7





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


                              FORM 10-Q/A Number 1



(Mark One)
[X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

[  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
         ______ TO ______

                        COMMISSION FILE NUMBER: 001-16701
                          ABRAXAS PETROLEUM CORPORATION
             (Exact name of registrant as specified in its charter)

          Nevada                                               74-2584033

 (State of Incorporation)                  (I.R.S. Employer Identification No.)

             500 N. Loop 1604 East, Suite 100, San Antonio, TX 78232

               (Address of principal executive offices) (Zip Code)
                                  210-490-4788

              (Registrant's telephone number, including area code)

                                 Not Applicable

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

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


Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer  (as  defined  in  Rule  12b-2  of  the  Exchange  Act)  or a
non-accelerated  filer.  See  definition  of  "accelerated  filer"  and "  large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One)


Large Accelerated Filer [   ] Accelerated Filer  [X]  Non-Accelerated Filer [  ]


Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [ X] No

         The number of shares of the issuer's common stock outstanding as of May
4, 2007 was:

            Class                                       Shares Outstanding
      Common Stock, $.01 Par Value                           42,878,725



                                EXPLANATORY NOTE

Abraxas Petroleum Corporation is filing this Amendment Number 1 to its Quarterly
Report on Form 10-Q for the period  ended March 31, 2007,  initially  filed with
the SEC on May 15, 2007, in order to correct the accounting for depletion on oil
and gas  properties.  Due to an error in the  estimating  of proved  undeveloped
reserves,  our total  proved  reserves  as of  December  31,  2006 were  revised
downward.  As a result of the  downward  adjustment  to our proved  reserves our
depletion expense was understated by approximately $246,000 for the three months
ended March 31, 2007.  This resulted in a restatement  of the Condensed  Balance
Sheet and the Condensed Statement of Operations for the three months ended March
31,  2007.  Cash flow from  operations  was not  impacted  by this  restatement.
Pursuant to Rule 12b-15 under the Securities  Exchange Act of 1934,the  complete
text of Form 10-Q as revised is included in this filing.


Forward-Looking Information

     We make forward-looking  statements throughout this document.  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 document is generally located in
the material set forth under the headings "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   prices 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 report.

     In addition to these  factors,  important  factors  that could cause actual
results to differ materially from our expectations ("Cautionary Statements") are
disclosed  under "Risk  Factors" in our Annual  Report on Form 10-K for the year
ended  December  31,  2006,  which is  incorporated  by  reference  herein.  All
subsequent written and oral  forward-looking  statements  attributable to us, or
persons acting on our behalf,  are expressly  qualified in their entirety by the
Cautionary Statements.


                                       2





                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
                                   FORM 10 - Q/A Number 1
                                      INDEX


                                     PART I
                              FINANCIAL INFORMATION


           
ITEM 1 -      Financial Statements
              Condensed Consolidated Balance Sheets - March 31, 2007
                  and December 31, 2006.........................................................4
              Condensed Consolidated Statements of Operations -
                  Three Months Ended March 31, 2007 and 2006....................................6
              Condensed Consolidated Statements of Cash Flows -
                  Three Months Ended March 31, 2007 and 2006....................................7
              Notes to Condensed Consolidated Financial Statements..............................8

ITEM 2 -      Management's Discussion and Analysis of Financial Condition and
              Results of Operations............................................................11

ITEM 3 -      Quantitative and Qualitative Disclosure about Market Risk........................22

ITEM 4 -      Controls and Procedures..........................................................22


                                     PART II
                                OTHER INFORMATION

ITEM 1 -      Legal Proceedings................................................................23
ITEM 1A-      Risk Factors.....................................................................23
ITEM 2 -      Unregistered Sales of Equity Securities and Use of Proceeds......................23
ITEM 3 -      Defaults Upon Senior Securities..................................................23
ITEM 4 -      Submission of Matters to a Vote of Security Holders..............................23
ITEM 5 -      Other Information................................................................23
ITEM 6 -      Exhibits     ....................................................................23
              Signatures   ....................................................................24


                                       3





                          Abraxas Petroleum Corporation
                      Condensed Consolidated Balance Sheets
                                 (in thousands)

                                                                                              March 31,            December 31,
                                                                                                 2007                  2006
                                                                                             (Unaudited)
                                                                                            ---------------      -----------------
                                                                                                      
Assets:
Current assets:
   Cash ..............................................................................  $            610    $               43
   Accounts receivable, net:
          Joint owners................................................................               949                   556
          Oil and gas production......................................................             5,285                 5,645
          Other.......................................................................                37                    39
                                                                                            ---------------      -----------------
                                                                                                   6,271                 6,240
  Other current assets................................................................               315                   470
                                                                                            ---------------      -----------------
       Total current assets...........................................................             7,196                 6,753

Property and equipment:
  Oil and gas properties, full cost method of accounting:
      Proved..........................................................................           351,141               347,245
   Other property and equipment.......................................................             3,523                 3,519
                                                                                            ---------------      -----------------
           Total......................................................................           354,664               350,764
      Less accumulated depreciation, depletion, and
           amortization...............................................................           250,008               246,353
                                                                                            ---------------      -----------------
      Total property and equipment - net..............................................           104,656               104,411

Deferred financing fees, net..........................................................             4,049                 4,446
Other assets  ........................................................................             1,001                 1,330
                                                                                            ---------------      -----------------
  Total assets........................................................................  $        116,902    $          116,940
                                                                                            ===============      =================





      See accompanying notes to condensed consolidated financial statements


                                        4





                          Abraxas Petroleum Corporation
                Condensed Consolidated Balance Sheets (continued)
                                 (in thousands)

                                                                                             March 31,         December 31,
                                                                                                2007              2006
                                                                                            (Unaudited)
                                                                                            -------------     -------------

                                                                                                     
Liabilities and Stockholders' Deficit
Current liabilities:
  Accounts payable...................................................................  $         2,480     $      5,268
  Oil and gas production payable.....................................................            2,547            2,621
  Accrued interest...................................................................            5,423            1,427
  Other accrued expenses.............................................................              975            1,156
                                                                                            -------------     -------------
    Total current liabilities........................................................           11,425           10,472

Long-term debt.......................................................................          127,322          127,614

Future site restoration..............................................................            1,046            1,019
                                                                                            -------------     -------------
     Total liabilities...............................................................          139,793          139,105

Stockholders'  deficit:
  Common Stock, par value $.01 per share-
   authorized 200,000,000 shares; issued, 42,878,725 and, 42,762,466.................              429              428
   Additional paid-in capital........................................................          164,224          164,210
  Accumulated deficit................................................................         (188,481)        (187,493)
  Treasury stock, at cost, -0- and 35,552 shares ....................................                -             (285)
  Accumulated other comprehensive income.............................................              937              975
                                                                                            -------------     -------------
      Total stockholders' deficit....................................................          (22,891)         (22,165)
                                                                                            -------------     -------------
Total liabilities and stockholders' deficit..........................................  $       116,902     $    116,940
                                                                                            =============     =============






      See accompanying notes to condensed consolidated financial statements





                                       5





                          Abraxas Petroleum Corporation
                 Condensed Consolidated Statements of Operations
                                   (Unaudited)
                      (in thousands except per share data)

                                                                                                         Three Months Ended
                                                                                                             March 31,
                                                                                                    ----------------------------
                                                                                                       2007            2006
                                                                                                    -----------     ------------
                                                                                                           
Revenue:
   Oil and gas production revenues..........................................................  $        11,322    $    12,926
   Rig revenues.............................................................................              328            376
   Other....................................................................................                1              3
                                                                                                    -----------     ------------
                                                                                                       11,651         13,305
Operating costs and expenses:
   Lease operating and production taxes.....................................................            2,962          2,822
   Depreciation, depletion and amortization.................................................            3,655          3,399
   Rig operations...........................................................................              171            211
   General and administrative (including stock-based compensation of  $172 and $171)........            1,316          1,286
                                                                                                    -----------     ------------
                                                                                                        8,104          7,718
                                                                                                    -----------     ------------
Operating income  ..........................................................................            3,547          5,587

Other (income) expense
   Interest income..........................................................................              (14)            (1)
   Interest expense.........................................................................            4,151          3,971
   Amortization of deferred financing fees..................................................              398            397
                                                                                                    -----------     ------------
                                                                                                        4,535          4,367
                                                                                                    -----------     ------------
Net income (loss)...........................................................................  $          (988)   $     1,220
                                                                                                    ===========     ============

 Net income per common share - basic........................................................  $         (0.02)   $      0.03
                                                                                                    ===========     ============
 Net income  per common share - diluted.....................................................  $         (0.02)   $      0.03
                                                                                                    ===========     ============




      See accompanying notes to condensed consolidated financial statements


                                       6





                          Abraxas Petroleum Corporation
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
                                 (in thousands)

                                                                                                Three Months Ended
                                                                                                     March 31,
                                                                                         ------------------------------------
                                                                                             2007                  2006
                                                                                         --------------        --------------
                                                                                                      
    Cash flows from Operating Activities
     Net  income (loss).............................................................  $        (988)        $        1,220
     Adjustments to reconcile net income to net
         cash provided by operating activities:
          Depreciation, depletion, and amortization.................................          3,655                  3,399
          Accretion of future site restoration......................................             27                     24
          Amortization of deferred financing fees...................................            398                    397
          Stock-based compensation..................................................            172                    171
          Other non-cash items......................................................            128                      -
     Changes in operating assets and liabilities:
          Accounts receivable.......................................................            (31)                   677
          Other ....................................................................            446                   (348)
          Accounts payable and accrued expenses.....................................            953                    832
                                                                                         --------------        --------------
     Net cash provided by operations................................................          4,760                  6,372

     Cash flows from Investing Activities
     Capital expenditures, including purchases and development
       of properties................................................................         (3,900)                (7,133)
                                                                                         --------------        --------------
     Net cash used in investing activities..........................................         (3,900)                (7,133)

     Cash flows from Financing Activities
     Proceeds from long-term borrowings.............................................            708                  4,271
     Payments on long-term borrowings...............................................         (1,000)                (4,000)
     Issuance of common stock for compensation......................................              -                    116
     Exercise of stock options  ....................................................              -                    374
     Deferred financing fees .......................................................             (1)                     1
                                                                                         ---------------    ----------------
     Net cash provided by (used in) financing operations............................           (293)                   762
                                                                                         ---------------    ----------------
     Increase in cash                                                                           567                      1
     Cash, at beginning of period...................................................             43                     42
                                                                                         ---------------    ----------------
     Cash, at end of period.........................................................  $         610         $           43
                                                                                         ===============    ================

     Supplemental disclosures of cash flow information:
     Interest paid .................................................................  $         108         $          191
                                                                                         ===============    ================



      See accompanying notes to condensed consolidated financial statements



                                       7
>


                          Abraxas Petroleum Corporation
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)
              (tabular amounts in thousands except per share data)

Note 1. Basis of Presentation

     The accounting  policies followed by Abraxas Petroleum  Corporation and its
subsidiaries  (the  "Company"  or  "Abraxas")  are set forth in the notes to the
Company's audited consolidated financial statements in the Annual Report on Form
10-K  filed for the year  ended  December  31,  2006.  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 months
ended March 31, 2007 are not  necessarily  indicative  of results to be expected
for the full year.

Stock-based Compensation

     The Company  currently  utilizes a standard  option  pricing  model  (i.e.,
Black-Scholes)  to measure the fair value of stock options granted to employees.
The Company uses the Black-Scholes  model for option valuation as of the current
time.

     The following  table  summarizes the stock option  activities for the three
months ended March 31, 2007 (in thousands except per share data):




                                                                   Weighted                 Weighted
                                                                Average Option            Average Grant
                                                                Exercise Price              Date Fair              Aggregate
                                            Shares                 Per Share             Value Per Share        Intrinsic Value
                                       --------------------     -------------------      -------------------    -------------------

                                                                                                    
Outstanding December 31, 2006.......          2,457             $     2.29               $      1.63            $     3,250

Granted.............................              -             $     -                  $      -                         -

Exercised...........................           (165)            $     1.08               $      0.77                   (127)

Expired or canceled.................             (2)            $     6.05               $      3.35                     (7)
                                       --------------------                                                     -------------------
Outstanding March 31, 2007..........          2,290             $     2.37               $      1.36            $     3,116
                                       ====================                                                     ===================


     Additional  information  related to options at March 31, 2007 and  December
31, 2006 is as follows:


                                                                            March 31,                       December 31,
                                                                              2007                              2006
                                                                  ------------------------------     ---------------------------
                                                                                                       
Options exercisable....................................                     1,743,116                        1,884,366
                                                                  ==============================     ===========================


     As of March 31, 2007, there was  approximately  $1.2 million of unamortized
compensation  expense  related to  outstanding  options that will be  recognized
through September 2010.

                                       8


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 basis 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.

     For the period ended March 31, 2007, there is no current or deferred income
tax expense or benefit due to losses  and/or loss  carryforwards  and  valuation
allowance which has been recorded against such benefits.

     In June 2006, the FASB issued FASB  Interpretation  No. 48, "Accounting for
Uncertainty  in Income Taxes" ("FIN 48").  FIN 48 is an  interpretation  of SFAS
109,  "Accounting  for Income  Taxes",  and it seeks to reduce the  diversity in
practice  associated  with certain  aspects of  measurement  and  accounting for
income taxes and requires expanded disclosure with respect to the uncertainty in
income taxes.  FIN 48 is effective for fiscal years beginning after December 15,
2006.  Accordingly,  the Company adopted FIN 48 on January 1, 2007. The adoption
of FIN 48 did not have any effect on the Company's financial position or results
of  operations  for the quarter  ended March 31,  2007.  The Company  recognizes
interest and penalties related to uncertain tax positions in income tax expense.
As of March 31, 2007, the Company did not have any accrued interest or penalties
related to uncertain tax positions.  The tax years from 1999 through 2006 remain
open to examination by the tax jurisdictions to which the Company is subject.


Note 3. Long-Term Debt



     Long-term debt consisted of the following:
                                                                                  March 31,              December 31,
                                                                                     2007                    2006
                                                                             ---------------------  -----------------------
                                                                                              
Floating rate senior secured notes due 2009............................        $    125,000            $   125,000
Senior secured revolving credit facility...............................               2,322                  2,614
                                                                             ---------------------  -----------------------
                                                                                    127,322                127,614
Less current maturities ...............................................                   -                      -
                                                                             ---------------------  -----------------------
                                                                               $    127,322            $   127,614
                                                                             =====================  =======================


     Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in aggregate principal
amount of floating rate senior  secured notes due 2009. The notes will mature on
December 1, 2009.  Interest is payable at a per annum floating rate of six-month
LIBOR plus 7.50%.  The interest  rate was 12.85% per annum as of March 31, 2007.
The interest rate is reset semi-annually on each June 1 and December 1. Interest
is payable semi-annually in arrears on June 1 and December 1 of each year.

     Senior Secured  Revolving  Credit  Facility.  On October 28, 2004,  Abraxas
entered  into an  agreement  for a revolving  credit  facility  having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit.  Availability  under the  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 revolving  credit  facility bear interest at
the prime rate announced by Wells Fargo Bank,  National  Association plus 1.00%.
The interest rate was 9.25% per annum as of March 31, 2007

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

Note 4. Earnings (Loss) Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:

                                       9




                                                                                          Three Months Ended March 31,
                                                                                       -----------------------------------
                                                                                               2007                2006
  Numerator:
                                                                                                  
       Net earnings (loss) available to common stockholders .............              $        (988)   $       1,220
                                                                                        ===============  =================

  Denominator:
       Denominator for basic earnings per share - weighted-average shares.                 42,681,278      42,470,802

       Effect of dilutive securities:
          Stock options and warrants......................................                         -        1,681,042
                                                                                        ---------------  -----------------
       Denominator  for  diluted  earnings  per share - adjusted
          weighted-average  shares and  assumed Conversions...............                42,681,278       44,151,844
                                                                                        ===============  =================
  Net earnings per common share - basic...................................             $       (0.02)   $        0.03
                                                                                        ===============  =================
  Net earnings per common share - diluted.................................             $       (0.02)   $        0.03
                                                                                        ===============  =================



     For the three  months  ended March 31, 2007 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 a loss in this  period,  dilutive  shares would have
been 613,811 shares for the three months ended March 31, 2007.

Note 5. Hedging Program and Derivatives

     The Company has elected out of hedge  accounting as prescribed by SFAS 133.
Accordingly,  instruments  are recorded on the balance sheet at their fair value
with  adjustments to the carrying value of the instruments  being  recognized in
oil and gas income in the current period.

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

     The following table sets forth the Company's current hedge position:

    Time Period          Notional Quantities                         Price
--------------------------------------------------------------------------------
June 2007            10,000 MMbtu of production per day           Floor of $5.00
July 2007            10,000 MMbtu of production per day           Floor of $4.25
August 2007          10,000 MMbtu of production per day           Floor of $5.00
September 2007       10,000 MMbtu of production per day           Floor of $5.50

Note 6. Contingencies - Litigation

   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 March 31,
2007, the Company was not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on its
operations.


                                       10


                          ABRAXAS PETROLEUM CORPORATION


                                     PART I

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

     The  following  is a  discussion  of our  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 our Annual Report on Form 10-K filed for the year ended December 31,
2006.

Critical Accounting Policies

     There have been no changes from the Critical  Accounting  Polices described
in our Annual Report on Form 10-K for the year ended December 31, 2006.

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  development
opportunities,  which  provide a basis for  significant  production  and reserve
increases. In addition, we intend to expand upon our development activities with
complementary exploration projects in our core areas of operation.

     Our financial results depend upon many factors which  significantly  affect
our results of operations including the following:

     o   the sales prices of natural gas and crude oil;

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

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

     o   the level of and interest rates on borrowings; and

     o   the level and success of exploration and development activity.

     Commodity Prices and Hedging Activities.  The results of our operations are
highly  dependent  upon the prices  received  for our  natural gas and crude oil
production. Substantially all of our sales of natural gas and crude oil are made
in the spot market,  or pursuant to contracts  based on spot market prices,  and
not  pursuant  to  long-term,  fixed-price  contracts.  Accordingly,  the prices
received  for our  natural  gas and  crude oil  production  are  dependent  upon
numerous factors beyond our control.  Significant declines in prices for natural
gas and  crude  oil  could  have a  material  adverse  effect  on our  financial
condition,  results of operations and  quantities of reserves  recoverable on an
economic  basis.  Recently,  the prices of  natural  gas and crude oil have been
volatile.  During the first half of 2006,  prices for  natural gas and crude oil
were  sustained  at  record  or  near-record  levels.  Supply  and  geopolitical
uncertainties  resulted in significant  price volatility during the remainder of
2006 with both  natural  gas and crude oil  prices  weakening.  During the first
three months of 2007,  prices have remained  relatively  strong  although not at
levels  attained  during the first  three  months of 2006.  New York  Mercantile
Exchange  (NYMEX)  futures  prices for West Texas  Intermediate  (WTI) crude oil
averaged  $58.39 per barrel for the first three months of 2007.  NYMEX Henry Hub
futures prices  averaged $7.16 per million  British thermal units (MMBtu) during
the first three months of 2007. The natural gas market continues to be driven by
high natural gas storage  inventories and mild early winter  conditions for much
of the  country.  NYMEX  natural gas prices  ended the first  quarter of 2007 at


                                       11


about $7.56 per MMBtu.  The outlook for the commodity  markets for the remainder
of 2007 calls for continued volatility.

     We seek  to  reduce  our  exposure  to  price  volatility  by  hedging  our
production  through  price  floors.  Under  the  terms of our  revolving  credit
facility, we are required to maintain hedging positions with respect to not less
than 25% nor more than 75% of our  crude  oil and  natural  gas  production.  We
currently have the following hedges in place:

     Time Period          Notional Quantities                         Price
--------------------------------------------------------------------------------
June 2007            10,000 MMbtu of production per day           Floor of $5.00
July 2007            10,000 MMbtu of production per day           Floor of $4.25
August 2007          10,000 MMbtu of production per day           Floor of $5.00
September 2007       10,000 MMbtu of production per day           Floor of $5.50


     Production Volumes. Because our proved reserves will decline as natural gas
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, exploration and development projects.

     We had capital  expenditures  during the first three months of 2007 of $3.9
million  and have a capital  budget for 2007  ranging  from $27 to $44  million,
which will depend on our success rate, production levels and commodity prices.

     Availability  of Capital.  As  described  more fully under  "Liquidity  and
Capital Resources" below, our sources of capital going forward will primarily be
cash from operating  activities,  funding under our revolving  credit  facility,
cash on hand, and if an appropriate  opportunity presents itself,  proceeds from
the sale of  properties.  We  currently  have  approximately  $14.1  million  of
availability under our revolving credit facility.

     Exploration  and  Development  Activity.  We believe  that our high quality
asset base,  high degree of operational  control and large inventory of drilling
projects  position us for future  growth.  Our properties  are  concentrated  in
locations  that  facilitate  substantial  economies  of  scale in  drilling  and
production  operations and more efficient  reservoir  management  practices.  We
operate 94% of the  properties  accounting for  approximately  93% of our PV-10,
giving us  substantial  control over the timing and  incurrence of operating and
capital  expenditures.  In addition,  we have 51 proved undeveloped projects and
have identified over 500 drilling and recompletion opportunities on our existing
acreage,  the  successful  development  of which we believe could  significantly
increase our daily production and proved reserves.

     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 development and exploration activities or, through
engineering studies, identify additional behind-pipe zones or secondary recovery
reserves.  We cannot assure you that our exploration and development  activities
will result in increases in our proved reserves.  For example, in 2006, while we
had some success in pursuing these activities, we were not able to fully replace
the production  volumes lost from natural field declines and property  sales. If
our proved reserves continue to decline in the future,  our production will also
decline and, consequently,  our cash flow from operations and the amount that we
are able to borrow under our revolving  credit  facility  will also decline.  In
addition,  approximately  52% of our total estimated proved reserves at December
31, 2006 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.  We may be unable to acquire or
develop  additional  reserves,  in which  case our  results  of  operations  and
financial condition could be adversely affected.

                                       12


     Borrowings and Interest.  We currently have  indebtedness of  approximately
$125.9  million and  availability  of $14.1 million  under our revolving  credit
facility.  Our cash  interest  expense will require us to increase our cash flow
from  operations in order to meet our debt service  requirements,  as well as to
fund the development of our numerous drilling opportunities.

     Results of Operations

     The  following  table sets  forth  certain  of our  operating  data for the
periods presented. All data is for continuing operations.



                                                                                         Three Months Ended
                                                                                             March 31,
                                                                                   ---------------------------------
                                                                                     2007                 2006
                                                                                   -----------        --------------
                                                                                              
Operating Revenue: (1)
Crude oil sales........................................................          $      2,741       $       2,783
Natural gas sales .....................................................                 8,581              10,143
Rig operations.........................................................                   328                 376
Other..................................................................                     1                   3
                                                                                   -----------        --------------
                                                                                 $     11,651       $      13,305
                                                                                   ===========        ==============

Operating Income ......................................................          $      3,547       $       5,587

Crude oil production (MBbl)............................................                  50.2                46.7
Natural gas production (MMcf)..........................................                 1,451               1,556
Average crude oil sales price ($/Bbl)..................................          $      54.63       $       59.57
Average natural gas sales price ($/Mcf)................................          $       5.91       $        6.52


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

Comparison  of Three Months Ended March 31, 2007 to Three Months Ended March 31,
2006

     Operating Revenue.  During the three months ended March 31, 2007, operating
revenue  from natural gas and crude oil sales  decreased  to $11.3  million from
$12.9  million  for the first  quarter of 2006.  The  decrease  in  revenue  was
primarily due to a reduction in realized prices during the first quarter of 2007
as compared to the same period of 2006.  Reduced  realized prices had a negative
impact of $1.2  million on revenue  for the  quarter.  A decline in natural  gas
production  partially  offset  by an  increase  in crude  oil  production  had a
negative impact of $427,000 for the first quarter of 2007.

     Average  sales prices net of hedging  cost for the quarter  ended March 31,
2007 were:

     o   $54.63 per Bbl of crude oil,
     o   $ 5.91 per Mcf of natural gas

     Average sales prices net of hedging cost for the quarter ended March 31,
2006 were:

     o   $59.57 per Bbl of crude oil,
     o   $ 6.52 per Mcf of natural gas

     Crude oil sales volumes  increased from 46.7 MBbls during the quarter ended
March 31, 2006 to 50.2 MBbls for the same period of 2007.  The increase in crude
oil sales volumes was primarily due to new  production  brought on line in 2006.
Sales in Wyoming  increased  from 1.1 MBbls during the first  quarter of 2006 to
4.2 MBbls for the same period of 2007.  Natural gas production volumes decreased
from 1,556 MMcf for the three  months ended March 31, 2006 to 1,451 MMcf for the
same  period of 2007.  The  decrease  in  natural  gas  production  volumes  was
primarily due to property  sales in the third quarter of 2006.  Properties  sold
contributed 74.4 MMcf to production during the first quarter of 2006.

     Lease Operating  Expenses.  Lease operating  expenses ("LOE") for the three
months ended March 31, 2007  increased to $3.0 million  compared to $2.8 million
in 2006. The increase in LOE was due to a general  increase in the cost of field
services.  LOE on a per Mcfe basis for the three months ended March 31, 2007 was
$1.69 per Mcfe  compared to $1.54 for the same period of 2006.  The  increase in
per Mcfe cost was attributable to the decrease in production  volumes during the
first  quarter of 2007 as compared  to 2006 as well as the  overall  increase in
cost.

                                       13

     General  and  Administrative   ("G&A")  Expenses.  G&A  expenses  excluding
stock-based  compensation  remained constant at $1.1 million during the quarters
ended March 31, 2007 and 2006. G&A expense on a per Mcfe basis was $0.65 for the
first  quarter  of 2007  compared  to $0.61  for the same  period  of 2006.  The
increase  in G&A expense on a per Mcfe basis was  primarily  due to a decline in
production  volumes during the first quarter of 2007 compared to the same period
in 2006.

     Stock-based  Compensation  We currently  utilize a standard  option pricing
model (i.e.,  Black-Scholes)  to measure the fair value of stock options granted
to employees.  Options  granted to employees are valued at the date of grant and
expense is recognized over the options  vesting  period.  For the quarters ended
March 31, 2007 and 2006, stock based compensation was approximately $172,000 and
$171,000 respectively.

     Depreciation,  Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense increased to $3.7 million for the three months
ended June 30, 2007 from $3.4 million for the same period of 2006.  The increase
in DD&A was  primarily due to a decrease in our proved  reserves.  Our DD&A on a
per Mcfe  basis for the three  months  ended  March 31,  2007 was $2.09 per Mcfe
compared to $1.85 per Mcfe in 2006. The increase in the per Mcfe DD&A was due to
higher expense for the period and a decrease in production volumes for the three
months ended March 31, 2007 as compared to the same period of 2006

     Interest Expense.  Interest expense increased to $4.2 million for the first
three months of 2007 from $4.0 million for the same period of 2006. The increase
in interest  expense was primarily  due to an increase in the interest  rates on
our  long-term  debt.  The interest  rate on our senior notes was 12.08% for the
three months ended March 31, 2006  compared to 12.85% for the three months ended
March 31, 2007. The rate on our senior secured  revolving  credit  facility also
increased  to 9.25%  from 8.75% for the three  months  ended  March 31,  2007 as
compared to the same period of 2006.

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 the  following  costs:

     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.

     Our sources of capital going forward will  primarily be cash from operating
activities, funding under our revolving credit facility, cash on hand, and if an
appropriate  opportunity presents itself,  proceeds from the sale of properties.
However,  under the terms of the notes, proceeds of optional sales of our 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 (Deficit). At March 31, 2007, our current liabilities of
approximately $11.4 million exceeded our current assets of $7.2 million
resulting in a working capital deficit of $4.2 million. This compares to a
working capital deficit of approximately $3.7 million at December 31, 2006.
Current liabilities at March 31, 2007 consisted of trade payables of $2.5
million, revenues due third parties of $2.5 million, accrued interest of $5.4
million and other accrued liabilities of $1.0 million.

     Capital expenditures. Capital expenditures during the first three months of
2007 were $3.9 million  compared to $7.1 million during the same period of 2006.
The table below sets forth the  components  of these capital  expenditures  on a
historical basis for the three months ended March 31, 2007 and 2006.

                                       14




                                                                                         Three Months Ended
                                                                                              March 31,
                                                                            -------------------------------------------
                                                                                  2007                   2006
                                                                            -------------------   ---------------------
                                                                                          
Expenditure category (in thousands):
  Development.....................................................      $           3,896       $       7,108
  Facilities and other............................................                      4                  25
                                                                            -------------------  ----------------------
      Total.......................................................      $           3,900       $       7,133
                                                                            ===================  ======================


     During the three months ended March 31, 2007 and 2006, capital expenditures
were primarily for the development of existing properties.  We anticipate making
capital  expenditures ranging from $27 to $44 million in 2007. These anticipated
expenditures  are subject to adequate cash flow from operations and availability
under our  revolving  credit  facility.  Our ability to make all of our budgeted
capital  expenditures  will also be subject to availability of drilling rigs and
other field equipment and services.  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.  Should the prices of natural gas and crude
oil begin to decline,  or if our costs of operations increase as a result of the
scarcity of drilling rigs or if our production  volumes decrease,  our cash flow
from  operations  will decrease  which may result in a further  reduction of the
capital expenditures budget.

     Sources of  Capital.  The net funds  provided by and/or used in each of the
operating,  investing and financing activities relating to continuing operations
are summarized in the following table and discussed in further detail below:



                                                                                      Three Months Ended
                                                                                           March 31,
                                                                              ---------------------------------
                                                                                   2007               2006
                                                                              ---------------    --------------
                                                                                        
Net cash provided by operating activities..........................     $         4,760       $    6,372
Net cash used in investing activities..............................              (3,900)          (7,133)
Net cash  provided by (used in) financing activities...............                (293)             762
                                                                              ---------------    --------------
Total..............................................................     $           567       $        1
                                                                              ===============    ==============


     Operating  activities  during the three months ended March 31, 2007 provide
us $4.8 million of cash compared to providing $6.4 million in the same period in
2006.  Net income  plus  non-cash  expense  items  during  2006 and 2007 and net
changes in operating  assets and liabilities  accounted for most of these funds.
Financing  activities  used $293,000 for the first three months of 2007 compared
to providing  $762,000 for the same period of 2006.  Funds used in 2007 were the
result of a net reduction in the  outstanding  balance of our revolving  line of
credit. In 2006, the funds were provided by net proceeds from our revolving line
of credit and proceeds from the exercise of employee  stock  options.  Investing
activities  used $3.9  million  during the three  months  ended  March 31,  2007
compared  to  using  $7.1  million  for  the  quarter   ended  March  31,  2006.
Expenditures  during the  quarter  ended  March 31, 2007 and March 31, 2006 were
primarily for the development of existing properties.

     Future  Capital  Resources.  We currently have three  principal  sources of
liquidity going forward: (i) cash from operating activities,  (ii) funding under
our revolving credit facility, and (iii) if an appropriate  opportunity presents
itself, the sale of producing  properties.  If these sources of liquidity do not
prove to be sufficient, we may also issue additional shares of equity securities
although we may not be able to complete equity financings on terms acceptable to
us, if at all.  Covenants  under the  indenture  for the notes and the revolving
credit facility restrict our 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 our assets that are not timely  reinvested in new natural gas
and crude oil assets  will be  required  to be used to reduce  indebtedness  and


                                       15


proceeds of mandatory  sales must be used to redeem  indebtedness.  The terms of
the notes and the  revolving  credit  facility also  substantially  restrict our
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 entity; 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.  Although  we have  hedged a  portion  of our  natural  gas and  crude  oil
production and will continue this practice as required pursuant to the 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.
Falling  natural  gas and crude oil  prices  could  also  negatively  affect our
ability to raise capital on terms favorable to us or at all.

     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  may  decline  as  reserves  are  produced.  Due to sales of
properties  in 2002 and 2003,  the  divestiture  of Grey Wolf  during  the first
quarter of 2005, property sales in 2006 and restrictions on capital expenditures
under the terms of our 11 1/2% secured notes due 2007 (which were  refinanced in
October  2004),  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 and development activities, acquire additional producing
properties  or  identify  additional  behind-pipe  zones or  secondary  recovery
reserves.  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.  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. For example, during
2006, we added  approximately  3.6 Bcfe of proved  reserves which were offset by
1.8  Bcfe  of  reserves  attributable  to  properties  we sold  and 7.7  Bcfe of
production.  If our proved  reserves  continue  to decline  in the  future,  our
production  will also decline and,  consequently,  our cash flow from operations
and the amount that we are able to borrow under our  revolving  credit  facility
will also decline.  The risk of not finding commercially  productive  reservoirs
will be compounded by the fact that 52% of our total  estimated  proved reserves
at December 31, 2006 were  undeveloped.  During 2006, we expended  approximately
$26.1 million for wells in south Texas, west Texas and Wyoming. These activities
did not result in significant new production or reserves.  In west Texas, we are
currently drilling a horizontal lateral in the Devonian  formation.  We continue
to perform general well  maintenance and work-overs  utilizing our own work-over
rigs.  In addition,  approximately  24% of our  production  for the three months
ended March 31, 2007 was from a single well in west Texas.  If  production  from
this well decreases,  the volume of our production would also decrease which, in
turn, would likely cause our cash flow from operations to decrease.

Contractual Obligations

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

     o   Long-term debt
     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 are obligated to make based on agreements in place as of March
31, 2007:

                                       16




                                                           Payments due in twelve month periods ended:
                                      ---------------------------------------------------------------------------------
Contractual Obligations                                    March 31,          March 31,          March 31,
(dollars in thousands)                      Total            2008            2009-2010          2011-2012         Thereafter
------------------------------------------------------ ------------------ ------------------ ------------------ ------------------
                                                                                                 
Long-Term Debt (1)                    $   127,322      $        -         $  127,322         $        -         $        -
Interest on long-term debt (2)             43,173          16,277             26,896                  -                  -
Operating Leases (3)                          471             259                212                  -                  -
                                      ---------------- ------------------ ------------------ ------------------ ------------------
    Total                             $   170,966      $   16,536         $  154,430         $                  $        -
                                      ================ ================== ================== ================== ==================


(1)      These amounts  represent the b outstanding  under the revolving  credit
         facility and the notes.  These repayments  assume that we will not draw
         down additional funds.
(2)      Interest  expense  assumes the balances of long-term debt at the end of
         the period and current effective interest rates.
(3)      Office  lease  obligations.  The lease  for  office  space for  Abraxas
         expires in 2009.

     We maintain a reserve for cost  associated  with the retirement of tangible
long-lived assets. At March 31, 2007, our reserve for these obligations  totaled
$1.0 million for which no contractual commitment exist.

     Off-Balance  Sheet  Arrangements.  At March 31,  2007,  we had no  existing
off-balance sheet arrangements,  as defined under SEC regulations,  that have or
are  reasonably  likely to have a  current  or  future  effect on our  financial
condition,  revenues or  expenses,  results of  operations,  liquidity,  capital
expenditures or capital resources that are material to investors.

     Other  obligations.  We make and will continue to make substantial  capital
expenditures  for the  acquisition,  development,  exploration and production of
crude oil and  natural  gas.  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.



Long-term Indebtedness.
                                                                                  March 31,            December 31,
                                                                                     2007                  2006
                                                                             ---------------------  -----------------
                                                                                           (in thousands)
                                                                                                 
Floating rate senior secured notes due 2009............................        $    125,000            $   125,000
Senior secured revolving credit facility...............................               2,322                  2,614
                                                                             ---------------------  -----------------
                                                                                    127,322                127,614
Less current maturities ...............................................                   -                      -
                                                                             ---------------------  -----------------
                                                                                $    127,322           $   127,614
                                                                             =====================  =================

     Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in aggregate principal
amount of Floating Rate Senior  Secured Notes due 2009. The 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 six-month LIBOR plus 7.50%. The current
interest rate is 12.85% per annum.  The interest rate is reset  semi-annually on
each June 1 and December 1. Interest is payable semi-annually in arrears on June
1 and December 1 of each year.

     The notes rank equally among themselves and with all of our  unsubordinated
and secured  indebtedness,  including our credit facility and senior in right of
payment to our existing and future subordinated indebtedness.

                                       17


     Each of our  subsidiaries,  Eastside Coal Company,  Inc.,  Sandia Oil & Gas
Corporation,  Sandia  Operating  Corp.,  Wamsutter  Holdings,  Inc.  and Western
Associated Energy Corporation (collectively,  the "Subsidiary Guarantors"),  has
unconditionally guaranteed, jointly and severally, the payment of the principal,
premium and interest on the notes on a senior  secured basis.  In addition,  any
other  subsidiary or affiliate of ours, that in the future  guarantees any other
indebtedness with us, or our restricted  subsidiaries,  will also be required to
guarantee the notes.

     The notes and the Subsidiary Guarantors' guarantees thereof,  together with
our 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 our  and  each  of our  restricted
subsidiaries' material property and assets,  including  substantially all of our
and 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, owned by
us and our restricted subsidiaries (collectively, the "Collateral").

     The notes may be redeemed, at our election, as a whole or from time to time
in part,  at any time after April 28, 2007,  upon not less than 30 nor more than
60 days notice to each holder of notes to be redeemed, subject to the conditions
and at the redemption  prices (expressed as percentages of principal amount) set
forth below,  together with accrued and unpaid interest and Liquidating  Damages
(as defined in the indenture) if any, 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%


     If we experience specific kinds of change of control events, each holder of
notes may require us 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.

     The indenture  governing the notes  contains  covenants  that,  among other
things, limit our 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 our subsidiaries to distribute or
         lend money to us;

     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 our and our 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 our revolving credit
facility, bankruptcy, and material judgments and liabilities.

                                       18


     Senior Secured  Revolving Credit Facility.  On October 28, 2004, we entered
into an agreement for a revolving credit facility having a maximum commitment of
$15 million,  which includes a $2.5 million  subfacility  for letters of credit.
Availability  under the 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 revolving  credit  facility bear interest at
the prime rate announced by Wells Fargo Bank,  National  Association plus 1.00%.
The current  interest  rate is 9.25% per annum.  Subject to earlier  termination
rights  and events of  default,  the stated  maturity  date under the  revolving
credit facility is October 28, 2008.

     We are  permitted to terminate  the revolving  credit  facility,  and under
certain circumstances, may be required, from time to time, to permanently reduce
the lenders'  aggregate  commitment under the 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 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 our current  subsidiaries  has  guaranteed,  and each of our future
restricted  subsidiaries  will guarantee,  our  obligations  under the revolving
credit facility on a senior secured basis. In addition,  any other subsidiary or
affiliate of ours, that in the future  guarantees any of our other  indebtedness
or of our restricted  subsidiaries will be required to guarantee our obligations
under the revolving  credit  facility.  Obligations  under the revolving  credit
facility  are  secured,  together  with the notes,  by a shared  first  priority
perfected security interest,  subject to certain permitted encumbrances,  in all
of our and each of our restricted  subsidiaries'  material  property and assets,
including  substantially  all of  our  and  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,  owned  by us and  our  restricted
subsidiaries.

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

     In addition to the foregoing and other customary  covenants,  the 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 our business;

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

                                       19


     o   permit a change of control;

     o   directly or indirectly make or acquire any investment;

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

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

     The 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 an Intercreditor, Security
and  Collateral  Agency  Agreement,  which  specifies  the rights of the parties
thereto to the proceeds from the Collateral.

     Intercreditor  Agreement.  The  holders  of the  notes,  together  with the
lenders under our credit facility, are subject to an Intercreditor, Security and
Collateral Agency  Agreement,  which specifies the rights of the parties thereto
to the proceeds from the Collateral.  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 notes and the credit
facility  lenders and (ii) governs the  priority of payments  among such parties
upon notice of an event of default under the Indenture or the credit facility.

     So long as no such event of default exists,  the collateral  agent will not
collect  payments  under the new  credit  facility  documents  or the  indenture
governing  the  notes and  other  note  documents  (collectively,  the  "Secured
Documents"),  and all payments will be made directly to the respective  creditor
under the applicable  Secured  Document.  Upon notice of an event of default and
for so long as an event of default  exists,  payments  to each  credit  facility
lender and holder of the notes from us and our current subsidiaries 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.

     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 credit facility  administrative  agent and the
trustee,  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 credit facility  administrative  agent and the
trustee,  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 credit facility;

         fifth, if, the collateral coverage value of three times the outstanding
obligations  under the 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 credit facility;

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

                                       20


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

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

     To the extent there exists any excess monies or property in the  collateral
account  after all of ours and our  subsidiaries'  obligations  under the credit
facility,  the indenture and the notes are paid in full,  the  collateral  agent
will be required to return such excess to us.

     The  collateral  agent  will  act  in  accordance  with  the  Intercreditor
Agreement  and as  directed by the  "Control  Party"  which for  purposes of the
Intercreditor  Agreement  is the  holders of the notes and the  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
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) we
have delivered an officers'  certificate to each of the  collateral  agent,  the
trustee,  the credit facility  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.

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  commodity  derivative  instruments.  Under the
senior credit agreement, we are required to maintain hedge positions on not less
than 25% or more than 75% of our projected oil and gas production..

Net Operating Loss Carryforwards.

     At  December  31,  2006  we  had  $191.7  million  of  net  operating  loss
carryforwards  for U.S.  tax  purposes.  These loss  carryforwards  will  expire
through 2026 if not 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 $67.1  million for
deferred tax assets at March 31, 2007.

     In June 2006, the FASB issued FASB  Interpretation  No. 48, "Accounting for
Uncertainty  in Income Taxes" ("FIN 48").  FIN 48 is an  interpretation  of SFAS
109,  "Accounting  for Income  Taxes",  and it seeks to reduce the  diversity in
practice  associated  with certain  aspects of  measurement  and  accounting for
income taxes and requires expanded disclosure with respect to the uncertainty in
income taxes.  FIN 48 is effective for fiscal years beginning after December 15,
2006.  Accordingly,  the Company adopted FIN 48 on January 1, 2007. The adoption
of FIN 48 did not have any effect on the Company's financial position or results
of  operations  for the quarter  ended March 31,  2007.  The Company  recognizes
interest and penalties related to uncertain tax positions in income tax expense.
As of March 31, 2007, the Company did not have any accrued interest or penalties
related to uncertain tax positions.  The tax years from 1999 through 2006 remain
open to examination by the tax jurisdictions to which the Company is subject.


                                       21


Item 3. Quantitative and Qualitative Disclosures about Market Risk

Commodity Price Risk

     As an  independent  crude oil and natural gas 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 and natural gas.  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 crude oil and natural gas 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 crude oil and natural gas 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 quarter ended
March 31,  2007,  a 10% decline in crude oil and  natural gas prices  would have
reduced our operating  revenue,  cash flow and net income by approximately  $1.1
million for the quarter.

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. In 2003 we elected not to designate derivative  instruments
as hedges. Accordingly the instruments are recorded on the balance sheet at fair
value with  changes in the market  value of the  derivatives  being  recorded in
current oil and gas revenue.

     Under  the terms of our  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.

Interest rate risk

     At March 31, 2007 we had $125.0 million in outstanding  indebtedness  under
the floating rate senior  secured  notes due 2009.  The notes bear interest at a
per annum rate of six-month  LIBOR plus 7.5%. The rate is redetermined on June 1
and  December 1 of each year,  beginning  June 1, 2005.  The current rate on the
notes is 12.85%.  For every  percentage  point that the LIBOR  rate  rises,  our
interest  expense  would  increase by  approximately  $1.3  million on an annual
basis. At March 31, 2007, we had $2.3 million of outstanding  indebtedness under
our revolving  credit  facility.  Interest on this facility accrues at the prime
rate  announced  by Wells  Fargo Bank plus  1.00%.  For every  percentage  point
increase in the announced  prime rate,  our interest  expense would  increase by
approximately $23,000 on an annual basis.

Item 4.  Controls  and Procedures.

     As of the end of the period  covered by this  report,  our Chief  Executive
Officer  and  Chief   Financial   Officer  carried  out  an  evaluation  of  the
effectiveness  of Abraxas'  "disclosure  controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e)and  15d-15(e)) and concluded
that the disclosure controls and procedures were effective.

     There were no changes in our internal controls over financial reporting
during the period covered by this report that could materially affect, or are
reasonably likely to materially affect, our financial reporting.

                                       22


                          ABRAXAS PETROLEUM CORPORATION

                                     PART II
                                OTHER INFORMATION

Item 1.    Legal Proceedings.

     There have been no changes in legal  proceedings from that described in the
Company's  Annual Report of Form 10-K for the year ended  December 31, 2006, and
in Note 6 in the Notes to Condensed  Consolidated Financial Statements contained
in Part I of this report on Form 10-Q.

Item 1A.   Risk Factors.

     In addition to the other  information set forth in this report,  you should
carefully  consider the factors  discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2006, which could
materially affect our business, financial condition or future results. The risks
described  in our  Annual  Report  on Form  10-K are not the only  risks  facing
Abraxas. Additional risks and uncertainties not currently known to us or that we
currently  deem to be  immaterial  also  may  materially  adversely  affect  our
business, financial condition and/or operating results.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

            None

Item 3.    Defaults Upon Senior Securities.

           None

Item 4.    Submission of Matters to a Vote of Security Holders.

           None

Item 5.    Other Information.

           None

Item 6.    Exhibits

           (a) Exhibits

           Exhibit 31.1 Certification  - Robert L.G. Watson, CEO
           Exhibit 31.2 Certification - Chris E. Williford, CFO
           Exhibit  32.1  Certification  pursuant  to 18 U.S.C.  Section  1350 -
           Robert L.G. Watson, CEO
           Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 - Chris
           E. Williford, CFO






                                       23


                          ABRAXAS PETROLEUM CORPORATION

                                   SIGNATURES



     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.




    Date: November 14, 2007    By: /s/Robert L.G. Watson
         ------------------    ----------------------
                               ROBERT L.G. WATSON,
                               President and Chief
                               Executive Officer


    Date: November 14, 2007    By: /s/Chris E. Williford
         -------------------   ----------------------------
                               CHRIS E. WILLIFORD,
                               Executive Vice President and
                               Principal Accounting Officer