198,640
                                                                     -----------------    -----------------

Stockholders' equity (deficit):
   Common Stock, par value $.01 per share-
   Authorized 200,000,000 shares; issued, 36,378,816 and
     36,024,308 at September 30, 2004 and December 31,
     2003 respectively.....................................                    364                   360
   Additional paid-in capital..............................                143,076               141,835
   Accumulated deficit.....................................               (220,527)             (213,701)
   Receivables from stock sales............................                      -                   (97)
   Treasury stock, at cost, 105,989 and 165,883 shares at
     September 30, 2004 and December 31, 2003 respectively.
                                                                              (549)                 (964)
   Accumulated other comprehensive loss....................                  1,249                   364
                                                                     -----------------    -----------------
     Total stockholders' deficit...........................                (76,387)              (72,203)
                                                                     -----------------    -----------------
Total liabilities and stockholders' equity (deficit).......       $        129,067     $         126,437
                                                                     =================    =================


         See accompanying notes to condensed consolidated financial statements



                                      F-51



                          Abraxas Petroleum Corporation
                      Consolidated Statements of Operations
                                   (Unaudited)

                                                             Three Months Ended              Nine Months Ended
                                                                September 30,                  September 30,
                                                        ------------------------------ -------------------------------
                                                             2004            2003           2004            2003
                                                        ---------------  ------------- ---------------- --------------
                                                                    (in thousands, except per share data)
Revenue:
                                                                                                   
   Oil and gas production revenues.............     $        11,478   $      8,244   $     34,249     $     29,277
   Gas processing revenues.....................                   -              -              -              132
   Rig revenues................................                 214            156            518              495
   Other.......................................                  91             30            218               67
                                                        --------------- -------------- ---------------- --------------
                                                             11,783          8,430         34,985           29,971
Operating costs and expenses:
   Lease operating and production taxes........               2,646          2,372          9,318            7,164
   Depreciation, depletion, and amortization...               3,141          2,418          9,398            7,861
   Rig operations..............................                 174            129            442              443
   General and administrative..................               1,245          1,143          4,813            3,769
   Stock-based compensation....................               1,375           (326)         1,122              467
                                                        --------------- -------------- ---------------- --------------
                                                              8,581          5,736         25,093           19,704
                                                        --------------- -------------- ---------------- --------------
Operating income ..............................               3,202          2,694          9,892           10,267

Other (income) expense:
   Interest income.............................                  (4)            (5)           (12)             (22)
   Interest expense............................               4,313          3,911         13,700           12,921
   Amortization of deferred financing fees.....                 468            433          1,380            1,244
   Financing cost..............................                  68            581          1,641            4,182
   Gain on sale of foreign subsidiaries........                   -           (298)             -          (67,258)
   Other expense...............................                   -            774             11              774
                                                        --------------- -------------- ---------------- --------------
                                                              4,845          5,396         16,720          (48,159)
                                                        --------------- -------------- ---------------- --------------
Earnings (loss) before cumulative effect of                  
   accounting change and taxes.................              (1,643)        (2,702)        (6,828)          58,426

Cumulative effect of accounting change.........                   -              -              -             (395)
Income tax expense ............................                   -              -              -             (377)
                                                        --------------- -------------- ---------------- --------------
Net earnings (loss)............................     $        (1,643)   $     (2,702)  $     (6,828)    $    57,654
                                                        =============== ============== ================ ==============

Basic earnings (loss) per common share:
   Net earnings (loss).........................               (0.05)          (0.08)         (0.19)           1.64
   Cumulative effect of accounting change......                -                 -              -            (0.01)
                                                        --------------- -------------- ---------------- --------------
Net earnings (loss) per common share--basic.....     $        (0.05)   $      (0.08)   $     (0.19)    $      1.63
                                                        =============== ============== ================ ==============

Diluted earnings (loss) per common share:
   Net earnings (loss).........................               (0.05)          (0.08)         (0.19)           1.61
   Cumulative effect of accounting change......                -                 -               -           (0.01)
                                                        --------------- -------------- ---------------- --------------
Net earnings (loss) per common share--diluted...     $        (0.05)   $      (0.08)   $     (0.19)   $       1.60
                                                        =============== ============== ================ ==============


         See accompanying notes to condensed consolidated financial statements



                                      F-52



                          Abraxas Petroleum Corporation
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

                                                                      Nine Months Ended September 30,
                                                                     ----------------------------------
                                                                        2004                 2003
                                                                     -------------       --------------
                                                                              (in thousands)
Operating Activities
                                                                                          
Net income (loss).........................................       $        (6,828)     $      57,654
Adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating activities:
Depreciation, depletion, and amortization.................                 9,398              7,861
Deferred income tax (benefit) expense.....................                     -                377
Accretion of future site restoration......................                   387                  -
Amortization of deferred financing fees...................                 1,380              1,244
Non-cash interest and financing cost......................                 9,114              7,989
Stock-based compensation..................................                 1,122                467
Gain on sale of foreign subsidiaries......................                     -            (67,258)
Changes in operating assets and liabilities:
     Accounts receivable..................................                 3,499                954
     Equipment inventory..................................                    88                130
     Other................................................                  (150)               681
     Accounts payable and accrued expenses................                (2,704)              (512)
                                                                     --------------      --------------
Net cash provided by operating activities.................                15,306              9,587
                                                                     --------------      --------------

Investing Activities
Capital expenditures, including purchases and development
   of properties..........................................               (10,985)           (16,327)
Proceeds from sale of foreign subsidiaries................                   -               86,851
                                                                     --------------      --------------
Net cash provided by (used in) investing activities.......               (10,985)            70,524
                                                                     --------------      --------------

Financing Activities
Proceeds from long-term borrowings........................                 6,500             52,688
Payments on long-term borrowings..........................                (6,600)          (133,344)
Proceeds from stock sale receivable.......................                    98                  -
Issuance of stock for compensation........................                   328
Deferred financing fees...................................                (1,823)            (2,458)
Exercise of stock options.................................                   209                 48
Other.....................................................                     -                 92
                                                                     --------------      --------------
Net cash used in financing activities.....................                (1,288)           (82,974)
                                                                     --------------      --------------
Effect of exchange rate changes on cash...................                    75                409
                                                                     --------------      --------------
(Decrease) increase in cash...............................                 3,108             (2,454)

Cash, at beginning of period..............................                   493              4,882
                                                                     --------------      --------------

Cash, at end of period....................................        $        3,601      $       2,428
                                                                     ==============      ==============

Supplemental disclosures of cash flow information:
Cash interest paid........................................        $        3,714      $       3,298
                                                                     ==============      ==============

Non-cash items:
Future site restoration...................................        $          244      $      (3,065)
                                                                     ==============      ==============


         See accompanying notes to condensed consolidated financial statements

                                      F-53

                          Abraxas Petroleum Corporation
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)
              (tabular amounts in thousands, except per share data)

Note 1.  Basis of Presentation

        Theaccounting policies followed by Abraxas Petroleum Corporation and its
subsidiaries  (the  "Company"  or  "Abraxas")  are set forth in the notes to the
Company's audited  financial  statements in the Annual Report on Form 10-K filed
for the year ended December 31, 2003. Such policies have been continued  without
change.  Also,  refer to the notes to those financial  statements for additional
details of the Company's financial  condition,  results of operations,  and cash
flows. All the material items included in those notes have not changed except as
a result of normal  transactions  in the interim,  or as  disclosed  within this
report. The accompanying interim consolidated financial statements have not been
audited by independent  accountants,  but in the opinion of management,  reflect
all adjustments  necessary for a fair presentation of the financial position and
results of  operations.  Any and all  adjustments  are of a normal and recurring
nature.  The results of operations for the three and nine months ended September
30, 2004 are not  necessarily  indicative of results to be expected for the full
year.

        The  consolidated  financial  statements  include  the  accounts  of the
Company and its  wholly-owned  foreign  subsidiary,  Grey Wolf  Exploration Inc.
("Grey Wolf").  In January 2003, the Company sold all of the common stock of its
wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited ("Canadian
Abraxas") and Grey Wolf Exploration Inc. ("Old Grey Wolf").  Certain oil and gas
properties  were  retained  and  transferred   into  New  Grey  Wolf  which  was
incorporated  in January 2003. The  operations of Canadian  Abraxas and Old Grey
Wolf are included in the consolidated  financial  statements through January 23,
2003.  This  restructuring  is sometimes  referred to herein as the January 2003
financial restructuring.

        Grey Wolf's assets and  liabilities  are  translated to U.S.  dollars at
period-end  exchange  rates.  Income and expense items are translated at average
rates of exchange  prevailing  during the period.  Translation  adjustments  are
accumulated as a separate component of shareholders' equity.

         Stock-based Compensation:

         The Company accounts for stock-based  compensation  using the intrinsic
value method  prescribed in Accounting  Principles Board Opinion ("APB") No. 25,
"Accounting  for  Stock  Issued  to  Employees"  ,and  related  interpretations.
Accordingly,  compensation  cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's  stock at the date of the grant
over the amount an employee must pay to acquire the stock.

        Effective  July  1,  2000,  the  Financial  Accounting  Standards  Board
("FASB")  issued FIN 44,  "Accounting for Certain  Transactions  Involving Stock
Compensation",  an  interpretation  of APB No.  25.  Under  the  interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998,  and were not exercised  prior to July 1, 2000,  require that
the awards be accounted for as variable until they are exercised,  forfeited, or
expired.  In January 2003,  the Company  amended the exercise  price to $0.66 on
certain options with an existing  exercise price greater than $0.66. The Company
recognized  expense  of  approximately  $326,000  and a credit of  approximately
$467,000   during  the  quarter  and  nine  months  ended  September  30,  2003,
respectively,   as  stock-based   compensation   expense  in  the   accompanying
consolidated  financial  statements.  For the  quarter  and  nine  months  ended
September 30, 2004 the Company recognized  Stock-based  compensation  expense of
approximately $1.4 million and $1.1 million, respectively, due to an increase in
the price of its common stock during the period.

        Pro forma  information  regarding net income (loss) and earnings  (loss)
per share is required by SFAS 123,  "Accounting  for  Stock-Based  Compensation"
(SFAS 123),  which also  requires that the  information  be determined as if the
Company has  accounted  for its employee  stock  options  granted  subsequent to


                                      F-54


December 31, 1995 under the fair value method  prescribed  by SFAS 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option  pricing model with the following  weighted-average  assumptions  for the
quarter and nine months ended  September 30, 2004 and 2003,  risk-free  interest
rates of 1.5%; dividend yields of -0-%; volatility factor of the expected market
price of the Company's  common stock of 0.35;  and a  weighted-average  expected
life of the option of ten years.

        The  Black-Scholes  option  valuation  model  was  developed  for use in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

        In October  2002,  the FASB issued  Statement  No. 148  "Accounting  for
Stock-Based  Compensation-Transition and Disclosure",  (SFAS No. 148), providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based  employee  compensation.  SFAS No. 148 also
amends the disclosure  requirement of SFAS No. 123,  "Accounting for Stock-Based
Compensation" to include  prominent  disclosures in annual and interim financial
statements  about the method of accounting for stock-based  compensation and the
effect  of the  method  used  on  reported  results.  The  Company  adopted  the
disclosure provisions of SFAS No. 148 on December 31, 2002.

        Had the Company determined  stock-based  compensation costs based on the
estimated fair value at the grant date for its stock options,  the Company's net
income  (loss) per share for the three and nine months ended  September 30, 2004
and 2003 would have been:



                                                Three Months Ended               Nine Months Ended
                                                   September 30,                   September 30,
                                              ------------------------      ----------------------------
                                                2004           2003           2004              2003
                                              ---------      ---------      ----------       -----------
                                                                                       
Net income (loss) as reported              $    (1,643)   $   (2,702)    $    (6,828)     $     57,654
Add: Stock-based employee compensation
   expense included in reported net
   income, net of related tax effects            1,375          (326)          1,122               467
Deduct: Total stock-based employee
   compensation expense determined under
   fair value based method for all
   awards, net of related tax effects              (30)          (68)           (101)            (206)
                                              ---------      ---------      ----------       -----------
Pro forma net income (loss)                $      (298)   $   (3,096)    $    (5,807)     $     57,915
                                              =========      =========      ==========       ===========

Earnings (loss) per share:
   Basic--as reported                      $     (0.05)   $    (0.08)    $     (0.19)     $       1.64
                                              =========      =========      ==========       ===========
   Basic--pro forma                        $     (0.01)   $    (0.09)    $     (0.16)     $       1.65
                                              =========      =========      ==========       ===========
   Diluted--as reported                    $     (0.05)   $    (0.08)    $     (0.19)     $       1.61
                                              =========      =========      ==========       ===========
   Diluted--pro forma                      $     (0.01)   $    (0.09)    $     (0.16)     $       1.62
                                              =========      =========      ==========       ===========


         Certain prior year balances have been reclassified for comparative
purposes.

Note 2.  Income Taxes

        The Company records income taxes using the liability method.  Under this
method,  deferred tax assets and liabilities are determined based on differences
between  financial  reporting  and tax base of assets  and  liabilities  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences are expected to reverse.

                                      F-55


        For the period ended September 30, 2004, there is no current or deferred
income tax expense or benefit due to losses or loss  carryforwards and valuation
allowance which has been recorded against such benefits.

Note 3.  Recent Events

        On October  21,  2004,  the  Company,  its  subsidiaries  Eastside  Coal
Company,  Inc., Sandia Oil & Gas Corporation,  Sandia Operating Corp., Wamsutter
Holdings,  Inc. and Western  Associated Energy  Corporation  (collectively,  the
"Subsidiary  Guarantors")  and  Guggenheim  Capital  Markets,  LLC (the "Initial
Purchaser"),  entered  into a Purchase  Agreement to issue and sell in a private
placement,  for resale  under Rule 144A,  Rule  501(a) and  Regulation  S of the
Securities  Act of  1933,  as  amended  (the  "Securities  Act"),  $125  million
aggregate principal amount of floating rate senior secured notes due 2009 of the
Company (the "New Notes").  Consummation of the transactions  contemplated under
the Purchase Agreement occurred on October 28, 2004.

        The New Notes.  The New Notes will  mature on December 1, 2009 and began
accruing  interest  from the date of  issuance,  October 28, 2004 at a per annum
floating rate of 6-month LIBOR plus 7.50%.  The initial interest rate on the New
Notes is 9.72% per annum. The interest will be reset  semi-annually on each June
1 and December 1, commencing on June 1, 2005. Interest is payable  semi-annually
in arrears on June 1 and December 1 of each year, commencing on June 1, 2005.

        The  New  Notes  rank  equally  among  themselves  and  with  all of the
Company's  unsubordinated and unsecured  indebtedness,  including the New Credit
Facility  (as  defined  below) and  senior in right of payment to the  Company's
existing and future  subordinated  indebtedness,  including  the Bridge Loan (as
defined below).

        Each  of  the  Subsidiary  Guarantors  has  unconditionally  guaranteed,
jointly and  severally,  the  payment of the  principal,  premium  and  interest
(including any additional interest) on, the New Notes on a senior secured basis.
In addition,  any other  subsidiary  or affiliate of the Company,  including the
Company's wholly-owned Canadian subsidiary,  Grey Wolf Exploration Inc., that in
the future guarantees any other indebtedness with the Company, or its restricted
subsidiaries,  will also be required to  guarantee  the New Notes.  Except under
limited  circumstances,  the New Notes are not  guaranteed by Grey Wolf, and are
structurally  subordinated  in  right  to  payment  to all  of its  obligations,
including  Grey  Wolf's  new $35  million  senior  secured  term  loan and trade
payables and other debt of Grey Wolf.

        The  New  Notes  and  the  Subsidiary  Guarantors'  guarantees  thereof,
together with the New Credit Facility and the Subsidiary  Guarantors' guarantees
thereof,  are secured by shared first  priority  perfected  security  interests,
subject to certain permitted  encumbrances,  in all of the Company's and each of
its   restricted   subsidiaries'   material   property  and  assets,   including
substantially  all of their natural gas and crude oil  properties and all of the
capital stock (or in the case of an unrestricted subsidiary that is a controlled
foreign corporation,  up to 65% of the outstanding capital stock) of any entity,
other than Grey  Wolf,  owned by the  Company  and its  restricted  subsidiaries
(collectively,  the  "Collateral").  The New Notes are not secured by any of the
property or assets of Grey Wolf (unless it becomes a restricted subsidiary). The
shares of capital  stock of Grey Wolf owned by the Company do not  constitute  a
part of the Collateral.

        After April 28, 2007, the Company may redeem all or a portion of the New
Notes at the  redemption  prices set forth in the  Indenture,  plus  accrued and
unpaid  interest to the date of redemption.  Prior to that date, the Company may
redeem up to 35% of the  aggregate  original  principal  amount of the New Notes
using the net  proceeds  of one or more  equity  offerings,  in each case at the
redemption  price  equal to the product of (i) the  principal  amount of the New
Notes being so redeemed and (ii) a redemption  price factor of 1.00 plus the per
annum interest rate on the New Notes  (expressed as a decimal) on the applicable
redemption  date plus accrued and unpaid  interest to the applicable  redemption
date, provided certain conditions are also met.

                                      F-56

        If the Company  experiences  specific kinds of change of control events,
each  holder of New Notes may  require  the  Company  to  repurchase  all or any
portion  of such  holder's  New Notes at a purchase  price  equal to 101% of the
principal amount of the New Notes,  plus accrued and unpaid interest to the date
of repurchase.

        The Indenture  governing the New Notes contains  covenants  that,  among
other things, limit the Company's ability to:

            o  incur or  guarantee  additional  indebtedness  and issue  certain
               types of preferred stock or redeemable stock;

            o  transfer or sell assets;

            o  create liens on assets;

            o  pay  dividends or make other  distributions  on capital  stock or
               make other restricted payments, including repurchasing, redeeming
               or retiring capital stock or subordinated  debt or making certain
               investments or acquisitions;

            o  engage in transactions with affiliates;

            o  guarantee other indebtedness;

            o  permit  restrictions  on  the  ability  of  its  subsidiaries  to
               distribute or lend money to the Company;

            o  cause a restricted subsidiary to issue or sell its capital stock;
               and

            o  consolidate,  merge or transfer all or  substantially  all of the
               consolidated   assets   of  the   Company   and  its   restricted
               subsidiaries.

         The Indenture  also  contains  customary  events of default,  including
nonpayment of principal or interest,  violations of covenants, cross default and
cross  acceleration  to certain  other  indebtedness,  including  the New Credit
Facility (as defined below) and Bridge Loan (as defined below),  bankruptcy, and
material judgments and liabilities.

         New  Credit  Facility.  On  October  28,  2004,  the  Company  and  the
Subsidiary  Guarantors  entered  into  a new  senior  secured  revolving  credit
facility with Wells Fargo Foothill,  Inc., as arranger and administrative  agent
and the lenders signatory thereto (the "New Credit Facility").

         The New Credit Facility has a maximum commitment of $15 million,  which
includes  an  available  $2.5  million   subfacility   for  letters  of  credit.
Availability  under the New  Credit  Facility  is subject  to a  borrowing  base
consistent  with  normal  and  customary  natural  gas  and  crude  oil  lending
transactions. Outstanding amounts under the New Credit Facility bear interest at
the prime rate announced by Wells Fargo Bank,  National  Association plus 1.00%.
Subject to earlier  termination  rights  and events of  default,  the New Credit
Facility's stated maturity date is October 28, 2008. The Company is permitted to
terminate  the New Credit  Facility,  and under  certain  circumstances,  may be
required,  from time to time,  to  permanently  reduce  the  lenders'  aggregate
commitment  under  the New  Credit  Facility.  Such  termination  and each  such
reduction  is  subject  to a  premium  equal  to  the  percentage  listed  below
multiplied by the lenders'  aggregate  commitment under the New Credit Facility,
or, in the case of a partial reduction, the amount of such reduction.


                                     Year           % Premium
                                 ------------      -------------------
                                       1                  1.5
                                       2                  1.0
                                       3                  0.5
                                       4                  0.0

                                      F-57


         Each of the  Subsidiary  Guarantors  has  guaranteed,  and  each of the
Company's  future  restricted   subsidiaries   will  guarantee,   the  Company's
obligations  under  the New  Credit  Facility  on a  senior  secured  basis.  In
addition, any other subsidiary or affiliate of the Company, including Grey Wolf,
that in the future  guarantees any other  indebtedness  of the Company or of its
restricted  subsidiaries will be required to guarantee the Company's obligations
under the New Credit  Facility.  Obligations  under the New Credit  Facility are
secured,  together  with the New Notes,  by a shared  first  priority  perfected
security  interest,  subject to certain  permitted  encumbrances,  in all of the
Company's and each of its restricted subsidiaries' material property and assets,
including the Collateral.

         Under the New Credit  Facility,  the  Company  is subject to  customary
covenants, including certain financial covenants and reporting requirements. The
New Credit Facility requires the Company to maintain a minimum net cash interest
coverage ratio and also requires the Company to enter into hedging agreements of
not less than 25% or more than 75% of the  Company's  projected  natural gas and
crude oil production.

         In addition to the foregoing  and other  customary  covenants,  the New
Credit  Facility  contains  a number of  covenants  that,  among  other  things,
restrict the Company's ability to:

            o  incur or  guarantee  additional  indebtedness  and issue  certain
               types of preferred stock or redeemable stock;

            o  transfer or sell assets;

            o  create liens on assets;

            o  pay  dividends or make other  distributions  on capital  stock or
               make other restricted payments, including repurchasing, redeeming
               or retiring capital stock or subordinated  debt or making certain
               investments  or  acquisitions;  

            o  engage in transactions with affiliates;

            o  guarantee other indebtedness;

            o  make any change in the principal nature of its business;

            o  prepay,  redeem,  purchase or otherwise acquire any of its or its
               restricted subsidiaries' indebtedness;

            o  permit a change of control;

            o  directly or indirectly make or acquire any investment;

            o  cause a restricted subsidiary to issue or sell its capital stock;
               and

            o  consolidate,  merge or transfer all or  substantially  all of the
               consolidated   assets   of  the   Company   and  its   restricted
               subsidiaries.

         The New Credit  Facility  also  contains  customary  events of default,
including  nonpayment of principal or interest,  violations of covenants,  cross
default and cross  acceleration  to certain other  indebtedness,  bankruptcy and
material judgments and liabilities, and is subject to an Intercreditor, Security
and Collateral Agency Agreement (the "Intercreditor  Agreement") which specifies
the rights of the parties thereto to proceeds from the Collateral.

         Bridge  Loan.  On October 28,  2004,  the Company  borrowed $25 million
under a $25 million  second  lien  increasing  rate bridge loan with  Guggenheim
Corporate  Funding,  LLC, as arranger and  administrative  agent and the lenders
signatory  thereto (the "Bridge  Loan").  Interest on the Bridge Loan  currently
accrues  at a rate of 12% per annum  until  October  28,  2005,  and is  payable
monthly in cash. Interest on the Bridge Loan will thereafter accrue at a rate of
15% per annum,  and will be  payable  in-kind.  Subject  to earlier  termination

                                      F-58


rights and events of default,  the Bridge Loan's stated maturity date is October
28, 2010. The Company's  obligations under the Bridge Loan are guaranteed by the
Subsidiary Guarantors and each of the Company's future restricted  subsidiaries.
Obligations  under the Bridge  Loan are secured by a second  priority  perfected
security  interest,  subject to certain permitted  encumbrances,  and all of the
Company's and each of its restricted  subsidiaries'  material  property  assets,
including the Collateral.

         The Bridge Loan is also secured by a first priority  perfected security
interest  in all of the  stock  of  Grey  Wolf  owned  by the  Company  and  its
restricted  subsidiaries.  The  Bridge  Loan  provides  for the  release of such
security  interest  in  connection  with a sale of such stock by the  Company as
permitted by the terms of the Bridge Loan, but not a distribution thereof to the
Company's shareholders.  Except under limited circumstances,  the Bridge Loan is
not  directly  secured by any of the  property or assets of Grey Wolf (unless it
becomes a restricted subsidiary).

         Any  prepayment  of principal on the Bridge Loan will be repaid with an
additional  amount equal to the principal  amount being so paid  multiplied by a
repayment  factor.  The  repayment  factor  is  currently  equal to  1.025  and,
following July 28, 2005, will increase monthly by 0.03.

         If the Bridge Loan is not fully repaid by January 28, 2006,  so long as
an event of default does not exist  thereunder or under the New Credit  Facility
or the New Notes,  the Bridge  Loan  lenders  will have the right to require the
Company and its restricted  subsidiaries  to consummate one or more asset sales.
Each  such  asset  sold will be  required  to be at a fair  market  value and to
generate  at least 80% of the  proceeds  in cash or cash  equivalence.  Net cash
proceeds from each such asset sale (other than with respect to any stock of Grey
Wolf,  which  will be  exclusively  applied  to repay the  Bridge  Loan) will be
applied by the Company and its restricted  subsidiaries in the following  order,
to the extent available to:

         first,  pay any  interest  then due and  payable  under the New  Credit
                 Facility;

         second, pay any interest then due and payable on the New Notes; 

         third,  pay any accrued and unpaid  interest on the New Credit Facility
                 that was not paid under clause "first" of this paragraph;

         fourth, to pay any outstanding principal of the New Credit Facility;

         fifth,  if the remaining  aggregate  amount of such net cash  proceeds,
                 together  with any net cash  proceeds  in the Bridge Loan asset
                 sale proceeds account from a previous asset sale consummated in
                 accordance  with  the  provisions  described  in the  Indenture
                 exceeds  $5.0  million,  the entire  amount in the Bridge  Loan
                 asset  sale  proceeds  account  is to be  used  to  make  a net
                 proceeds  offer to  purchase  New Notes from all holders of the
                 New  Notes as if such net cash  proceeds  remaining  after  any
                 payment made pursuant to clause "first,"  "second,"  "third" or
                 "fourth"  above,  and any other net cash proceeds in the Bridge
                 Loan asset sale proceeds account, are excess proceeds; and

         sixth,  after the  payment of all amounts  required  by a net  proceeds
                 offer made in accordance with clause "fifth" above to repay all
                 amounts outstanding under the Bridge Loan.

         Under the Bridge Loan, the Company is subject to substantially the same
covenants  and  reporting  requirements,  and  substantially  the same events of
default, as are set forth in the New Credit Facility.

         Intercreditor  Agreement.  The holders of the New Notes,  together with
the lenders under the Company's New Credit Facility and Bridge Loan, are subject
to the Intercreditor Agreement. The Intercreditor Agreement, among other things,
(i) creates security  interests in the Collateral in favor of a collateral agent
for the benefit of the holders of the New Notes, the New Credit Facility lenders

                                      F-59


and the Bridge Loan lenders and (ii) governs the priority of payments among such
parties upon notice of an event of default under the  Indenture,  the New Credit
Facility or the Bridge Loan.

         So long as no such event of default exists,  the collateral  agent will
not collect  payments  under the New Credit  Facility  documents,  the indenture
governing the New Notes (the  "Indenture")  and other New Note  documents or the
Bridge Loan documents (collectively,  the "Secured Documents"), and all payments
will be made directly to the respective  creditor  under the applicable  Secured
Document. Upon notice of such an event of default and for so long as an event of
default exists,  payments to each New Credit Facility lender,  holder of the New
Notes and Bridge Loan lender from the Company and the Subsidiary Guarantors, and
proceeds  from any  disposition  of any  collateral,  will,  subject  to limited
exceptions,  be collected by the collateral  agent for deposit into a collateral
account and then distributed as provided in the following  paragraph,  provided,
that, any payment made with proceeds from the sale or other  disposition of Grey
Wolf stock will be applied exclusively to pay amounts with respect to the Bridge
Loan, and no such proceeds will be deposited into the collateral account or will
be subject to the payment priority described in the following paragraph.

         Upon  notice of any such  event of  default  and so long as an event of
default  exists,  funds in the  collateral  account will be  distributed  by the
collateral agent generally in the following order of priority:

         first,     to reimburse the collateral  agent for expenses  incurred in
                    protecting and realizing upon the value of the Collateral;

         second,    to reimburse the New Credit Facility  administrative  agent,
                    the trustee and the Bridge Loan  administrative  agent, on a
                    pro rata basis,  for  expenses  incurred in  protecting  and
                    realizing  upon the  value of the  Collateral  while  any of
                    these  parties was acting on behalf of the Control Party (as
                    defined below);

         third,     to reimburse the New Credit Facility  administrative  agent,
                    the trustee and the Bridge Loan  administrative  agent, on a
                    pro rata basis,  for  expenses  incurred in  protecting  and
                    realizing  upon the  value of the  Collateral  while  any of
                    these parties was not acting on behalf of the Control Party;

         fourth,    to pay all accrued and unpaid  interest (and then any unpaid
                    commitment fees) under the New Credit Facility;

         fifth,     if,  the  collateral  coverage  value  of  three  times  the
                    outstanding  obligations under the New Credit Facility would
                    be met after giving  effect to any payment under this clause
                    "fifth," to pay all  accrued and unpaid  interest on the New
                    Notes;

         sixth,     to pay all  outstanding  principal  of (and  then any  other
                    unpaid amounts,  including,  without  limitation,  any fees,
                    expenses,  premiums and  reimbursement  obligations) the New
                    Credit Facility;

         seventh,   to pay all accrued and unpaid  interest on the New Notes (if
                    not paid under clause "fifth");

         eighth,    to pay all  outstanding  principal  of (and  then any  other
                    unpaid amounts,  including,  without limitation, any premium
                    with respect to) the New Notes;

         ninth,     to pay the  Bridge  Loan  lenders  all  accrued  and  unpaid
                    interest under the Bridge Loan;
         
         tenth,     to pay all  outstanding  principal  of (and  then any  other
                    unpaid amounts,  including,  without limitation, any premium
                    with respect to) the Bridge Loan; and

                                      F-60



         eleventh,  to pay each New Credit  Facility  lender,  holder of the New
                    Notes,  Bridge Loan lender and other secured party, on a pro
                    rata  basis,  all other  amounts  outstanding  under the New
                    Credit Facility, the New Notes and the Bridge Loan.

         To the  extent  there  exists  any  excess  monies or  property  in the
collateral  account  after all  obligations  of the Company  and the  Subsidiary
Guarantors  under the New Credit  Facility,  the Indenture and the New Notes and
the Bridge  Loan are paid in full,  the  collateral  agent will be  required  to
return such excess to the Company.

         The  collateral  agent will act in  accordance  with the  Intercreditor
Agreement and as directed by the "Control Party". Prior to the occurrence of any
such event of default,  the "Control Party" will be the holders of the New Notes
and the New Credit  Facility  lenders,  acting as a single class, by vote of the
holders  of  a  majority  of  the  aggregate  principal  amount  of  outstanding
obligations under the New Notes and the New Credit Facility.  Upon notice of any
such event of default, the Bridge Loan lenders will be the Control Party for 240
days  following such notice.  If a stay under the Bankruptcy  Code occurs during
such 240-day  period,  that period will be extended by the number of days during
which that stay was effective. If the New Credit Facility lenders and holders of
the New Notes  have not been paid in full by the end of such  specified  period,
they will become the Control  Party,  acting as a single  class,  by vote of the
holders  of  a  majority  of  the  aggregate  principal  amount  of  outstanding
obligations under the New Notes and the New Credit Facility.

         The  Intercreditor  Agreement  provides  that  the  lien on the  assets
constituting  part of the  Collateral  that is sold or otherwise  disposed of in
accordance  with the terms of each  Secured  Document  may be released if (i) no
default or event of default exists under any of the Secured Documents,  (ii) the
Company has delivered an officers'  certificate to each of the collateral agent,
the trustee,  the New Credit Facility  administrative  agent and the Bridge Loan
administrative agent,  certifying that the proposed sale or other disposition of
assets is  either  permitted  or  required  by,  and is in  accordance  with the
provisions of, the applicable  Secured  Documents and (iii) the collateral agent
has acknowledged such certificate.

         The  Intercreditor  Agreement  provides for the termination of security
interests on the date that all obligations  under the Secured Documents are paid
in full.

         Grey  Wolf  Loan.  On  October  28,  2004,  Grey Wolf  entered  into an
agreement  with  Guggenheim  Corporate  Funding,  LLC for a $35  million  senior
secured term loan.  Interest on the Grey Wolf term loan currently accrues at the
prime rate announced by the administrative agent plus 6.25% and will increase by
0.75% at the end of each  six-month  period during which the Grey Wolf term loan
is  outstanding.  Such  interest  is  payable  quarterly  in cash with the first
interest  payment to be made on  January 1, 2005.  If the Grey Wolf term loan is
still  outstanding at the end of the first year, an  amortization  schedule will
require  Grey Wolf to repay at least 5% of the initial  principal  amount of the
loan at the  end of  each  of the  first  three  years  and  10% of the  initial
principal  amount of the loan at the end of the fourth year, with the balance of
the loan due at  maturity.  Subject  to early  termination  rights and events of
default, the Grey Wolf term loan will mature on October 29, 2009.

         Grey Wolf's  obligations under its term loan will be guaranteed by each
of Grey Wolf's future  subsidiaries.  Obligations  under the Grey Wolf term loan
are secured by a first priority perfected security interest,  subject to certain
permitted  encumbrances,  in all of Grey  Wolf's  and each of its  subsidiaries'
material property and assets,  including  substantially all of their natural gas
and crude oil  properties  and all the capital stock in any entity owned by Grey
Wolf and its subsidiaries.

         The Grey  Wolf term loan is  pre-payable,  in whole or in part,  on not
less than 10 days' written notice,  at Grey Wolf's option at any time at a price
of 100% of the  principal  amount of the loan being  prepaid,  plus  accrued and
unpaid interest to the date of prepayment.

         Under the Grey Wolf term loan,  Grey Wolf is  subject to  substantially
the same covenants and reporting requirements, and substantially the same events
of default, as are set forth in the Bridge Loan.

                                      F-61


Note 4.  Long-Term Debt

         In October 2004, Abraxas refinanced its long-term debt by redeeming its
11 1/2%  secured  notes due 2007 and  terminating  its  previous  senior  credit
facility with proceeds from:

            o    the issuance of $125.0 million  aggregate  principal  amount of
                 the notes being offered hereby;

            o    the proceeds of its new $25.0 million bridge loan; and

            o    the payment to Abraxas by Grey Wolf of $35.0  million  from the
                 proceeds of Grey Wolf's new $35.0 million term loan.

         This refinancing is described in Note 3, above.

         Prior to the October 2004  refinancing,  long-term debt as of September
30, 2004 consisted of the following:

                                               September 30,       December 31,
                                                    2004              2003
                                            ------------------- ----------------
11 1/2% Secured  Notes due 2007.............     $   143,154      $   137,258
Senior Credit Agreement.....................          47,362           47,391
                                            ------------------- ----------------
                                                     190,516          184,649
Less current maturities.....................               -                -
                                            ------------------- ----------------
                                                 $   190,516      $   184,649
                                            =================== ================

         11 1/2% Notes due 2007. In connection with the financial  restructuring
completed in January 2003,  Abraxas issued $109.7 million in principal amount of
it's 11 1/2%  Secured  Notes due 2007,  Series A, or 11 1/2% notes due 2007,  in
exchange for our 11 1/2% Senior Notes due 2004  tendered in the exchange  offer.
The 11 1/2% notes due 2007 were issued under an indenture  with U.S. Bank, N. A.
In  accordance  with SFAS 15,  the basis of the 11 1/2%  notes due 2007 at issue
date  exceeded  the face  amount of the 11 1/2% notes due 2007 by  approximately
$19.0 million.  Were it not for the refinancing described in Note 3, such amount
would  have  been  amortized  over the term of the 11 1/2%  notes due 2007 as an
adjustment to the yield of the 11 1/2% notes due 2007.

         The 11 1/2% notes due 2007 accrued  interest from the date of issuance,
at a fixed annual rate of 11 1/2%,  payable in cash  semi-annually on each May 1
and November 1, commencing May 1, 2003, provided that, if we failed, or were not
permitted   pursuant  to  our  then  current  senior  credit  agreement  or  the
intercreditor  agreement between the trustee under the indenture for the 11 1/2%
notes due 2007 and the lenders under the then current  senior credit  agreement,
to make such cash  interest  payments in full,  we paid  interest in kind by the
issuance of additional 11 1/2% notes with a principal amount equal to the amount
of  accrued  and  unpaid  cash  interest  on the 11 1/2%  notes due 2007 plus an
additional 1% accrued interest for the applicable period.

         On October 28,  2004,  Abraxas  gave notice to the trustee  that it was
redeeming  all of the 11 1/2% notes due 2007 at a  redemption  price of 98.5837%
plus  interest  accrued  and  unpaid  to the  applicable  redemption  date.  The
redemption will take place on November 27, 2004.

         Senior Credit Agreement.  In connection with the January 2003 financial
restructuring,  Abraxas entered into a new senior credit  agreement  providing a
term loan facility and a revolving  credit  facility.  On February 23, 2004, the
Company entered into an amendment to that agreement  providing for two revolving
credit  facilities  and a  non-revolving  credit  facility as  described  below.
Subject to earlier  termination  on the occurrence of events of default or other
events,  the stated  maturity date for these credit  facilities  was February 1,

                                      F-62


2007. As described in Note 3 above, amounts outstanding under these three credit
facilities  were repaid and the credit  facilities were terminated as of October
28, 2004.

Note 5.  Earnings Per Share

         The  following  table sets forth the  computation  of basic and diluted
earnings per share:



                                                             Three Months Ended                  Nine Months Ended
                                                               September 30,                       September 30,
                                                       -------------------------------    -------------------------------
                                                            2004             2003             2004             2003
                                                        -------------    -------------    -------------    --------------
                                                                                                        
Numerator:
Net income (loss) before cumulative effect
     of accounting change                           $        (1,643)   $     (2,702)    $        (6,828)  $      58,049
Cumulative effect of accounting change (1)                        -               -                  -             (395)
                                                    $        (1,643)   $     (2,702)    $        (6,828)  $      57,654
Denominator:
Denominator for basic earnings per share -
Weighted-average shares                                  36,251,323      35,781,625          36,164,268      35,205,111

Effect of dilutive securities: 
Stock options, warrants and CVR's                                 -               -                   -         653,053

Dilutive potential common shares
Denominator for diluted earnings per
      share -
adjusted weighted-average shares and assumed
Conversions                                              36,251,323      35,781,625          36,164,268      35,858,164

Basic earnings (loss) per share:
   Net income (loss before cumulative
       effect of accounting change                  $         (0.05)   $      (0.08)    $         (0.19)  $        1.64
   Cumulative effect of accounting change                         -               -                   -           (0.01)
                                                        -------------    -------------     -------------    --------------
  Net earnings (loss) per common share - basic      $         (0.05)   $      (0.08)    $         (0.19)  $        1.63
                                                        =============    =============     =============    ==============

Diluted earnings (loss) per share:                  $         (0.05)          (0.08)    $         (0.19)           1.61
    Cumulative effect of accounting change                        -               -                 -             (0.01)
                                                        -------------    -------------     -------------    --------------
  Net earnings (loss) per common share--diluted      $        (0.05)   $      (0.08)    $         (0.19)  $        1.60
                                                        =============    =============     =============    ==============


(1) The Company adopted SFAS 143, "Accounting for Asset Retirement  Obligations"
effective  January 1, 2003. For the nine months period ended  September 30, 2003
the  Company  recorded a charge of  $395,341  for the  cumulative  effect of the
change in accounting principle.

         For the three months ended  September  30, 2003,  and for the three and
nine months ended  September 30, 2004 none of the shares  issuable in connection
with stock  options or warrants  are  included in diluted  shares.  Inclusion of
these shares would be  antidilutive  due to losses  incurred in the period.  Had
there not been losses in these periods,  dilutive shares would have been 834,354
shares,  1,420,879  shares  and  1,689,884  shares  for the three  months  ended
September  30,  2003 and the three and nine months  ended  September  30,  2004,
respectively.

Note 6.  Hedging Program and Derivatives

         On  January 1, 2001,  the  Company  adopted  SFAS 133  "Accounting  for
Derivative  Instruments and Hedging  Activities" SFAS 133 as amended by SFAS 137
"Accounting for Derivative Instruments and Hedging  Activities--Deferral  of the

                                      F-63


Effective  Date of FASB 133" and SFAS 138  "Accounting  for  Certain  Derivative
Instruments  and  Certain  Hedging  Activities.  Gains  and  losses  on  hedging
instruments  related  to  accumulated  Other  Comprehensive  Income  (Loss)  and
adjustments to carrying amounts on hedged production are included in natural gas
or crude oil  production  revenue in the period that the related  production  is
delivered.

         Under  the  terms  of our  previous  senior  credit  agreement  we were
required to maintain  hedging  agreements  with respect to not less than 40% nor
more than 75% of it crude oil and natural gas production for a rolling six month
period.  Under the terms of our new revolving credit facility we are required to
maintain hedging  agreements with respect to not less than 25% nor more than 75%
of it crude oil and natural gas production for a rolling six month period.

         The following table sets forth the Company's current hedge position:



 Time Period                           Notional Quantities                      Price
---------------------------------------------------------------------------------------
                                                                   
November 2004                 7,100 MMbtu of production per day          Floor of $4.25
                              400 Bbl of crude oil production per day    Floor of $24.00
December 2004                 7,100 MMbtu of production per day          Floor of $4.50
                              400 Bbl of crude oil production per day    Floor of $25.00
January 2005                  7,100 MMbtu of production per day          Floor of $4.50
                              400 Bbl of crude oil production per day    Floor of $25.00
February 2005                 7,100 MMbtu of production per day          Floor of $4.50
                              400 Bbl of crude oil production per day    Floor of $25.00
March 2005                    7,100 MMbtu of production per day          Floor of $4.50
                              400 Bbl of crude oil production per day    Floor of $25.00
April 2005                    7,100 MMbtu of production per day          Floor of $4.50
                              400 Bbl of crude oil production per day    Floor of $25.00
May - December 2005           9,500 MMbtu of production per day          Floor of $5.00



Note 7.  Contingencies - Litigation


         In 2001,  the Company  and a limited  partnership,  of which  Wamsutter
Holdings,  Inc.  is the general  partner  (the  "Partnership"),  were named in a
lawsuit  filed in U.S.  District  Court in the  District of  Wyoming.  The claim
asserts breach of contract, fraud and negligent misrepresentation by the Company
and the Partnership related to the responsibility for year 2000 ad valorem taxes
on crude oil and natural gas properties sold by the Company and the Partnership.
In February 2002, a summary judgment was granted to the plaintiff in this matter
and a final judgment in the amount of $1.3 million was entered.  The Company and
the Partnership  appealed the District Court's judgment and on November 3, 2004,
the U.S.  Court of Appeals for the 10th Circuit  affirmed  the District  Court's
decision.  The Company is currently  considering whether to file further appeals
or pay the  judgment.  The  Company has  established  a reserve in the amount of
$845,000,  which  represents  the Company's  share of the judgment.  The Company
continues to believe that these charges are without merit.

         Additionally,  from time to time, the Company is involved in litigation
relating  to  claims  arising  out of its  operations  in the  normal  course of
business.  At  September  30,  2004,  the  Company  was not engaged in any legal
proceedings  that are  expected,  individually  or in the  aggregate,  to have a
material adverse effect on the Company.



Note 8.  Comprehensive Income

         Comprehensive  income  includes  net income,  losses and certain  items
recorded directly to Stockholder's  Equity and classified as Other Comprehensive
Income.

                                      F-64


         The following table illustrates the calculation of comprehensive income
(loss) for the three and nine months ended September 30, 2004 and 2003:



                                                               Three Months Ended        Nine Months Ended September
                                                                 September 30,                       30,
                                                          ------------------------------ -----------------------------
                                                              2004          2003             2004            2003
                                                          -----------    -----------     -------------    ------------
                                                                                                    
Net income (loss)..................................       $  (1,643)     $   (2,702)     $  (6,828)       $  57,654
Other Comprehensive loss:
Change in fair market value of outstanding hedge
positions..........................................               -             34               -              (15)
  Foreign currency translation adjustment..........           2,236            (50)            885            7,763
                                                          -----------    -----------     -------------    ------------
Other comprehensive income (loss)..................       $     593      $  (2,718)      $  (5,943)       $  65,402
                                                          ===========    ===========     =============    ============


Note 9.  Business Segments

         Business segment information for the three months and nine months ended
September 30, 2004 and 2003 in different geographic areas is as follows:



                                                         Three Months Ended September 30, 2004
                                             --------------------------------------------------------------
                                                    U.S.                  Canada              Total
                                             -------------------     -----------------  -------------------
                                                                                          
Revenues................................         $   8,237              $    3,546          $   11,783
                                             ===================     ================   ===================
Operating income........................         $   4,210              $    1,365          $    5,575
                                             ===================     ================
General Corporate..................................................................             (2,373)
Interest expense and amortization of
   deferred financing fees.........................................................             (4,845)
Other income (expense)-net.........................................................                  -
                                                                                        -------------------
Loss before income taxes...........................................................         $   (1,643)
                                                                                        ===================


                                                         Three Months Ended September 30, 2003
                                             --------------------------------------------------------------
                                                    U.S.                  Canada              Total
                                             -------------------     -----------------  -------------------
Revenues................................         $   7,176              $    1,254          $    8,430
                                             ===================     ================   ===================
Operating income........................         $   2,973              $      279          $    3,252
                                             ===================     ================
General Corporate..................................................................               (558)
Interest expense and amortization of
   deferred financing fees.........................................................             (4,920)
Gain on sale of foreign subsidiaries...............................................                298
Other income (expense)-net.........................................................               (774)
                                                                                        -------------------
Loss before income taxes...........................................................       $     (2,702)
                                                                                        ===================

                                      F-65



                                                         Nine Months Ended September 30, 2004
                                             --------------------------------------------------------------
                                                    U.S.                  Canada              Total
                                             -------------------     -----------------  -------------------
Revenues................................         $  24,701              $   10,284          $   34,985
                                             ===================     =================  ===================
Operating income........................         $  12,165              $    2,632          $   14,797
                                             ===================     =================
General Corporate                                                                               (4,905)
Interest expense, financing cost and amortization of
   deferred financing fees............................................................         (16,709)
Other income (expense)-net............................................................             (11)
                                                                                        -------------------
Income before income taxes.........................................................       $     (6,828)
                                                                                        ===================

                                                         Nine Months Ended September 30, 2003
                                              --------------------------------------------------------------
                                                    U.S.                  Canada              Total
                                             -------------------     -----------------  -------------------
Revenues................................         $  23,193              $    6,778          $   29,971
                                             ===================     =================  ===================
Operating income........................         $  11,044              $    2,810          $   13,854
                                             ===================     =================
General Corporate..................................................................             (3,587)
Interest expense, financing cost and amortization of
deferred financing fees............................................................            (18,325)
Gain on sale of foreign subsidiaries...............................................             67,258
Other income (expense)-net.........................................................               (774)
Cumulative effect of accounting change.............................................               (395)
                                                                                        -------------------
Income before income taxes.........................................................         $   58,031
                                                                                        ===================

                                                                 At September 30, 2004
                                             --------------------------------------------------------------
                                                    U.S.                  Canada              Total
                                             -------------------     -----------------  -------------------
Identifiable assets.....................         $  83,028              $   40,521          $  123,549
                                             ===================     =================
Corporate assets...................................................................              5,518
                                                                                        -------------------
Total assets.......................................................................         $  129,067
                                                                                        ===================


Note 10.  New Accounting Standards

         In March  2004,  the  Emerging  Issues  Task Force  ("EITF")  reached a
consensus  that  mineral  rights,  as defined in EITF Issue No.  04-2,  "Whether
Mineral Rights Are Tangible or Intangible  Assets," are tangible assets and that
they  should be  removed  as  examples  of  intangible  assets in SFAS No.  141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". The
FASB has recently  ratified this  consensus and directed the FASB staff to amend
SFAS Nos. 141 and 142 through the issuance of FASB Staff Position FAS Nos. 141-1
and 142-1.  Historically,  the Company has  included  the costs of such  mineral
rights as tangible  assets,  which is consistent with the EITF's  consensus.  As
such,  EITF  04-02  has  not  affected  the  Company's   consolidated  financial
statements.

         In March 2004, the FASB issued an exposure draft entitled  "Share-Based
Payment,  an  Amendment  of FASB  Statements  No.  123 and  95."  This  proposed
statement addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for: (1) equity instruments
of the  enterprise  or (2)  liabilities  that are based on the fair value of the
enterprise's  equity  instruments or that may be settled by the issuance of such
equity  instruments.  The  proposed  statement  would  eliminate  the ability to
account  for  share-based  compensation  transactions  using APB Opinion No. 25,
"Accounting  for Stock Issued to Employees" and generally  would require instead
that such  transactions  be accounted for using a fair  value-based  method.  As
proposed,  this statement would be effective for the Company on January 1, 2005.

                                      F-66



The Company is currently  unable to determine  what effect this  statement  will
have on the Company's financial position or results of operations."

Note 11.  Accounting Change

         The  Company  adopted  SFAS  143,   "Accounting  for  Asset  Retirement
Obligations", effective January 1, 2003. For the nine months ended September 30,
2003 the Company recorded a charge of approximately  $395,000 for the cumulative
effect of the change in  accounting  principle  and an  additional  liability of
approximately  $712,000.  During the period ended September 30, 2004 the Company
recorded an additional liability of approximately $387,000.



                                       F-67




                          ABRAXAS PETROLEUM CORPORATION
                             Offer to Exchange up to

   $125,000,000 Principal Amount floating rate senior Secured Notes due 2009,
                         Series B and guarantees thereof

                           For Any And All Outstanding

   $125,000,000 Principal Amount floating rate senior Secured Notes due 2009,
                         Series A and guarantees thereof

   THE SERIES A/B EXCHANGE OFFER WILL EXPIRE AT midnight, NEW YORK CITY TIME,
                      ON __________, 2005, UNLESS EXTENDED.


     Each  broker-dealer  that  receives  exchange  notes  for its  own  account
pursuant to the Series A/B exchange offer must  acknowledge that it will deliver
a prospectus in connection with any resale of such exchange notes. The Letter of
Transmittal  states that by so acknowledging  and by delivering a prospectus,  a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning  of the  Securities  Act.  This  Prospectus,  as it may  be  amended  or
supplemented  from time to time,  may be used by a  broker-dealer  in connection
with resales of exchange notes  received in exchange for  Securities  where such
Securities  were  acquired by such  broker-dealer  as a result of  market-making
activities  or other  trading  activities.  The Company has agreed  that,  for a
period of 180 days after the Expiration Date (as defined  herein),  it will make
this Prospectus  available to any  broker-dealer  for use in connection with any
such resale. See "Plan of Distribution".




                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20.  Indemnification of Directors and Officers

     Abraxas' Articles of Incorporation  contain a provision that eliminates the
personal  monetary  liability  of  directors  and  officers  to Abraxas  and its
stockholders for a breach of fiduciary  duties to the extent  currently  allowed
under the Nevada General  Corporation Law (the "Nevada Statute").  If a director
or officer of Abraxas were to breach his fiduciary  duties,  neither Abraxas nor
its stockholders  could recover monetary damages,  and the only course of action
available  to Abraxas'  stockholders  would be  equitable  remedies,  such as an
action to enjoin or rescind a transaction  involving a breach of fiduciary duty.
To the extent  certain  claims  against  directors  or  officers  are limited to
equitable  remedies,  this provision of Abraxas'  Articles of Incorporation  may
reduce the likelihood of derivative  litigation and may discourage  stockholders
or  management  from  initiating  litigation  against  directors or officers for
breach  of  their  duty of care.  Additionally,  equitable  remedies  may not be
effective in many  situations.  If a stockholder's  only remedy is to enjoin the
completion of the Board of Director's  action,  this remedy would be ineffective
if the stockholder did not become aware of a transaction or event until after it
had been completed.  In such a situation,  it is possible that the  stockholders
and Abraxas would have no effective remedy against the directors or officers.

     Liability  for  monetary  damages  has  not  been  eliminated  for  acts or
omissions which involve intentional misconduct,  fraud or a knowing violation of
law or payment of an improper  dividend in  violation  of section  78.300 of the
Nevada  Statute.  The  limitation of liability  also does not eliminate or limit
director liability arising in connection with causes of action brought under the
Federal securities laws.

     The Nevada  Statute  permits a corporation  to indemnify  certain  persons,
including officers and directors, who are (or are threatened to be made) parties
against  all  expenses  (including  attorneys'  fees)  actually  and  reasonably
incurred by, or imposed upon,  him in  connection  with the defense by reason of
his being or having  been a director or officer if he acted in good faith and in
a manner  which  he  reasonably  believed  to be in or not  opposed  to the best
interests  of the  corporation  and,  with  respect  to any  criminal  action or
proceeding,  had no reasonable cause to believe his conduct was unlawful, except
where he has been  adjudged  by a court of  competent  jurisdiction  (and  after
exhaustion  of all  appeals)  to be  liable  for  gross  negligence  or  willful
misconduct  in the  performance  of his  duty.  The  Bylaws of  Abraxas  provide
indemnification to the same extent allowed pursuant to the foregoing  provisions
of the Nevada Statute.

     Nevada  corporations  also are  authorized  to obtain  insurance to protect
officers and directors from certain liabilities,  including  liabilities against
which the  corporation  cannot  indemnify its  directors  and officers.  Alberta
Business  Corporation  Act  corporations  are permitted to obtain such insurance
also,  except for liability  relating to the failure to act honestly and in good
faith with a view to the best interests of the  corporation.  Abraxas  currently
has a directors' and officers'  liability  insurance  policy in effect providing
$5.0 million in coverage and an additional  $1.0 million in coverage for certain
employment related claims.

     Abraxas has entered into  indemnity  agreements  with each of its directors
and  officers.  These  agreements  provide  for  indemnification  to the  extent
permitted by the Nevada Statute.



                                      II-1


Item 21.  Exhibits and Financial Statement Schedules

(a)      Exhibits

         The following Exhibits have previously been filed by the Registrant or
are included following the Index to Exhibits:

Exhibit  Description
Number

3.1      Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to Abraxas'
         Registration Statement on Form S-4, No. 33-36565 (the "S-4 Registration
         Statement")).

3.2      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         October  22,  1990.  (Filed  as  Exhibit  3.3 to the  S-4  Registration
         Statement).

3.3      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         December  18,  1990.  (Filed  as  Exhibit  3.4 to the S-4  Registration
         Statement).

3.4      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         June 8, 1995. (Filed as Exhibit 3.4 to Abraxas' Registration  Statement
         on Form S-3, No. 333-00398 (the "S-3 Registration Statement")).

3.5      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         as of August 12, 2000 (Filed as Exhibit 3.5 to Abraxas'  Annual  Report
         of Form 10-K filed April 2, 2001).

3.6      Amended  and  Restated  Bylaws of  Abraxas.  (Filed as  Exhibit  3.6 to
         Abraxas' Annual Report on Form 10-K filed April 5, 2002).

4.1      Specimen Common Stock Certificate of Abraxas.  (Filed as Exhibit 4.1 to
         the S-4 Registration Statement).

4.2      Specimen Preferred Stock Certificate of Abraxas.  (Filed as Exhibit 4.2
         to Abraxas' Annual Report on Form 10-K filed on March 31, 1995).

4.3      Indenture dated October 28, 2004, by and among Abraxas,  as Issuer; the
         Subsidiary Guarantors party thereto and U.S. Bank National Association,
         as Trustee, relating to Abraxas' Floating Rate Senior Secured Notes Due
         2009.  (filed as Exhibit  4.1 to  Abraxas'  Current  Report on Form 8-K
         filed on November 3, 2004).

4.4      Form of Rule 144A Global Note for Floating  Rate Senior  Secured  Notes
         due 2009.  (Filed as Exhibit  A-1 to Exhibit  4.1 to  Abraxas'  Current
         Report on Form 8-K filed on November 3, 2004).

4.5      Form of Regulation S Global Note for Floating Rate Senior Secured Notes
         due 2009.  (Filed as Exhibit  A-2 to Exhibit  4.1 to  Abraxas'  Current
         Report on Form 8-K filed on November 3, 2004).

4.6      Form of Accredited Investor  Certificated Note for Floating Rate Senior
         Secured  Notes  due 2009.  (Filed  as  Exhibit  A-3 to  Exhibit  4.1 to
         Abraxas' Current Report on Form 8-K filed on November 3, 2004).


**4.7    Form of Letter of Transmittal. 

**4.8    Form of Notice of Guaranteed Delivery. 

**5.1    Opinion of Cox Smith Matthews Incorporated. 


*10.1    Abraxas  Petroleum  Corporation  401(k) Profit Sharing Plan.  (Filed as
         Exhibit  10.4 to  Abraxas'  Registration  Statement  on Form  S-4,  No.
         333-18673, (the "1996 Exchange Offer Registration Statement")).

                                      II-2


*10.2    Abraxas  Petroleum  Corporation  Director Stock Option Plan.  (Filed as
         Exhibit 10.5 to the 1996 Exchange Offer Registration Statement).

*10.3    Abraxas  Petroleum  Corporation  Restricted  Share Plan for  Directors.
         (Filed as Exhibit 10.20 to Abraxas' Annual Report on Form 10-K filed on
         April 12, 1994).

10.4     Abraxas  Petroleum  Corporation  Amended  and  Restated  1994 Long Term
         Incentive Plan. (Filed herewith).

*10.5    Abraxas Petroleum  Corporation Incentive Performance Bonus Plan. (Filed
         as Exhibit 10.24 to Abraxas'  Annual Report on Form 10-K filed on April
         12, 1994).

*10.6    Form of Indemnity  Agreement  between Abraxas and each of its directors
         and officers. (Filed as Exhibit 10.30 to the 1993 S-1).

10.7     Farmout Agreement  between Grey Wolf Exploration  Limited and PrimeWest
         Energy,  Inc. (Filed as Exhibit 10.2 to Abraxas' Current Report on Form
         8-K/A filed on December 9, 2002).

10.8     Purchase  Agreement  dated as of October 21, 2004 by and among  Abraxas
         Petroleum Corporation,  the Subsidiary Guarantors signatory thereto and
         Guggenheim  Capital  Markets,  LLC.  (Filed as Exhibit 10.1 to Abraxas'
         Current Report on Form 8-K filed November 3, 2004).

10.9     Loan  Agreement  dated as of  October  28,  2004 by and  among  Abraxas
         Petroleum  Corporation,  the Subsidiary Guarantors party thereto, Wells
         Fargo  Foothill,  Inc.,  as Arranger and  Administrative  Agent and the
         Lenders signatory  thereto.  (Filed as Exhibit 10.2 to Abraxas' Current
         Report on Form 8-K filed November 3, 2004).

10.10    Loan  Agreement  dated as of  October  28,  2004 by and  among  Abraxas
         Petroleum   Corporation,   the  Subsidiary  Guarantors  party  thereto,
         Guggenheim Corporate Funding, LLC, as Arranger and Administrative Agent
         and the Lenders signatory  thereto.  (Filed as Exhibit 10.3 to Abraxas'
         Current Report on Form 8-K filed November 3, 2004).

10.11    Loan  Agreement   dated  October  28,  2004  by  and  among  Grey  Wolf
         Exploration Inc.,  Guggenheim  Corporate  Funding,  LLC as Arranger and
         Administrative  Agent  and the  Lenders  signatory  thereto.  (Filed as
         Exhibit 10.4 to Abraxas'  Current  Report on Form 8-K filed November 3,
         2004).

10.12    Intercreditor,  Security and Collateral  Agency  Agreement  dated as of
         October  28,  2004 by and  among  Abraxas  Petroleum  Corporation,  the
         Subsidiary  Guarantors  party  thereto,  Wells  Fargo  Foothill,  Inc.,
         Guggenheim Corporate Funding,  LLC and U.S. Bank National  Association.
         (Filed as Exhibit  10.5 to  Abraxas'  Current  Report on Form 8-K filed
         November 3, 2004).

10.13    Warrant issued to Guggenheim  Corporate Funding,  LLC dated October 28,
         2004.  (Filed as Exhibit  10.6 to Abraxas'  Current  Report on Form 8-K
         filed November 3, 2004).

10.14    Exchange and  Registration  Rights Agreement dated October 28, 2004, by
         and among Abraxas  Petroleum  Corporation,  the  Subsidiary  Guarantors
         signatory  thereto,  and Guggenheim  Capital  Markets,  LLC.  (Filed as
         Exhibit 10.1 to Abraxas'  Quarterly  Report on Form 10-Q filed November
         12, 2004).

16.1     Letter  addressing  change in certifying  accountant (Filed on Abraxas'
         Form 8-K filed on August 22, 2001).

21.1     Subsidiaries of Abraxas.  (Filed as Exhibit 21.1 to Abraxas,  Grey Wolf
         Exploration Inc., Sandia Oil & Gas Corporation, Sandia Operating Corp.,
         Wamsutter  Holdings,  Inc.,  Western  Associated Energy Corporation and
         Eastside Coal Company,  Inc.'s Registration  Statement on Form S-1, No.
         333-103027).

                                      II-3


23.1     Consent of BDO Seidman, LLP. (Filed herewith).

23.2     Consent of Deloitte & Touche LLP. (Filed herewith).


**23.3   Consent of DeGolyer and MacNaughton. 

**23.4   Consent of McDaniel & Associates Consultants, Ltd. 

**23.5   Consent of Cox Smith Matthews Incorporated. (Filed with Exhibit 5.1)

**24.1   Power of Attorney of Craig S. Bartlett, Jr.

**24.2   Power of Attorney of Franklin A. Burke.

**24.3   Power of Attorney of Harold D. Carter. 

**24.4   Power of Attorney of Ralph F. Cox.

**24.5   Power of Attorney of Barry J. Galt.

**24.6   Power of Attorney of Dennis E. Logue.

**24.7   Power of Attorney of James C. Phelps.

**24.8   Power of Attorney of Joseph A. Wagda.

**25.1   Statement  of  Eligibility   of  Trustee  for  the  Indenture. 


*      Management Compensatory Plan or Agreement.


**     Previously filed.



                                      II-4


Item 22.  Undertakings

         The undersigned registrants hereby undertake:

         1.       To file,  during any period in which offers or sales are being
                  made,  a   post-effective   amendment  to  this   registration
                  statement:

                  i.       To  include  any   prospectus   required  by  section
                           10(a)(3) of the Securities Act of 1933;

                  ii.      To  reflect  in the  prospectus  any  facts or events
                           arising after the effective date of the  registration
                           statement   (or  the   most   recent   post-effective
                           amendment  thereof)  which,  individually  or in  the
                           aggregate,  represent  a  fundamental  change  in the
                           information set forth in the registration  statement.
                           Notwithstanding   the  foregoing,   any  increase  or
                           decrease  in volume  of  securities  offered  (if the
                           total dollar value of  securities  offered  would not
                           exceed that which was  registered)  and any deviation
                           from  the low or high  end of the  estimated  maximum
                           offering  range  may  be  reflected  in the  form  of
                           prospectus filed with the Commission pursuant to Rule
                           424(b) if, in the  aggregate,  the  changes in volume
                           and price  represent  no more than 20%  change in the
                           maximum  aggregate  offering  price  set forth in the
                           "Calculation  of  Registration   Fee"  table  in  the
                           effective registration statement; and

                  iii.     To include any material  information  with respect to
                           the plan of distribution not previously  disclosed in
                           the registration  statement or any material change to
                           such information in the registration statement.

         2.       That, for the purpose of determining  any liability  under the
                  Securities  Act of 1933,  each such  post-effective  amendment
                  shall be deemed to be a new registration statement relating to
                  the  securities  offered  therein,  and the  offering  of such
                  securities at that time shall be deemed to be the initial bona
                  fide offering thereof.

         3.       To  remove  from  registration  by means  of a  post-effective
                  amendment any of the securities  being registered which remain
                  unsold at the termination of the offering.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors,  officers and controlling  persons of
each of the registrants pursuant to the foregoing provisions,  or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore,  unenforceable. In the event that a claim for indemnification
against such liabilities  (other than the payment by the registrants of expenses
incurred or paid by a director,  officer or controlling person in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling  person in connection with the securities being  registered,  the
registrants  will,  unless in the  opinion of their  counsel the matter has been
settled by controlling precedent,  submit to a court of appropriate jurisdiction
the question  whether such  indemnification  by either of them is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

         The undersigned registrants hereby undertake to respond to requests for
information  that is incorporated  by reference into the prospectus  pursuant to
Items 4, 10(b),  11 or 13 of this Form,  within one  business  day of receipt of
such request,  and to send the  incorporated  documents by  first-class  mail or
other equally  prompt means.  This includes  information  contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.

                                     II-5

         The undersigned  registrants  hereby  undertake to supply by means of a
post-effective  amendment  all  information  concerning a  transaction,  and the
company  being  acquired  involved  therein,  that  was not the  subject  of and
included in the registration statement when it became effective.



 

                                      II-6

                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Act, the  undersigned
registrant has duly caused this Amendment No. 1 to Registration  Statement to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.





                          ABRAXAS PETROLEUM CORPORATION


                          By:   /s/ Robert L.G. Watson                
                                --------------------------------------
                                Chairman of the Board, Chief Executive
                                Officer and President




                                      II-7



         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.





                                                                                
Signature                        Name and Title                                       Date
/s/ Robert L.G. Watson           Chairman of the Board, President, Chief Executive    January 12, 2005
---------------------------
Robert L.G. Watson               Officer (Principal Executive Officer) and Director
                                 of Abraxas

/s/ Chris E. Williford           Executive Vice President, Treasurer, and Chief       January 12, 2005
---------------------------
Chris E. Williford               Financial Officer (Principal Financial and
                                 Accounting Officer) of Abraxas

/s/ Robert W. Carington, Jr.     Executive Vice President of Abraxas                  January 12, 2005
----------------------------
Robert W. Carington, Jr.

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
Craig S. Bartlett, Jr.

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
Franklin A. Burke

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
Harold D. Carter

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
Ralph F. Cox

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
Barry J. Galt

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
Dennis E. Logue

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
James C. Phelps

              *                  Director of Abraxas                                  January 12, 2005
---------------------------
Joseph A. Wagda






*By:   /s/ Chris E. Williford
    -------------------------
     Chris E. Williford
     Attorney-in-Fact



                                      II-8




                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Act, the  undersigned
registrant has duly caused this Amendment No. 1 to Registration  Statement to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.




                          SANDIA OIL & GAS CORPORATION


                          By:  /s/ Robert L.G. Watson             
                               -----------------------------------
                               President





                                      II-9

         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.








Signature                        Name and Title                                       Date
---------                        --------------                                       ----
                                                                                    
/s/ Robert L.G. Watson           President (Principal Executive Officer) and          January 12, 2005
---------------------------
Robert L.G. Watson               Director of Sandia Oil & Gas Corporation


/s/ Chris E. Williford           Vice President  (Principal Financial and             January 12, 2005
---------------------------
Chris E. Williford               Accounting Officer) and Director of Sandia Oil &
                                 Gas Corporation

/s/ Robert W. Carington, Jr.     Vice President and Director of Sandia Oil & Gas      January 12, 2005
----------------------------
Robert W. Carington, Jr.         Corporation





                                     II-10

                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Act, the  undersigned
registrant has duly caused this Amendment No. 1 to Registration  Statement to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.





                                  SANDIA OPERATING CORP.


                                  By:  /s/ Robert L.G. Watson                 
                                       ---------------------------------------
                                       President




                                     II-11





         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.





Signature                      Name and Title                      Date
---------                      --------------                      ----


/s/ Robert L.G. Watson         President (Principal 
----------------------------   Executive Officer)
Robert L.G. Watson             and Director of                January 12, 2005
                               Sandia Operating Corp.

/s/ Chris E. Williford         Vice President (Principal      January 12, 2005
----------------------------   Financial and Accounting
Chris E. Williford             Officer) and Director of
                               Sandia Operating Corp.
                               


/s/ Robert W. Carington, Jr.   Vice President and Director    January 12, 2005
----------------------------   of Sandia Operating Corp.
Robert W. Carington, Jr.       





                                     II-12




                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Act, the  undersigned
registrant has duly caused this Amendment No. 1 to Registration  Statement to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.





                            WAMSUTTER HOLDINGS, INC.


                            By:  /s/ Robert L.G. Watson                 
                                 ---------------------------------------
                                 President



                                     II-13




         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.





Signature                          Name and Title                      Date
---------                          --------------                      ----


/s/ Robert L.G. Watson        President (Principal Executive
----------------------------- Officer) and Director of  
Robert L.G. Watson             Wamsutter                       January 12, 2005


/s/ Chris E. Williford        Vice President (Principal        January 12, 2005
----------------------------- Financial and Accounting
Chris E. Williford            Officer) and Director
                              of Wamsutter


/s/ Robert W. Carington, Jr.  Vice President and Director      January 12, 2005
----------------------------- of Wamsutter
Robert W. Carington, Jr.      






                                     II-14




                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Act, the  undersigned
registrant has duly caused this Amendment No. 1 to Registration  Statement to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.





                                WESTERN ASSOCIATED ENERGY CORPORATION


                                By:  /s/ Robert L.G. Watson                 
                                     ---------------------------------------
                                     President




                                     II-15





         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.





Signature                          Name and Title                      Date
---------                          --------------                      ----


/s/ Robert L.G. Watson        President (Principal Executive   January 12, 2005
----------------------------  Officer) and Director of
Robert L.G. Watson            Western Associated Energy
                              Corporation
                             


/s/ Chris E. Williford       Vice President (Principal         January 12, 2005
---------------------------- Accounting Officer) and
Chris E. Williford           Director of Western Associated
                             Energy Corporation
                             

/s/ Robert W. Carington, Jr. Vice President and                January 12, 2005
---------------------------- Director of Western
Robert W. Carington, Jr.     Associated Energy Corporation
                             




                                     II-16



                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Act, the  undersigned
registrant has duly caused this Amendment No. 1 to Registration  Statement to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.





                           EASTSIDE COAL COMPANY, INC.


                           By:  /s/ Robert L.G. Watson                 
                                ---------------------------------------
                                President



                                     II-17




         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.





Signature                         Name and Title                      Date
---------                         --------------                      ----


/s/ Robert L.G. Watson        President (Principal Executive   January 12, 2005
----------------------------  Officer) and Director of
Robert L.G. Watson            Eastside Coal Company, Inc.
        

/s/ Chris E. Williford        Vice President (Principal        January 12, 2005
----------------------------  Accounting Officer) and
Chris E. Williford            Director of Eastside Coal
                              Company, Inc.                              


/s/ Robert W. Carington, Jr.  Vice President and               January 12, 2005
----------------------------  Director of Eastside Coal
Robert W. Carington, Jr.      Company, Inc.

                              



                                     II-18

                                  EXHIBIT INDEX




Exhibit Number:

23.1     Consent of BDO Seidman, LLP

23.2     Consent of Deloitte & Touche LLP