<Page>

    As filed with the Securities and Exchange Commission on February 7, 2003.

                                                    Registration No. 333-_______

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


                                    FORM S-1

             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

           ----------------------------------------------------------
           (Exact Name of Registrants as Specified in their Charters)

<Table>
     <S>                                    <C>                               <C>
                  Nevada                                1331                             74 2584033
                 Alberta                                1331                                N/A
                  Texas                                 1331                             74-2368968
                  Texas                                 1331                             74-2468708
                 Wyoming                                1331                             74-2897013
                  Texas                                 1331                             74-1937878
                 Colorado                               1331                             74-2275407
     (State or other jurisdiction of        (Primary Standard Industrial      (I.R.S. Employer Identification
      incorporation or organization)        Classification Code Number)                   Number)
</Table>

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

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

                                 With a copy to:

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

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

<Page>

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

     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [x]

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

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

     If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

                         CALCULATION OF REGISTRATION FEE

<Table>
<Caption>
                                                                         Proposed        Proposed
                                                                         Maximum         Maximum         Amount of
                 Title of Each Class of               Amount to be    Offering Price    Aggregate      Registration
               Securities to be Registered             Registered        Per Unit     Offering Price        Fee
               ---------------------------            ------------    --------------  --------------   -------------
       <S>                                            <C>                 <C>            <C>                <C>
       11 1/2% Secured Notes Due 2007, Series A       $ 184,000,000(1)      32.5%(3)     $ 59,800,000       $ 5,501.60
       Guarantees                                                  (2)        --                   --             None(4)
       Common Stock, par value $0.01 per share            6,583,291       $ 0.80(3)      $  5,266,633       $   484.53
</Table>

(1)  Of the $184,000,000 to be registered, $109,523,000 represents outstanding
     principal and the remainder represents interest to be paid by the issuance
     of additional notes in lieu of cash interest during the term of the notes.

(2)  The 11 1/2% Secured Notes due 2007, Series A of Abraxas Petroleum
     Corporation being registered are guaranteed by each of the subsidiary
     guarantors.

(3)  Estimated solely for the purpose of calculating the registration fee in
     accordance with Rule 457(c).

(4)  Pursuant to Rule 457(n).

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

                                       ii
<Page>

                  SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2003

                                   PROSPECTUS

                          ABRAXAS PETROLEUM CORPORATION

                    11 1/2% SECURED NOTES DUE 2007, SERIES A

                    6,583,291 SHARES OF ABRAXAS COMMON STOCK

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

     This prospectus relates to the offering for resale of Abraxas Petroleum
Corporation's 11 1/2% Secured Notes due 2007, Series A, and 6,583,291 shares of
common stock of Abraxas Petroleum Corporation. The notes and 5,633,291 shares
of common stock were issued in connection with an overall financial
restructuring through a private exchange offer exempt from, or not subject
to, the registration requirements of the Securities Act of 1933, as amended.
The remaining 950,000 shares of common stock represent shares issuable upon
exercise of outstanding warrants. This prospectus will be used by selling
security holders to resell the notes and shares of common stock. We will not
receive any of the proceeds from the sale of notes or common stock by the
selling security holders.

THE NOTES

          -    accrue interest from the date of issuance, at a fixed annual rate
               of 11 1/2%, payable in cash semi-annually on each May 1 and
               November 1, commencing May 1, 2003, PROVIDED THAT, if we fail, or
               are not permitted pursuant to our new senior credit agreement or
               the intercreditor agreement between the trustee under the
               indenture for the notes and the lenders under the new senior
               credit agreement, to make such cash interest payments in full, we
               will pay such unpaid interest in kind by the issuance of
               additional notes with a principal amount equal to the amount of
               accrued and unpaid cash interest on the notes plus an additional
               1% accrued interest for the applicable period;

          -    will, upon an event of default, accrue interest at an annual rate
               of 16.5%;

          -    are guaranteed by all of Abraxas' current subsidiaries, Sandia
               Oil & Gas Corp., Sandia Operating Corp., Wamsutter Holdings,
               Inc., Western Associated Energy Corporation, Eastside Coal
               Company, Inc., and our newly-formed, wholly-owned Canadian
               subsidiary, Grey Wolf Exploration Inc., or New Grey Wolf, and
               will be guaranteed by all of Abraxas' future subsidiaries;

          -    are secured by a second lien or charge on all of our current and
               future assets, including, but not limited to, our crude oil and
               natural gas properties; and

          -    are not listed on any national securities exchange.

THE ABRAXAS COMMON STOCK

          -    is currently traded on the American Stock Exchange under the
               symbol "ABP." On February 5, 2003, the closing sale price of
               Abraxas common stock was $0.78 per share.

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

         YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 12 OF
THIS PROSPECTUS IN EVALUATING AN INVESTMENT IN THE NOTES OR COMMON STOCK.

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

         NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THE NOTES OR THE ABRAXAS COMMON STOCK OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

                                ___________, 2003

<Page>

                                TABLE OF CONTENTS

<Table>
<Caption>
                                                                                                      Page
<S>                                                                                                    <C>
Cautionary Statements Regarding Forward-Looking Information..............................................3
Summary..................................................................................................4
Risk Factors............................................................................................12
Use of Proceeds.........................................................................................22
Ratio of Earnings to Fixed Charges......................................................................22
Capitalization..........................................................................................22
Price Range of Abraxas Common Stock.....................................................................23
Unaudited Pro Forma Condensed Consolidated Financial Statements.........................................24
Selected Historical Financial Data......................................................................29
Management's Discussion and Analysis of Financial Condition and Results of Operations...................30
Business  ..............................................................................................49
Management..............................................................................................66
Executive Compensation..................................................................................68
Certain Transactions....................................................................................71
Principal Stockholders..................................................................................72
Selling Security Holders................................................................................74
Plan of Distribution....................................................................................77
Description of the Notes................................................................................79
Description of Capital Stock...........................................................................129
Registration Rights; Liquidated Damages................................................................133
Certain U.S. Federal Income Tax Considerations.........................................................134
Legal Matters..........................................................................................141
Experts   .............................................................................................141
Where You Can Find More Information....................................................................141
Glossary of Terms......................................................................................142
</Table>

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

     You should rely only on the information contained in this prospectus or a
document that we have referred you to. We have not authorized anyone to provide
you with information that is different. The delivery of this prospectus shall
not, under any circumstances, create any implication that the information herein
is correct as of any time subsequent to the date hereof.

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

     THE DISTRIBUTION OF THIS PROSPECTUS AND THE SALE OF THE NOTES OR SHARES OF
ABRAXAS COMMON STOCK MAY BE RESTRICTED BY LAW IN CERTAIN JURISDICTIONS. PERSONS
WHO RECEIVE THIS PROSPECTUS OR ANY OF THE NOTES OR SHARES OF ABRAXAS COMMON
STOCK MUST INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS.

                                        2
<Page>

           CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

     We make forward-looking statements throughout this prospectus. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur or what we
"intend" to do, and other similar statements), you must remember that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this prospectus is generally located in
the material set forth under the headings "Summary," "Risk Factors," "Business,"
and "Managements 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:

       -  our high debt level;

       -  our ability to raise capital;

       -  our limited liquidity;

       -  economic and business conditions;

       -  price and availability of alternative fuels;

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

       -  our success in development, exploitation and exploration activities;

       -  planned capital expenditures;

       -  prices for crude oil and natural gas;

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

       -  our acquisition and divestiture activities;

       -  results of our hedging activities; and

       -  other factors discussed elsewhere in this prospectus.

                                        3
<Page>

                                     SUMMARY

     THE FOLLOWING SUMMARIZES THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, "ABRAXAS" REFERS TO ABRAXAS
PETROLEUM CORPORATION AND NOT TO ANY OF ITS SUBSIDIARIES, AND "WE," "OUR" AND
"US" REFER TO ABRAXAS AND ALL OF ITS SUBSIDIARIES. EXCEPT AS OTHERWISE NOTED,
(I) THE RESERVE DATA REPORTED IN THIS PROSPECTUS IS BASED ON THE RESERVE
ESTIMATES OF OUR INDEPENDENT PETROLEUM ENGINEERS, (II) THE TERMS "ON A PRO FORMA
BASIS" OR "PRO FORMA" REFER TO WHAT OUR BUSINESS MIGHT HAVE LOOKED LIKE IF THE
FINANCIAL RESTRUCTURING DESCRIBED IN THIS PROSPECTUS HAD OCCURRED AT THE TIMES
INDICATED, AND (III) ALL DOLLAR AMOUNTS REFERENCED IN THIS PROSPECTUS ARE
REFERENCES TO U.S. DOLLARS. SEE "GLOSSARY OF TERMS" FOR DEFINITIONS OF SOME
TECHNICAL TERMS USED IN THIS PROSPECTUS.

                                  ABOUT ABRAXAS

     We are an independent energy company engaged primarily in the exploration,
exploitation, development and production of crude oil and natural gas. Since
January 1, 1991, our principal means of growth has been through the acquisition
and subsequent development and exploitation of producing properties and related
assets. As a result of our historical acquisition activities, we believe we have
a substantial inventory of low risk opportunities, the exploitation and
development of which are critical to the maintenance and growth of our current
production levels. We seek to complement our exploitation and development
activities by selectively participating in exploration projects with experienced
industry partners.

     Our principal areas of operation are Texas, western Canada and Wyoming. At
September 30, 2002, on a pro forma basis, we owned interests in 467,234 gross
acres (372,860 net acres) and operated properties accounting for the majority of
our PV-10, affording us substantial control over the timing and incurrence of
operating and capital expenditures. At June 30, 2002, on a pro forma basis,
estimated total proved reserves were 111.6 Bcfe with an aggregate PV-10 of $81.3
million. We have not obtained an updated independent reserve report since June
30, 2002.

     Our principal offices are located at 500 North Loop 1604 East, Suite 100,
San Antonio, Texas 78232 and the telephone number is (210) 490-4788.

                             FINANCIAL RESTRUCTURING

     We recently completed a series of transactions designed to reduce our
indebtedness, improve our ability to meet our debt service obligations and
provide us with working capital necessary to develop our existing crude oil and
natural gas properties. As a result of the financial restructuring, we have
reduced the principal amount of our overall outstanding indebtedness from
approximately $295 million to approximately $156 million and have reduced our
annual cash interest payments from approximately $34 million to approximately $4
million, assuming that, as required under the new senior credit agreement,
Abraxas issues additional notes in lieu of cash interest payments. Although the
principal amount of our current outstanding indebtedness is approximately $156
million, due to the accounting treatment under generally accepted accounting
principles for financial restructurings with respect to the notes, the reported
carrying value of our total outstanding indebtedness will be approximately $175
million. The transactions comprising the financial restructuring are summarized
below. For a more complete description of the transactions, you should read the
section entitled "Business--Recent Developments--Financial Restructuring"
beginning on page 49.

     EXCHANGE OFFER

     On January 23, 2003 Abraxas completed an exchange offer, pursuant to which
it offered to exchange cash and securities for all of the outstanding 11 1/2%
Senior Secured Notes due 2004, Series A, or second lien notes, and 11 1/2%
Senior Notes due 2004, Series D, or old notes, issued by Abraxas and Canadian
Abraxas Petroleum Limited, a former wholly-owned subsidiary of Abraxas. In
exchange for each $1,000 principal amount of notes tendered in the exchange
offer, tendering noteholders received

                                        4
<Page>

          -    cash in the amount of $264;

          -    an 11 1/2% Secured Note due 2007, Series A, with a principal
               amount equal to $610; and

          -    31.36 shares of Abraxas common stock.

     At the time the exchange offer was made, there were approximately $190.1
million of the second lien notes and $800,000 of the old notes outstanding.
Holders of approximately 94% of the aggregate outstanding principal amount of
the second lien notes and old notes tendered their notes for exchange in the
offer. Pursuant to the procedures for redemption under the applicable indenture
provisions, the remaining 6% of the aggregate outstanding principal amount of
the second lien notes and old notes were redeemed at 100% of the principal
amount plus accrued and unpaid interest, for approximately $11.8 million. The
indentures for the second lien notes and old notes have been duly discharged. In
connection with the exchange offer, Abraxas made cash payments of approximately
$47.4 million and issued approximately $109.5 million in principal amount of new
notes and 5,633,291 shares of Abraxas common stock, each of which are being
offered for resale under this prospectus. Fees and expenses incurred in
connection with the exchange offer were approximately $3.8 million.

     The selling security holders identified in this prospectus are the holders
of the notes and shares of Abraxas common stock issued in the exchange offer.
The exchange offer was conducted pursuant to an exemption from the registration
requirements of the Securities Act of 1933, and as such, the notes and shares of
Abraxas common stock issued in the exchange offer are restricted securities.
Pursuant to a registration rights agreement with the dealer manager for the
exchange offer on behalf of the tendering noteholders, we agreed to file a
registration statement with the SEC with respect to the notes and Abraxas common
stock, of which this prospectus forms a part, and to use our reasonable best
efforts to keep the registration statement effective until two years after its
effective date. Upon effectiveness of the registration statement, the notes and
shares of Abraxas common stock will be freely tradable by the selling security
holders and any subsequent purchasers.

     SALE OF STOCK OF CANADIAN ABRAXAS AND OLD GREY WOLF

     Contemporaneously with the closing of the exchange offer, on January 23,
2003, Abraxas completed the sale to a wholly-owned subsidiary of PrimeWest
Energy Inc. of all of the outstanding capital stock of two of Abraxas' former
wholly-owned subsidiaries, Canadian Abraxas and Grey Wolf Exploration Inc.,
referred to herein as Old Grey Wolf, for approximately $138 million before net
adjustments of $3.4 million. Under the terms of the agreement with PrimeWest, we
have retained certain assets formerly held by Canadian Abraxas and Old Grey
Wolf, including all of Canadian Abraxas' and Old Grey Wolf's undeveloped acreage
existing at the time of the sale, which includes all of our interests in the
Ladyfern area. These assets have been contributed to New Grey Wolf. Portions of
this undeveloped acreage will be developed by PrimeWest and New Grey Wolf under
a farmout arrangement.

     Abraxas used the proceeds from the sale of the capital stock of Canadian
Abraxas and Old Grey Wolf for the following purposes:

     -    to pay fees and expenses of the sale of Canadian Abraxas and Old
          Grey Wolf of approximately $2.5 million;

     -    to redeem our outstanding 12?% Senior Secured Notes, Series A, or
          first lien notes, at 100% of their principal amount, plus accrued
          and unpaid interest, for approximately $66.4 million; and

     -    to pay approximately $19.4 million of the cash portion of the
          exchange offer.

In addition, upon the closing of the sale, Old Grey Wolf repaid all of its
outstanding indebtedness of approximately $46.3 million.

                                        5
<Page>

     REDEMPTION OF FIRST LIEN NOTES

     On January 24, 2003, we completed the redemption of 100% of our outstanding
12?% Senior Secured Notes, Series A, or first lien notes with approximately
$66.4 million of the proceeds from the sale of Canadian Abraxas and Old Grey
Wolf. Prior to the redemption, we had $63.5 million of our first lien notes
outstanding. Under the terms of the indenture for the first lien notes, as of
March 15, 2002, we had the right to redeem the first lien notes at 100% of the
outstanding principal amount of the notes, plus accrued and unpaid interest to
the date of redemption, and to discharge the indenture upon call of the first
lien notes for redemption and deposit of the redemption funds with the trustee.
We exercised these rights on January 23, and upon the discharge of the
indenture, the trustee released the collateral securing our obligations under
the first lien notes.

     NEW SENIOR CREDIT AGREEMENT

     Contemporaneously with the closing of the exchange offer and the sale of
Abraxas' Canadian subsidiaries, Abraxas entered into a new senior credit
agreement providing a term loan facility and a revolving credit facility as
described below. Subject to earlier termination on the occurrence of events of
default or other events, the stated maturity date for both the term loan
facility and the revolving credit facility is January 22, 2006. Outstanding
amounts under both facilities bear interest at the prime rate announced by Wells
Fargo Bank, N.A. plus 4.5%. Any amounts in default under the term loan facility
will accrue interest at an additional 4%. At no time will the amounts
outstanding under the senior credit agreement bear interest at a rate less than
9%.

     TERM LOAN FACILITY. Abraxas has borrowed $4.2 million pursuant to a term
loan facility, all of which was used to make cash payments in connection with
the financial restructuring. Accrued interest under the term loan facility will
be capitalized and added to the principal amount of the term loan facility until
maturity.

     REVOLVING CREDIT FACILITY. Lenders under the new senior credit agreement
have provided a revolving credit facility to Abraxas with a maximum borrowing
base of up to $50 million. Our current borrowing base under the revolving credit
facility is $49.9 million, subject to adjustments based on periodic calculations
and mandatory prepayments under the senior credit agreement. Portions of accrued
interest under the revolving credit facility may be capitalized and added to the
principal amount of the revolving credit facility. As of the date of this
prospectus, we have borrowed $42.5 million under the revolving credit facility,
all of which was used to make cash payments in connection with the financial
restructuring. We plan to use the remaining borrowing availability under the new
senior credit agreement to fund our operations, including capital expenditures.

                             SUMMARY OF THE OFFERING

     The selling security holders are offering to sell up to 6,583,291 shares of
Abraxas common stock and $109,523,000 principal amount in currently outstanding
notes, in addition to any notes issued in lieu of cash interest payments
thereon. We will not receive any proceeds from the sale of the notes or common
stock. You should read the discussions under the headings "Description of the
Notes" beginning on page 79 and "Description of Capital Stock" beginning on page
129 for further information regarding the notes and common stock.

                              SUMMARY OF THE NOTES

<Table>
<S>                                          <C>
Notes...................................     Up to $184 million in principal amount of 11 1/2% Secured Notes due
                                             2007, which includes approximately $109.5 million principal amount
                                             in currently outstanding notes, and any notes issued in lieu of cash
                                             interest payments thereon.

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

Maturity Date...........................     May 1, 2007
</Table>

                                        6
<Page>

<Table>
<S>                                          <C>
Interest Rate and Payment Dates.........     The notes accrue interest from the date of issuance, at a fixed
                                             annual rate of 11 1/2%, payable in cash semi-annually on each May 1 and
                                             November 1, commencing May 1, 2003, PROVIDED THAT, if we fail, or
                                             are not permitted pursuant to our new senior credit agreement or the
                                             intercreditor agreement between the trustee under the indenture for
                                             the notes and the lenders under the new senior credit agreement, to
                                             make such cash interest payments in full, we will pay such unpaid
                                             interest in kind by the issuance of additional notes with a
                                             principal amount equal to the amount of accrued and unpaid cash
                                             interest on the notes plus an additional 1% accrued interest for the
                                             applicable period.  The notes will, upon an event of default, accrue
                                             interest at an annual rate of 16.5%.

Guarantees..............................     All of Abraxas' current subsidiaries, Sandia Oil & Gas, Sandia
                                             Operating (a wholly-owned subsidiary of Sandia Oil & Gas),
                                             Wamsutter, New Grey Wolf, Western Associated Energy and Eastside
                                             Coal, are guarantors of the notes, and all of Abraxas' future
                                             subsidiaries will guarantee the notes.  If Abraxas cannot make
                                             payments on the notes when they are due, the guarantors must make
                                             them instead.

Ranking.................................     The notes and related guarantees

                                                  -    are subordinated to the
                                                       indebtedness under the new senior
                                                       credit agreement;

                                                  -    rank equally with all of Abraxas'
                                                       current and future senior
                                                       indebtedness; and

                                                  -    rank senior to all of Abraxas'
                                                       current and future subordinated
                                                       indebtedness, in each case, if any.


                                             As of the date of this prospectus, our
                                             total borrowings under the new senior
                                             credit agreement were approximately $46.7
                                             million.

Intercreditor Agreement.................     The notes are subordinated to amounts outstanding under the new
                                             senior credit agreement both in right of payment and with respect to
                                             lien priority and are subject to an intercreditor agreement.  For
                                             more information on the intercreditor agreement, see the section
                                             entitled "Description of the Notes--Intercreditor Agreement"
                                             beginning on page 83 of this prospectus.

Collateral..............................     The notes are secured by a second lien or charge on all of our
                                             current and future assets, including, but not limited to, all of our
                                             crude oil and natural gas properties.

Optional Redemption.....................     Abraxas may redeem some or all of the notes at any time at the
                                             redemption prices described in the section entitled  "Description of
                                             the Notes--Redemption--Optional Redemption" on page 81 of this
                                             prospectus.

Mandatory Offer to Repurchase...........     If Abraxas sells certain assets or experiences specific kinds of
                                             changes of control, Abraxas must offer to repurchase the notes,
                                             subject to certain limitations in the case of assets sales, at the
                                             prices described in the sections "Description of the Notes--Change of
                                             Control" and "--Certain Covenants--Limitation on Asset Sales" on pages
                                             82  and 88, respectively, of this prospectus.
</Table>

                                        7
<Page>

<Table>
<S>                                          <C>
Basic Covenants of Indenture............     Abraxas issued the notes under an indenture with U.S. Bank, N.A.
                                             The indenture, among other things, restricts our ability to:

                                                  -    borrow money or issue preferred
                                                       stock;

                                                  -    pay dividends on stock or purchase
                                                       stock;

                                                  -    make other asset transfers;

                                                  -    transact business with affiliates;

                                                  -    sell stock of subsidiaries;

                                                  -    engage in any new line of business;

                                                  -    impair the security interest in any
                                                       collateral for the notes;

                                                  -    use assets as security in other
                                                       transactions; and

                                                  -    sell certain assets or merge with
                                                       or into other companies.

                                             The indenture for the notes also includes
                                             certain financial covenants including
                                             covenants limiting Abraxas' selling,
                                             general and administrative expenses and
                                             capital expenditures, a covenant requiring
                                             Abraxas to maintain a specified ratio of
                                             consolidated EBITDA to cash interest and a
                                             covenant requiring Abraxas to permanently,
                                             to the extent permitted, pay down debt
                                             under the new senior credit agreement and,
                                             to the extent permitted by the new senior
                                             credit agreement, the notes or, if not
                                             permitted, paying indebtedness under the
                                             new senior credit agreement.
</Table>

                             THE COMMON STOCK

     Of the 6,583,291 shares of common stock being offered under this
prospectus, 5,633,291 shares were issued in connection with the financial
restructuring exchange offer and 950,000 shares are issuable upon exercise of
currently outstanding warrants to purchase common stock. Abraxas is currently
authorized to issue a total of 200,000,000 shares of common stock, par value
$.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per
share. As of February 6, 2003, there were 35,612,688 shares of Abraxas common
stock outstanding and no shares of preferred stock outstanding. For a more
complete description of the common stock, see the section entitled
"Description of Capital Stock--Common Stock" beginning on page 129 of this
prospectus.

                                        8
<Page>

            SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

     The following table presents certain of our summary historical condensed
consolidated financial data and certain pro forma information after giving
effect to and reflecting the exchange offer and each of the other transactions
described under "Business--Recent Developments--Financial Restructuring". The
summary historical financial information presented below for each of the three
years ended December 31, 1999, 2000 and 2001, and as of and for each of the nine
months ended September 30, 2001 and 2002 has been derived from our consolidated
financial statements included in this prospectus. The pro forma statements of
consolidated operations for the year ended December 31, 2001 and the nine months
ended September 30, 2002, give effect to the exchange offer and each of the
other transactions as if they had occurred on January 1, 2001. The pro forma
balance sheet gives effect to the exchange offer and each of the other
transactions as if they had occurred on September 30, 2002. The unaudited pro
forma information set forth below is not necessarily indicative of the results
that actually would have been achieved had the exchange offer and each of the
other transactions described under "Business--Recent Developments--Financial
Restructuring" been consummated on January 1, 2001, or that may be achieved in
the future. It is important that you read this information along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Historical Financial Data," our Consolidated Financial
Statements and the notes thereto and the "Unaudited Pro Forma Condensed
Consolidated Financial Statements" beginning on page 24 of this prospectus.

<Table>
<Caption>
                                                                                                      NINE MONTHS ENDED
                                                        YEARS ENDED DECEMBER 31,                        SEPTEMBER 30,
                                            ----------------------------------------------  ----------------------------------
                                                                                   PRO                                 PRO
                                                                                  FORMA                               FORMA
                                               1999        2000        2001        2001        2001        2002        2002
                                           ----------- -----------  ----------  ----------  ----------  ---------- -----------
                                                                          (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>         <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
  Total operating revenue (1).............. $ 66,770    $ 76,600    $ 77,243    $ 30,352    $ 65,103    $  37,103    $ 14,274
  Lease and other operating expenses (2)...   18,562      19,500      19,318       9,097      14,227       11,644       6,012
  Depreciation, depletion and amortization
     expense...............................   34,811      35,857      32,484      11,399      25,150       21,010       6,367
  Proved property impairment...............   19,100          --       2,638          --          --      115,995      28,179
  General and administrative expense.......    5,269       6,533       6,445       5,390       5,051        4,578       3,718
  Interest expense, net of interest
  income(3).................................  36,149      30,610      31,445      15,479      23,626       25,734      12,351
  Amortization of deferred financing fee...    1,915       2,091       2,268       1,730       1,315        1,283       1,477
  Income (loss) before extraordinary items. $(36,680)   $  6,676    $(19,718)   $(11,455)   $ (6,868)   $(112,827)   $(43,774)
  Net income (loss) applicable to common
     stock................................. $(36,680)      8,449    $(19,718)   $(11,455)   $ (6,868)   $(112,827)   $(43,774)
  Income (loss) before extraordinary items
     per common share:
    Basic.................................. $  (5.41)   $   0.29    $  (0.76)   $  (0.36)   $  (0.28)   $   (3.76)   $  (1.23)
    Diluted................................ $  (5.41)   $   0.21    $  (0.76)   $  (0.36)   $  (0.28)   $   (3.76)   $  (1.23)

OTHER DATA:
  Capital expenditures (including
  acquisitions)............................ $128,708    $ 74,412    $ 57,056    $ 19,241    $ 47,793    $  33,392    $ 10,163
  Ratio of earnings to fixed charges (4)...      n/a       1.36x         n/a         n/a         n/a          n/a         n/a
</Table>

<Table>
<Caption>
                                                                      SEPTEMBER 30, 2002
                                                               ---------------------------------
                                                                    ACTUAL         PRO FORMA
                                                               ---------------  ----------------
                                                                    (DOLLARS IN THOUSANDS)
                 CONSOLIDATED BALANCE SHEET DATA:
                 <S>                                           <C>                    <C>
                 Total assets...........................       $  183,893             $ 112,844
                 Total other liabilities................       $   27,226             $   5,237
                 Total debt ............................       $  294,699             $ 175,083
                 Stockholders' deficit..................       $ (138,032)            $ (67,476)
</Table>

                                        9
<Page>

----------

(1)  Consists of crude oil and natural gas production sales, revenue from rig
     operations and processing facilities, and other miscellaneous revenue.

(2)  Consists of lease operating expenses, production taxes, rig operating
     expenses and processing costs.

(3)  Interest expense on our indebtedness includes cash interest expense on the
     new revolving credit facility and non-cash (additional notes) interest
     expense on the term loan and the new notes. Non-cash interest expense is
     calculated at 9% on the term loan and at an imputed rate of 8.6% on the new
     notes based on the carrying value of the exchanged notes of $128.4 million.

(4)  Earnings consist of income (loss) from continuing operations before income
     taxes plus fixed charges. Fixed charges consist of interest expense,
     amortization of deferred financing fees and premium on the old notes. Our
     earnings were inadequate to cover fixed charges in 1999, 2001 and Pro
     Forma 2001, and the nine month periods ended September 30, 2001, 2002 and
     Pro Forma 2002, by $49.0 million, $15.6 million, $11.0 million, $1.5
     million, $143.1 million and $43.8 million, respectively. In 2000, we had
     earnings from continued operations of $44.4 million and fixed charges of
     $32.7 million. Our ratio of earnings to fixed charges during 2000 was
     1.36x.

                 SUMMARY HISTORICAL AND PRO FORMA OPERATING DATA

<Table>
<Caption>
                                                                                                         NINE MONTHS
                                                      YEARS ENDED DECEMBER 31,                       ENDED SEPTEMBER 30,
                                              ---------------------------------------------   ----------------------------------
                                                                                      PRO                                  PRO
                                                                                     FORMA                                FORMA
                                                  1999         2000        2001       2001        2001       2002          2002
                                              ----------   ----------  ----------  ---------   ----------  ----------   --------
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S>                                           <C>          <C>         <C>         <C>         <C>         <C>          <C>
PRODUCTION:
   Crude oil (MBbls)..........................      778          637         454         329         373         216          180
   NGLs (MBbls)...............................      376          315         278          44         203         182            7
   Natural gas (MMcf).........................   25,698       19,962      17,496       7,006      13,420      11,692        4,080
     Mmcfe....................................   32,624       25,675      21,888       9,244      16,876      14,080        5,202
AVERAGE SALES PRICE:(1)

   Crude oil (per Bbl)........................$   14.57    $   18.69   $   24.63   $   25.01   $   25.91   $   22.27    $   22.66
   NGLs (per Bbl).............................    13.40        22.42       21.51       16.02       24.02       16.53        13.52
   Natural gas (per Mcf)......................     1.66         2.71        3.20        2.94        3.54        2.25         2.33
     Per Mcfe.................................     1.81         2.84        3.35        3.19        3.68        2.43         2.63
LOE (PER MCFE)................................$    0.55    $    0.73   $    0.85   $    0.93   $    0.81   $    0.80    $    1.07
NATURAL GAS PROCESSING PLANTS (PERIOD-END):

   Number of natural gas processing plants....       20           13          12          --          12           9           --
   Net plant capacity (MMcfpd)................      120          120         107          --         107         154           --
</Table>

----------
(1)  Average sales prices include effects of hedging activities.

                                       10
<Page>

                 SUMMARY HISTORICAL AND PRO FORMA RESERVES DATA

     The following table sets forth summary information with respect to our
estimated proved crude oil, NGLs and natural gas reserves as of the dates
indicated and sets forth an unaudited summary report of our pro forma reserves
as of December 31, 2001, and June 30, 2002, gives effect to and reflects the
exchange offer and each of the other transactions described under
"Business--Recent Developments--Financial Restructuring" as if all were
consummated as of such dates. The information in these tables should be read in
conjunction with the section entitled "Unaudited Pro Forma Condensed
Consolidated Financial Statements" beginning on page 24 of this prospectus.

<Table>
<Caption>
                                                                 AS OF DECEMBER 31,                      AS OF JUNE 30,
                                                   -----------------------------------------------  ------------------------
                                                                                            PRO                        PRO
                                                                                           FORMA                      FORMA
                                                       1999        2000         2001        2001        2002          2002
                                                   ----------  ----------   ----------   ----------  ----------    ---------
                                                                   (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S>                                                <C>       <C>           <C>             <C>         <C>           <C>
ESTIMATED PROVED RESERVES:
Crude oil and NGLs (MBbls).......................      9,849       8,844        6,802        3,555       5,093         3,812
Natural gas (MMcf)...............................    164,305     191,327      188,757      105,965     141,963        88,775
Natural gas equivalents (MMcfe)..................    223,399     244,391      229,569      127,295     172,520       111,646
  % Proved developed.............................        78%          66%          62%          42%         65%           49%
Estimated future net revenue before income taxes.  $ 462,518 $ 1,727,909   $  386,762      136,299     238,979       151,651
PV-10............................................    257,104   1,006,521      209,666       73,874     128,692(1)     81,285(1)
  % Proved developed.............................         82%         68%          82%          66%         82%           72%
</Table>

----------
(1)  The prices used to calculate PV-10 as of June 30, 2002 were $3.25 per Mcf
     of natural gas and $26.86 per barrel of crude oil. At January 28, 2003,
     NYMEX prices were $5.44 per Mcf of natural gas and $32.67 per barrel of
     crude oil. At the January 28, 2003 prices, PV-10 for our reserves at June
     30, 2002 would have been approximately $195.6 million.

                                       11
<Page>

                                  RISK FACTORS

     YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT IN THE NOTES OR
ABRAXAS COMMON STOCK OFFERED BY THE SELLING SECURITY HOLDERS.

RISKS RELATED TO THE OFFERING

     THE SECURITY FOR THE NOTES MAY BE INADEQUATE TO SATISFY ALL AMOUNTS DUE AND
OWING TO OUR SENIOR SECURED CREDITORS AND THE HOLDERS OF OUR NOTES. Currently,
the notes are secured by a second lien or charge on all of our current and
future assets, including, but not limited to, our crude oil and natural gas
assets. There can be no assurance that, following an acceleration after an event
of default under the indenture for the notes, the proceeds from the sale of the
collateral and allocable to the notes would be sufficient to satisfy all amounts
due on such notes. The ability of the holders of the notes to realize upon the
collateral will also be subject to certain limitations in the indenture for the
notes, the accompanying mortgage and the pledge agreement, including a
prohibition on foreclosing on the collateral for 180 days after an event of
default under the notes, as applicable. In addition, if we become a debtor in a
case under the bankruptcy code, the automatic stay imposed by the bankruptcy
code would prevent the trustee from selling or otherwise disposing of the
collateral without bankruptcy court authorization. In that case, the foreclosure
might be delayed indefinitely. See "Description of the Notes--Security" on page
82 of this prospectus.

     THE GUARANTEES MAY NOT BE ENFORCEABLE IN BANKRUPTCY. Abraxas' obligations
under the notes (and any additional notes issued in lieu of cash interest
payments), are guaranteed by Sandia Oil & Gas, Sandia Operating, Wamsutter, New
Grey Wolf, Western Associated Energy, Eastside Coal and any other future
subsidiaries. Various fraudulent conveyance laws have been enacted for the
protection of creditors and may be utilized by courts to subordinate or void
such guarantees. It is also possible that under certain circumstances a court
could hold that the direct obligations of a guarantor could be superior to the
obligations under its guarantee.

     To the extent that a court were to find that at the time a guarantor
entered into a guarantee either:

     (1)  the guarantee was incurred by the guarantor with the intent to hinder,
          delay or defraud any present or future creditor or that the guarantor
          contemplated insolvency with a design to favor one or more creditors
          to the exclusion in whole or in part of others; or

     (2)  the guarantor did not receive fair consideration or reasonably
          equivalent value for issuing the guarantee and, at the time it issued
          the guarantee, the guarantor

       -  was insolvent or rendered insolvent by reason of the issuance of the
          guarantee;

       -  was engaged or about to engage in a business or transaction for which
          the remaining assets of the guarantor constituted unreasonably small
          capital; or

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

the court could void or subordinate the guarantee in favor of the guarantor's
other creditors. Among other things, a legal challenge of a guarantee issued by
a guarantor on fraudulent conveyance grounds may focus on the benefits, if any,
realized by the guarantor as a result of our issuance of the notes or any
additional notes issued in lieu of cash interest payments. A court might find
that the guarantors did not benefit from incurrence of the indebtedness
represented by such notes.

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

                                       12
<Page>

     Under applicable provisions of Canadian federal bankruptcy law or
comparable provisions of provincial fraudulent preference laws, if a court in an
action brought by an unpaid creditor of New Grey Wolf or by a bankruptcy trustee
thereof were to find that the liens granted by New Grey Wolf over its assets
were intended to prefer the holders of the notes over other creditors, such
liens could be set aside. This would become an issue if New Grey Wolf became
insolvent or bankrupt within a certain period after granting the liens.

     UNDER CERTAIN CIRCUMSTANCES A BANKRUPTCY COURT COULD ORDER THE REPAYMENT OF
INTEREST PAYMENTS MADE UNDER THE NOTES. The bankruptcy code allows the
bankruptcy trustee (or us, acting as debtor-in-possession) to avoid certain
transfers of a debtor's property as a "preference." Under the bankruptcy code a
preference is:

       -  a transfer of the debtor's property;

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

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

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

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

     Our payment of principal and/or accrued interest, or our grant of a lien or
security interest, including payments made or liens or security interests
granted pursuant to the exchange offer, may be deemed to be a preference if all
of the factors discussed above are present. If such transfers were deemed to be
preferential transfers, the payments could be recovered from the noteholders and
the lien or security interest could be avoided.

     If the notes (and any additional notes issued in lieu of cash interest
payments), are fully secured (i.e., the value of collateral exceeds the amount
it secures), payments on such notes would not constitute preferential transfers.
However, if, or to the extent, the notes are undersecured (i.e., the value of
the collateral is less than the amount which it secures), payments would be
deemed to have been applied, first, to the unsecured portion of the notes and,
second, to the secured portion of the notes and the payments attributable to the
unsecured portion could be considered preferential transfers. Therefore, if we
are involved in a bankruptcy proceeding, holders of our notes or any additional
notes issued in lieu of cash interest payments may be required to disgorge
payments made on such notes to the extent the notes are undersecured.

     Additionally, due to Abraxas' and the guarantors' being domiciled in the
United States and in Canada, Abraxas and the guarantors could be subject to
multi-jurisdictional insolvency proceedings in the United States and Canada. If
multi-jurisdictional insolvency proceedings were to occur, this could result in
additional delay in payment of the notes or any additional notes issued in lieu
of cash interest payments, as well as delay in or prevention from enforcing
remedies under such notes, any guarantee thereunder and the liens securing such
notes and the guarantees. Likewise, our notes could be subject to different
treatment inasmuch as the multiple insolvency proceedings would be conducted by
different courts applying different laws.

     IN BANKRUPTCY, THE PAYMENT OF CASH AND THE ISSUANCE OF THE NOTES AND
ABRAXAS COMMON STOCK IN THE EXCHANGE OFFER COULD BE AVOIDED AS A PREFERENTIAL
TRANSFER. If we were to become subject to a petition for relief under the
bankruptcy code within 90 days after the consummation of the exchange offer (or,
with respect to any insiders specified in the bankruptcy code, within one year
after consummation of the exchange offer) and certain other conditions are met,
the consideration paid to noteholders in the exchange offer, absent the presence
of one of the bankruptcy code defenses to avoidance, could be avoided as a
preferential transfer and, to the extent avoided, the value of such
consideration could be recovered from the noteholder and possibly from
subsequent transferees.

     ORIGINAL ISSUE DISCOUNT WILL BE INCLUDED IN YOUR GROSS INCOME FOR U.S.
FEDERAL INCOME TAX PURPOSES BEFORE YOU RECEIVE ANY CASH PAYMENTS ON THE NOTES.
The notes have been deemed to be issued at a substantial discount from their
stated principal amount at maturity because the issue price of the notes will be
determined by reference to the fair market value of the second lien notes and
old notes in exchange for which the notes subject to this prospectus were issued
on January 23, 2003, the closing date of the private exchange offer in which the
notes were issued. Furthermore, periodic interest payments on the notes will be
payable in cash or by the issuance of

                                       13
<Page>

additional notes and, as such, will be treated as if all interest payments are
made in the form of additional notes, thereby creating original issue discount
on the notes. Consequently, prior to receiving any cash interest payments on the
notes, a holder of notes will be required to include significant original issue
discount in the gross income of such holder for U.S. federal income tax
purposes. For a more detailed discussion of the tax consequences applicable to
holders of the notes, see the section entitled "Certain U.S. Federal Income Tax
Considerations" beginning on page 134 of this prospectus.

     THE AMOUNT OF ANY CLAIM MADE BY YOU IN A BANKRUPTCY ACTION MAY BE LIMITED
AS A RESULT OF THE NOTES BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT. If a
bankruptcy petition is filed by or against us under the U.S. Bankruptcy Code
while the notes are outstanding, the claim of a holder of the notes with respect
to the accreted value of the notes may be limited to an amount equal to the sum
of:

       -  the initial issue price for the notes; and

       -  that portion of the original issue discount that is not deemed to
          constitute "unmatured interest" within the meaning of the United
          States Bankruptcy Code.

     Any original issue discount that was not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest." Accordingly,
holders of the notes under such circumstances may receive a lesser amount than
they would be entitled to under the express terms of the indenture for the
notes, even if sufficient funds are available. In addition, to the extent that
the U.S. Bankruptcy Code differs from the Internal Revenue Code of 1986, as
amended, in determining the method of amortization of original issue discount, a
holder of the notes may realize taxable gain or loss upon payment of that
holder's claim in bankruptcy.

     WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL. Upon
the occurrence of certain change of control events, holders of the notes may
require us to offer to repurchase all or any part of their notes. We may not
have sufficient funds at the time of the change of control to make the required
repurchases of such notes.

     The source of funds for any repurchase required as a result of any change
of control will be our available cash or cash generated from crude oil and
natural gas operations or other sources, including borrowings, sales of assets,
sales of equity or funds provided by a new controlling entity. We cannot assure
you, however, that sufficient funds would be available at the time of any change
of control to make any required repurchases of the notes tendered. Furthermore,
using available cash to fund the potential consequences of a change of control
may impair our ability to obtain additional financing in the future. In
addition, the new senior credit agreement restricts our ability to repurchase
the notes. Any future credit agreements or other agreements relating to debt to
which we may become a party will most likely contain similar restrictions and
provisions.

     AN ACTIVE MARKET MAY NOT DEVELOP FOR THE NOTES OR ABRAXAS COMMON STOCK. The
notes were originally issued on January 23, 2003 and no assurance can be given
that an active market will develop, or, if such a market develops, that such
market will be liquid. The notes will not be listed on any national securities
exchange. Accordingly, no assurance can be given that a holder of the notes will
be able to sell such notes in the future or as to the price at which such sale
may occur. The liquidity of the market for the notes and the prices at which
such notes trade will depend upon the amount outstanding, the number of holders
thereof, the interest of securities dealers in maintaining a market in such
notes and other factors beyond our control. The liquidity of, and trading market
for, the notes also may be adversely affected by general declines in the market
for high yield securities. Such declines may adversely affect the liquidity and
trading markets for the notes.

     The Abraxas common stock is quoted on the American Stock Exchange. While
there is currently one specialist in the Abraxas common stock, this specialist
is not obligated to continue to make a market in the Abraxas common stock. In
this event, the liquidity of the Abraxas common stock could be adversely
impacted and a stockholder could have difficulty obtaining accurate stock
quotes.

     COMPOUND INTEREST ON THE NOTES MAY BE RESTRICTED BY APPLICABLE LAW.
Interest on the notes will compound semi-annually to the extent permitted by
applicable law. Although applicable law provides for enforceability of compound
interest in certain loans and agreements, it may not be enforceable in a loan
with a principal amount of $250,000 or less. It is unclear whether compound
interest is enforceable in a loan with a principal amount of $250,000 or less
when the aggregate amount of the debt incurred under the financing agreement
governing that loan is over $250,000. Accordingly, the ability of the holder of
any note with a principal amount of $250,000 or less to

                                       14
<Page>

collect compounded interest may be restricted by applicable law. In any event,
Abraxas intends to pay compound interest in accordance with the terms of the
indenture for the notes.

     ABRAXAS DOES NOT PAY DIVIDENDS ON COMMON STOCK. Abraxas has never paid a
cash dividend on its common stock and the terms of the new senior credit
agreement and the indenture relating to the notes limit the ability of Abraxas
to pay dividends on its common stock.

     SHARES ELIGIBLE FOR FUTURE SALE MAY DEPRESS OUR STOCK PRICE. At February 6,
2003 we had 35,612,688 shares of common stock outstanding of which 2,939,757
shares were held by affiliates, 3,291,340 shares of common stock were subject to
outstanding options granted under certain stock option plans (of which 2,136,149
shares were vested at February 6, 2003) and 950,000 shares were issuable upon
exercise of warrants.

     All of the shares of common stock held by affiliates are restricted or
control securities under Rule 144 promulgated under the Securities Act. The
shares of the common stock issuable upon exercise of the stock options have been
registered under the Securities Act. The shares of the common stock issuable
upon exercise of the warrants are subject to certain registration rights and,
therefore, will be eligible for resale in the public market after a registration
statement covering such shares has been declared effective. Sales of shares of
common stock under Rule 144 or another exemption under the Securities Act or
pursuant to a registration statement could have a material adverse effect on the
price of the common stock and could impair our ability to raise additional
capital through the sale of equity securities.

     THE PRICE OF ABRAXAS' COMMON STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO
FLUCTUATE SUBSTANTIALLy. Abraxas' common stock is traded on the American Stock
Exchange. The market price of Abraxas' common stock has been volatile and could
fluctuate substantially based on a variety of factors, including the following:

       -  Fluctuations in commodity prices;

       -  Variations in results of operations;

       -  Legislative or regulator changes;

       -  General trends in the industry;

       -  Market conditions; and

       -  Analysts' estimates and other events in the crude oil and natural gas
          industry.

     WE MAY ISSUE SHARES OF PREFERRED STOCK WITH GREATER RIGHTS THAN OUR COMMON
STOCK. Subject to the rules of the American Stock Exchange, our articles of
incorporation authorize our board of directors to issue one or more series of
preferred stock and set the terms of the preferred stock without seeking any
further approval from holders of our common stock. Any preferred stock that is
issued may rank ahead of our common stock in terms of dividends, priority and
liquidation premiums and may have greater voting rights than our common stock.

     ANTI-TAKEOVER PROVISIONS COULD MAKE A THIRD PARTY ACQUISITION OF ABRAXAS
DIFFICULT. Abraxas' articles of incorporation and by-laws provide for a
classified board of directors, with each member serving a three-year term, and
eliminate the ability of stockholders to call special meetings or take action by
written consent. Abraxas also has adopted a stockholder rights plan. Each of the
provisions in the articles of incorporation and by-laws and the stockholder
rights plan could make it more difficult for a third party to acquire Abraxas
without the approval of Abraxas' board. In addition, the Nevada corporate
statute also contains certain provisions that could make an acquisition by a
third party more difficult.

RISKS RELATED TO OUR BUSINESS

     OUR REDUCED OPERATING CASH FLOW RESULTING FROM THE SALE OF CANADIAN ABRAXAS
AND OLD GREY WOLF MAY PUT SIGNIFICANT STRAIN ON OUR LIQUIDITY AND CASH POSITION.
Our reduced operating cash flow and resulting limited liquidity has caused us,
and the limitations imposed by the new senior credit agreement and the notes
will cause us, to reduce capital expenditures, including exploration,
exploitation and development projects. These reductions will limit our ability
to replenish our depleting reserves, which could negatively impact our cash flow
from operations and results of operations in the future. In addition, under the
terms of the notes, we are required, to the extent

                                       15
<Page>

permitted, to permanently pay down debt under the new senior credit agreement
and, if permitted, the notes, with our cash flow which is not required to pay
our capital expenditures or make cash interest and tax payments.

     The effects of our reduced operating cash flow will be exacerbated by our
high level of debt, which will affect our operations in several important ways,
including:

       -  A substantial amount of our cash flow from operations will be required
          to make principal and interest payments on our outstanding
          indebtedness and will not be available for other purposes, including
          developing our properties;

       -  The covenants contained in the indenture governing the notes and in
          the new senior credit agreement will limit our ability to borrow
          additional funds or to dispose of assets or use the proceeds of any
          asset sales and may affect our flexibility in planning for, and
          reacting to, changes in our business; and

       -  Our debt level may impair our ability to obtain additional financing
          in the future for working capital, capital expenditures, acquisitions,
          interest payments, scheduled principal payments, general corporate
          purposes or other purposes.

     OUR LIMITED LIQUIDITY AND RESTRICTIONS ON USES OF CASH DICTATED BY BOTH THE
NEW SENIOR CREDIT AGREEMENT AND THE NOTES, COMBINED WITH OUR HIGH DEBT LEVELS
MAY HINDER OUR ABILITY TO SATISFY THE SUBSTANTIAL CAPITAL REQUIREMENTS RELATED
TO OUR OPERATIONS. The success of our future operations will require us to make
substantial capital expenditures for the exploitation, development, exploration
and production of crude oil and natural gas. Volatile commodity prices could
negatively impact our cash flow from operations as well as any future sales of
producing properties.

     Under the terms of the new senior credit agreement, we are required to
establish deposit accounts at financial institutions acceptable to the lenders
and we are required to direct our customers to make all payments into these
accounts. The amounts in these accounts will be transferred to the lender upon
the occurrence and during the continuance of an event of default under the new
senior credit agreement. We will also be required to make mandatory repayments
of the outstanding amounts owing under the new senior credit agreement if the
outstanding amounts exceed the borrowing base.

     In addition, under the terms of the notes, Abraxas is subject to cash and
expenditures covenants including those set forth in the sections entitled
"Description of the Notes--Certain Covenants--Excess Cash Flow and Excess Cash,"
"--Limitations on Expenditures for Selling, General and Administrative
Expenses," "--Limitations on Capital Expenditures" and "--Limitation on Uses of
Cash" beginning on page 87 of this prospectus.

     These limitations imposed on Abraxas by the new senior credit agreement and
the notes will have the effect of limiting our ability to develop our crude oil
and natural gas properties because much of our cash flow will be used for debt
service. As a result, our ability to replace production will be limited. You
should read the discussion under "--Our ability to replace production with new
reserves is highly dependent on acquisitions or successful development and
exploration activities" for more information regarding the risks associated with
limitations on our ability to develop our crude oil and natural gas properties.

     HEDGING TRANSACTIONS MAY LIMIT OUR POTENTIAL GAINS. From time to time, we
enter into hedge agreements and other financial arrangements at various times to
attempt to minimize the effect of crude oil and natural gas price fluctuations.
As of January 23, 2003, we have entered into hedging agreements expiring in six
months with respect to approximately 25% of our current production. We cannot
assure you that our hedging transactions will reduce risk or minimize the effect
of any decline in crude oil or natural gas prices. Any substantial or extended
decline in crude oil or natural gas prices would have a material adverse effect
on our business and financial results. Hedging activities may limit the risk of
declines in prices, but such arrangements may also limit, and have in the past
limited, additional revenues from price increases. In addition, such
transactions may expose us to risks of financial loss under certain
circumstances, such as:

       -  production being less than expected; or

                                       16
<Page>

       -  price differences between delivery points for our production and those
          in our hedging agreements increasing.

     In 2000, 2001 and the nine month period ended September 30, 2002, we
experienced hedging losses of $20.2 million, $12.1 million and $2.8 million,
respectively. Under the terms of the new senior credit agreement, we are
required to enter into hedging transactions with respect to not less than 25%
nor more than 75% of our crude oil and natural gas production on an ongoing
basis. For a more detailed description of the new senior credit agreement and
our hedging sensitivity, see the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 30.

     OUR ABILITY TO REPLACE PRODUCTION WITH NEW RESERVES IS HIGHLY DEPENDENT ON
ACQUISITIONS OR SUCCESSFUL DEVELOPMENT AND EXPLORATION ACTIVITIES. The rate of
production from crude oil and natural gas properties declines as reserves are
depleted. Our proved reserves will decline as reserves are produced unless we
acquire additional properties containing proved reserves, conduct successful
exploration, exploitation and development activities or, through engineering
studies, identify additional behind-pipe zones or secondary recovery reserves.
Our future crude oil and natural gas production is therefore highly dependent
upon our level of success in acquiring or finding additional reserves. While we
have had some success in pursuing these activities, we have not been able to
fully replace the production volumes lost from natural field declines and
property sales. We have implemented a number of measures to conserve our cash
resources, including postponement of exploration and development projects.
However, while these measures will conserve our cash resources in the near term,
they will also limit our ability to replenish our depleting reserves, which
could negatively impact our cash flow from operations in the future. Further, in
addition to the effects of our limited liquidity, our operations may be
curtailed, delayed or cancelled by other factors, such as title problems,
weather, compliance with governmental regulations, mechanical problems or
shortages or delays in the delivery of equipment. We cannot assure you that our
exploration and development activities will result in increases in reserves.

     USE OF OUR NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED. At December 31,
2001, Abraxas had, subject to the limitation discussed below, $115.9 million of
net operating loss carryforwards for U.S. tax purposes. These loss carryforwards
will expire from 2002 through 2021 if not utilized. At December 31, 2001,
Abraxas had approximately $6.7 million of net operating loss carryforwards for
Canadian tax purposes. These carryforwards will expire from 2002 through 2008 if
not utilized. In connection with the financial restructuring, a significant
portion of the U.S. loss carryforwards will be utilized.

     As to a portion of the U.S. net operating loss carryforwards, the amount of
such carryforwards that we can use annually is limited under U.S. tax law.
Additionally, uncertainties exist as to the future utilization of the operating
loss carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, Abraxas has established a valuation allowance of $34,763,000 and
$39,670,000 for deferred tax assets at December 31, 2000 and 2001, respectively.

     CRUDE OIL AND NATURAL GAS PRICES AND THEIR VOLATILITY COULD ADVERSELY
AFFECT OUR REVENUE, CASH FLOWS, PROFITABILITY AND GROWTH. Our revenue, cash
flows, profitability and future rate of growth depend substantially upon
prevailing prices for crude oil and natural gas. Natural gas prices affect us
more than crude oil prices because most of our production and reserves are
natural gas. Prices also affect the amount of cash flow available for capital
expenditures and our ability to borrow money or raise additional capital. In
addition, we may have ceiling limitation write-downs when prices decline. During
the second quarter of 2002, we had a ceiling limitation write down of
approximately $116.0 million. Lower prices may also reduce the amount of crude
oil and natural gas that we can produce economically.

     We cannot predict future crude oil and natural gas prices. Factors that can
cause price fluctuations include:

       -  changes in supply and demand for crude oil and natural gas;

       -  weather conditions;

       -  the price and availability of alternative fuels;

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

                                       17
<Page>

       -  overall economic conditions.

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

       -  reducing the overall volumes of crude oil and natural gas that we can
          produce economically;

       -  causing a ceiling limitation write-down;

       -  increasing our dependence on external sources of capital to meet our
          liquidity requirements; and

       -  impairing our ability to obtain needed equity capital.

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

     At June 30, 2002, our net capitalized costs of crude oil and natural gas
properties exceeded the present value of our estimated proved reserves by $138.7
million ($28.2 million on the U.S. properties and $110.5 million on the Canadian
properties). These amounts were calculated considering June 30, 2002 prices of
$26.12 per Bbl for crude oil and $2.16 per Mcf for natural gas as adjusted to
reflect the expected realized prices for each of the full cost pools. Subsequent
to June 30, 2002, commodity prices increased in Canada and we utilized these
increased prices in calculating the ceiling limitation write-down. The
write-down for our Canadian properties was $87.8 million at June 30, 2002 and
the total write-down was approximately $116.0 million. At September 30, 2002 our
net capitalized cost of crude oil and natural gas properties did not exceed the
present value of our estimated reserves, due to increased commodity prices
during the third quarter and, as such, no further write-down was recorded. We
cannot assure you that we will not experience additional ceiling limitation
write-downs in the future.

     ESTIMATES OF OUR PROVED RESERVES AND FUTURE NET REVENUE ARE UNCERTAIN AND
INHERENTLY IMPRECISe. This prospectus contains estimates of our proved crude oil
and natural gas reserves and the estimated future net revenue from such
reserves. The process of estimating crude oil and natural gas reserves is
complex and involves decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data. Therefore, these
estimates are imprecise.

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

     You should not assume that the present value of future net revenues
referred to in this prospectus is the current market value of our estimated
crude oil and natural gas reserves. In accordance with SEC requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the end of the period of the estimate. Actual
future prices and costs may be materially higher or lower than the prices and
costs as of the end of the year of the estimate. Any changes in consumption by
natural gas purchasers or in governmental regulations or taxation will also
affect actual future net cash flows. The timing of both the production and the
expenses from the development and production of crude oil and natural gas
properties will affect the timing of actual future net cash flows from proved
reserves and their present value. In addition, the 10% discount factor,

                                       18
<Page>

which is required by the SEC to be used in calculating discounted future net
cash flows for reporting purposes, is not necessarily the most accurate discount
factor. The effective interest rate at various times and the risks associated
with us or the crude oil and natural gas industry in general will affect the
accuracy of the 10% discount factor.

     The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of crude oil and natural gas reserves, future net
revenue from proved reserves and the PV-10 thereof for the crude oil and natural
gas properties described in this prospectus are based on the assumption that
future crude oil and natural gas prices remain the same as crude oil and natural
gas prices at June 30, 2002. The sales prices as of such date used for purposes
of such estimates were $26.16 per Bbl of crude oil, $16.82 per Bbl of NGLs and
$2.16 per Mcf of natural gas. This compares with $18.26 per Bbl of crude oil,
$16.29 per Bbl of NGLs and $2.16 per Mcf of natural gas as of December 31, 2001.
These estimates also assume that we will make future capital expenditures of
approximately $53 million in the aggregate, which are necessary to develop and
realize the value of proved undeveloped reserves on our properties. Any
significant variance in actual results from these assumptions could also
materially affect the estimated quantity and value of reserves set forth herein.

     WE HAVE EXPERIENCED RECURRING NET LOSSES. The following table shows the
losses we had in 1997, 1998, 1999 and 2001 and for the first nine months of
2002:

<Table>
<Caption>
                                               YEAR ENDED DECEMBER 31,
                                     ------------------------------------------                NINE
                                                                                          MONTHS ENDED
                                     1997        1998        1999          2001        SEPTEMBER 30, 2002
                                     ----        ----        ----          ----        ------------------
                                                           (DOLLARS IN MILLIONS)
<S>                                 <C>        <C>         <C>           <C>                <C>
   Net (loss) applicable to
   common stock                     $ (6.5)    $ (84.0)    $ (36.7)      $ (19.7)           $ (112.8)
</Table>


     While we had net income in 2000 of $8.4 million, if the significant gain on
the sale of an interest in a partnership were excluded, we would have
experienced a net loss for the year of $(25.5) million. We cannot assure you
that we will become profitable in the future.

     THE MARKETABILITY OF OUR PRODUCTION DEPENDS LARGELY UPON THE AVAILABILITY,
PROXIMITY AND CAPACITY OF NATURAL GAS GATHERING SYSTEMS, PIPELINES AND
PROCESSING FACILITIES. The marketability of our production depends in part upon
processing facilities. Transportation space on such gathering systems and
pipelines is occasionally limited and at times unavailable due to repairs or
improvements being made to such facilities or due to such space being utilized
by other companies with priority transportation agreements. Our access to
transportation options can also be affected by U.S. federal and state and
Canadian regulation of crude oil and natural gas production and transportation,
general economic conditions, and changes in supply and demand. These factors and
the availability of markets are beyond our control. If market factors
dramatically change, the financial impact on us could be substantial and
adversely affect our ability to produce and market crude oil and natural gas.

     OUR CANADIAN OPERATIONS ARE SUBJECT TO THE RISKS OF CURRENCY FLUCTUATIONS
AND IN SOME INSTANCES ECONOMIC AND POLITICAL DEVELOPMENTS. We have significant
operations in Canada. The expenses of such operations are payable in Canadian
dollars while most of the revenue from crude oil and natural gas sales is based
upon U.S. dollar price indices. As a result, Canadian operations are subject to
the risk of fluctuations in the relative values of the Canadian and U.S.
dollars. We are also required to recognize foreign currency translation gains or
losses related to any debt issued by our Canadian subsidiary because the debt is
denominated in U.S. dollars and the functional currency of such subsidiary is
the Canadian dollar. Our foreign operations may also be adversely affected by
local political and economic developments, royalty and tax increases and other
foreign laws or policies, as well as U.S. policies affecting trade, taxation and
investment in other countries.

     WE DEPEND ON OUR KEY PERSONNEL. We depend to a large extent on Robert L.G.
Watson, our Chairman of the Board, President and Chief Executive Officer, for
our management and business and financial contacts. The unavailability of Mr.
Watson could have a materially adverse effect on our business. Mr. Watson has a
three-year employment contract with Abraxas commencing on December 21, 1999,
which automatically renews thereafter for successive one-year periods unless
Abraxas gives 120 days notice prior to the expiration of the original term or
any extension thereof of its intention not to renew the employment agreement.
Our success is also dependent upon our

                                       19
<Page>

ability to employ and retain skilled technical personnel. While we have not
experienced difficulties in employing or retaining such personnel, our failure
to do so in the future could adversely affect our business.

RISKS RELATED TO OUR INDUSTRY

     OUR OPERATIONS ARE SUBJECT TO NUMEROUS RISKS OF CRUDE OIL AND NATURAL GAS
DRILLING AND PRODUCTION ACTIVITIES. Our crude oil and natural gas drilling and
production activities are subject to numerous risks, many of which are beyond
our control. These risks include the following:

       -  that no commercially productive crude oil or natural gas reservoirs
          will be found;

       -  that crude oil and natural gas drilling and production activities may
          be shortened, delayed or canceled; and

       -  that our ability to develop, produce and market our reserves may be
          limited by:

          -    title problems,

          -    weather conditions,

          -    compliance with governmental requirements, and

          -    mechanical difficulties or shortages or delays in the delivery of
               drilling rigs, work boats and other equipment.

     In the past, we have had difficulty securing drilling equipment in certain
of our core areas. We cannot assure you that the new wells we drill will be
productive or that we will recover all or any portion of our investment.
Drilling for crude oil and natural gas may be unprofitable. Dry holes and wells
that are productive but do not produce sufficient net revenues after drilling,
operating and other costs are unprofitable. In addition, our properties may be
susceptible to hydrocarbon draining from production by other operations on
adjacent properties.

     Our industry also experiences numerous operating risks. These operating
risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards. Environmental hazards include
oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of
these industry operating risks occur, we could have substantial losses.
Substantial losses also may result from injury or loss of life, severe damage to
or destruction of property, clean-up responsibilities, regulatory investigation
and penalties and suspension of operations. In accordance with industry
practice, we maintain insurance against some, but not all, of the risks
described above. We cannot assure you that our insurance will be adequate to
cover losses or liabilities. Also, we cannot predict the continued availability
of insurance at premium levels that justify its purchase.

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

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

     We face significant competition for obtaining additional natural gas
supplies for gathering and processing operations, for marketing NGLs, residue
gas, helium, condensate and sulfur, and for transporting natural gas and
liquids. Our principal competitors include major integrated oil companies and
their marketing affiliates and national

                                       20
<Page>

and local gas gatherers, brokers, marketers and distributors of varying sizes,
financial resources and experience. Certain competitors, such as major crude oil
and natural gas companies, have capital resources and control supplies of
natural gas substantially greater than ours. Smaller local distributors may
enjoy a marketing advantage in their immediate service areas.

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

     OUR CRUDE OIL AND NATURAL GAS OPERATIONS ARE SUBJECT TO VARIOUS U.S.
FEDERAL, STATE AND LOCAL AND CANADIAN FEDERAL AND PROVINCIAL GOVERNMENTAL
REGULATIONS THAT MATERIALLY AFFECT OUR OPERATIONS. Matters regulated include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells and unitization and pooling
of properties and taxation. At various times, regulatory agencies have imposed
price controls and limitations on production. In order to conserve supplies of
crude oil and natural gas, these agencies have restricted the rates of flow of
crude oil and natural gas wells below actual production capacity. Federal,
state, provincial and local laws regulate production, handling, storage,
transportation and disposal of crude oil and natural gas, by-products from crude
oil and natural gas and other substances and materials produced or used in
connection with crude oil and natural gas operations. To date, our expenditures
related to complying with these laws and for remediation of existing
environmental contamination have not been significant. We believe that we are in
substantial compliance with all applicable laws and regulations. However, the
requirements of such laws and regulations are frequently changed. We cannot
predict the ultimate cost of compliance with these requirements or their effect
on our operations.

                                       21
<Page>

                                 USE OF PROCEEDS

     We will not receive any proceeds from the sale of the notes or the Abraxas
common stock by the selling security holders pursuant to this prospectus.

                       RATIO OF EARNINGS TO FIXED CHARGES

     Earnings consist of income from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing fees and premium on the old notes. Our earnings were
inadequate to cover fixed charges in 1997, 1998, 1999, 2001 and Pro Forma 2001,
and the nine month period ended September 30, 2002 and Pro Forma September 30,
2002, by $6.7 million, $84.0 million, $49.0 million, $15.6 million, $11.0
million, $143.1 million and $43.8 million, respectively. In 2000, we had
earnings from continued operations of $44.4 million and fixed charges of $32.7
million. Our ratio of earnings to fixed charges during 2000 was 1.36x.

                                 CAPITALIZATION

     The following table sets forth our cash position and total consolidated
capitalization at September 30, 2002, on a historical and pro forma basis.

<Table>
<Caption>
                                                                 SEPTEMBER 30, 2002
                                                          -------------------------------
                                                            HISTORICAL       PRO FORMA(1)
                                                          --------------   --------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                       <C>             <C>
Cash.............................................         $     13,665    $        8,694
                                                          ============    ==============
Total debt, including current maturities:
  Old Grey Wolf Credit Facility(2) ..............               40,220                --
  First Lien Notes...............................               63,500                --
  Second Lien Notes .............................              190,178                --
  Old Notes......................................                  801                --
  New Senior Credit Agreement....................                   --            46,700
  New Secured Notes(3)...........................                                128,383
                                                          ------------    --------------
     Total debt..................................              294,699           175,083
Stockholders' equity (deficit)...................             (138,032)          (67,476)
                                                          ------------    --------------

  Total capitalization...........................         $    156,667    $      107,607
                                                          ============    ==============
</Table>

----------

(1)  Reflects the exchange offer and each of the other transactions described
     under "Business--Recent Developments--Financial Restructuring."

(2)  Indebtedness of Old Grey Wolf, which was non-recourse to Abraxas and
     Canadian Abraxas.

(3)  For accounting purposes, the historical carrying value of the second lien
     notes and old notes has been reduced by exchange offer cash payments of
     $59.2 million and the value of the common stock issued of $3.8 million. The
     outstanding principal amount of the notes currently is $109.5 million.

                                       22
<Page>

                       PRICE RANGE OF ABRAXAS COMMON STOCK

     Abraxas common stock began trading on the American Stock Exchange on August
18, 2000, under the symbol "ABP." The following table sets forth certain
information as to the high and low bid quotations quoted for Abraxas' common
stock on the American Stock Exchange.

<Table>
<Caption>
                     PERIOD                                              HIGH          LOW
                     ------                                              ----          ---
        <S>          <C>                                                <C>           <C>
        2001         First Quarter...................................   $ 5.32        $ 3.69
                     Second Quarter..................................     4.98          3.10
                     Third Quarter...................................     3.65          1.70
                     Fourth Quarter..................................     1.85          0.88

        2002

                     First Quarter...................................   $ 1.70        $ 0.89
                     Second Quarter..................................     1.41          0.52
                     Third Quarter...................................     0.98          0.42
                     Fourth Quarter..................................     0.80          0.52

        2003

                     First Quarter (through February 5, 2003)........   $ 0.85          0.55
</Table>

DIVIDENDS

     Abraxas has not paid any cash dividends on its common stock and it is not
presently determinable when, if ever, Abraxas will pay cash dividends in the
future. In addition, the senior credit facility and the indenture governing the
notes prohibit the payment of cash dividends and stock dividends on Abraxas'
common stock. You should read the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" beginning on page 40 for more information regarding the restrictions
on Abraxas' ability to pay dividends.

                                       23
<Page>

         UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The Unaudited Pro Forma Condensed Consolidated Balance Sheet of Abraxas as
of September 30, 2002 has been prepared assuming that the exchange offer and
each of the other transactions described under "Business--Recent
Developments--Financial Restructuring" were consummated on September 30, 2002.
The Unaudited Pro Forma Statements of Operations of Abraxas for the year ended
December 31, 2001 and the nine months ended September 30, 2002 have been
prepared assuming the divestiture of the East White Point, Quirk Creek and
Mahaska and the repurchase of the Production Payment which occurred in the
second quarter of 2002 (collectively, the "Sale of Properties") and the exchange
offer and each of the other transactions described under "Business--Recent
Developments--Financial Restructuring" had occurred on January 1, 2001. The pro
forma financial data are based on assumptions and include adjustments as
explained in the notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements. The unaudited pro forma financial statements are not
necessarily indicative of results that actually would have been achieved had the
exchange offer and each of the other referenced transactions been consummated
on the dates indicated or that may be achieved in the future.

     These unaudited pro forma condensed consolidated financial statements have
been prepared from, and should be read along with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Selected Historical
Financial Data", our Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus.

                                       24
<Page>

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                      FOR THE YEAR ENDED DECEMBER 31, 2001

<Table>
<Caption>
                                           HISTORICAL
                                            ABRAXAS
                                           PETROLEUM         SALE OF          FINANCIAL
                                          CORPORATION      PROPERTIES       RESTRUCTURING      PRO FORMA
                                         ------------     ------------     ---------------     ----------
                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>             <C>              <C>                <C>
Revenues:
  Oil and gas production revenues...     $   73,201      $   (10,922)(1)  $    (32,768)(4)   $    29,511
  Gas processing revenues...........          2,438             (982)(1)        (1,456)(4)            --
  Rig revenues......................            756                                 --               756
  Other.............................            848                               (763)(4)            85
                                         ----------      -----------      -------------      -----------
         Total revenues.............         77,243          (11,904)          (34,987)           30,352
Operating costs and expenses:
  Lease operating and production
   taxes ...........................         18,616           (2,599)(1)        (7,622)(4)         8,395
  Depreciation, depletion and
    amortization....................         32,484           (3,536)(1)       (17,549)(4)        11,399
  Proved property impairment........          2,638               --            (2,638)(4)            --
  Rig operations....................            702               --                --               702
  General and administrative........          6,445                -            (1,055)(4)         5,390
  General and administrative -
    (Stock-based compensation)......         (2,767)              --                --            (2,767)
                                         -----------     -----------      ------------       ------------
         Total operating expenses...         58,118           (6,135)          (28,864)           23,119
                                         ----------      ------------     -------------      -----------
Operating income (loss).............         19,125           (5,769)           (6,123)            7,233
Other (income) expense:
  Interest income...................            (78)              --                --               (78)
  Amortization of deferred                                                      (2,268)(5)
    financing fees..................          2,268               --             1,730 (5)         1,730
  Interest expense..................                                           (30,314)(5)
                                             31,523           (1,209)(2)        15,479 (5)        15,479
  Loss on equity investment.........            845               --                --               845
  Other.............................            207               --                --               207
                                         ----------      -----------      ------------       -----------
  Income (loss) from operations before
  income tax........................        (15,640)          (4,560)            9,250           (10,950)
Income tax expense (benefit):.......          2,402             (919)(3)          (978)(3)           505
Minority interest in income of
    consolidated foreign subsidiary
    (2001 prior to purchase)........         (1,676)              --             1,676 (4)            --
                                         -----------     -----------      ------------       -----------
Net income (loss) ..................     $  (19,718)     $    (3,641)     $     11,904       $   (11,455)
                                         ===========     ============     ============       ============

Weighted average common shares:

    Basic...........................     25,788,571                          5,633,291 (6)    31,421,862
                                         ----------                       ------------        ----------
    Diluted.........................     25,788,571                          5,633,291 (6)    31,421,862
                                         ----------                       ------------       -----------

Net loss per share:
    Basic...........................     $   (0.76)                                          $     (0.36)
                                         ----------                                          ------------
    Diluted.........................     $   (0.76)                                          $     (0.36)
                                         ----------                                          ------------
</Table>

             See notes to unaudited pro forma financial statements.

                                       25
<Page>

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

<Table>
<Caption>
                                           HISTORICAL
                                            ABRAXAS
                                           PETROLEUM          SALE OF           FINANCIAL
                                          CORPORATION       PROPERTIES        RESTRUCTURING      PRO FORMA
                                          -----------       ----------        -------------      ---------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>             <C>                <C>                <C>
Revenues:
  Oil and gas production revenues...     $   34,158      $     (2,518)(1)   $    (17,949)(4)   $   13,691
  Gas processing revenues...........          1,933              (417)(1)         (1,516)(4)           --
  Rig revenues......................            513                                   --              513
  Other.............................            499                --               (429)(4)           70
                                         ----------      ------------       -------------      ----------
         Total revenues.............         37,103            (2,935)           (19,894)          14,274
Operating costs and expenses:
  Lease operating and production taxes       11,205              (289)(1)         (5,343)(4)        5,573
  Depreciation, depletion and
    amortization....................         21,010            (1,993)(1)        (12,650)(4)        6,367
  Proved property impairment........        115,995                --            (87,816)(4)       28,179
  Rig operation.....................            439                --                 --              439
  General and administrative........          4,578                --               (860)(4)        3,718
                                         ----------      ------------       -------------      ----------
         Total operating expenses...        153,227            (2,282)          (106,669)          44,276
                                         ----------      -------------      -------------      ----------
Operating income (loss).............       (116,124)             (653)            86,775          (30,002)
Other (income) expense:
  Interest income...................            (56)               --                 --              (56)
  Amortization of deferred                                                        (1,283)(5)
    financing fees..................          1,283                --              1,477 (5)        1,477
  Interest expense..................         25,790              (604)(2)        (12,835)(5)       12,351
                                         ----------      -------------      --------------     ----------
   Income (loss) from operations
     before income tax .............       (143,141)              (49)            99,416          (43,774)
Income tax expense (benefit)........        (30,314)             (253)(3)         30,567(3)            --
                                         -----------     -------------      ------------       ----------
Net income  (loss)..................     $ (112,827)     $        204       $     68,849       $  (43,774)
                                         ===========     ============       ============       ===========

Weighted average common shares:

   Basic............................     29,979,397                            5,633,291(6)    35,612,688
                                         ----------                            ---------       ----------
   Diluted..........................     29,979,397                            5,633,291(6)    35,612,688
                                         ----------                            ---------       ----------

Net loss per share:
   Basic............................     $   (3.76)                                            $   (1.23)
                                         ----------                                            ----------
   Diluted..........................     $   (3.76)                                            $   (1.23)
                                         ----------                                            ----------
</Table>

             See notes to unaudited pro forma financial statements.

                                       26
<Page>

            UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

                            AS OF SEPTEMBER 30, 2002

<Table>
<Caption>
                                            HISTORICAL
                                             ABRAXAS
                                            PETROLEUM       FINANCIAL
                                           CORPORATION     RESTRUCTURING     PRO FORMA
                                          --------------  ---------------   -----------
<S>                                       <C>             <C>               <C>
Assets:
  Cash...............................     $    13,358     $    (4,664)(1)   $    8,694
  Accounts receivable................           7,491          (4,019)(1)        3,472
  Other..............................           1,733            (595)(1)        1,138
                                          -----------     ------------      ----------
         Total current assets........          22,582          (9,278)          13,304
 Net property and equipment..........         149,530         (56,577)(1)       92,953
Deferred financing fees..............           2,952           3,248(5)         6,200
Other assets.........................           8,829          (8,442)(1)          387
                                          -----------     ------------      ----------
         Total assets................     $   183,893     $   (71,049)      $  112,844
                                          ===========     ============      ==========

Liabilities and Stockholders' Equity
  (Deficit):

Current Liabilities:
   Accounts payable..................     $    11,180     $    (8,580)(1)        2,600
   Current maturities of First Lien
    Notes............................          63,500         (63,500)(3)           --
   Other current liabilities.........          12,059          (9,422)(3)        2,637
                                          -----------     ------------      ----------
        Total current liabilities....          86,739         (81,502)           5,237

Long-term debt:
  New Secured Notes..................              --         128,383(5)       128,383
  Senior Credit Agreement ...........              --          46,700(4)        46,700
  Old Grey Wolf Credit Facility......          40,220         (40,220)(1)           --
  Old Notes..........................             801            (801)(5)           --
  Second Lien Notes..................         190,178        (190,178)(5)           --
                                          -----------     ------------      ----------
         Total.......................         231,199         (56,116)         175,083
Deferred income taxes................              --              --               --
Other liabilities....................           3,987          (3,987)(1)           --
Stockholders' equity (deficit):
  Common stock.......................             301              56(2)           357
  Additional paid-in capital.........         136,830           3,718(2)       140,548
  Receivable from stock sale.........             (97)             --              (97)
  Accumulated deficit................        (263,921)         61,638(6)      (202,283)
  Accumulated other comprehensive
   income adjustment.................         (10,181)          5,144(1)        (5,037)
  Treasury stock.....................            (964)             --             (964)
                                          ------------    -----------       -----------
         Total stockholders' equity

           (deficit).................        (138,032)         70,556          (67,476)
                                          ------------    -----------       -----------
         Total liabilities and
           stockholders' equity

           (deficit).................     $   183,893     $   (71,049)      $  112,844
                                          ===========     ============      ==========
</Table>

             See notes to unaudited pro forma financial statements.

                                       27
<Page>

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(1)  To adjust oil and gas production revenues, gas processing revenues, lease
     operating and production taxes and depreciation, depletion and amortization
     as if the property sales and the repayment of a production payment
     obligation which occurred in the second quarter of 2002 had been completed
     as of January 1, 2001.

(2)  To adjust interest expense, giving effect to pay-down of Abraxas' long-term
     debt and current maturities of long-term debt, at the stated interest rates
     of the associated debt.

(3)  To record income tax expense (benefit) of the pro forma taxable income
     (loss) at Canadian statutory rates, as applicable. No tax expense (benefit)
     for US purposes due to loss carryovers.

(4)  To adjust for revenue and expense to reflect the sale of the Canadian
     operations, excluding the revenue and expense related to assets retained by
     Abraxas.

(5)  To adjust the amortization of deferred financing fees for debt retired and
     record the amortization of additional fees related to new senior credit
     agreement. To adjust interest expense to reflect debt retired and record
     expense on new debt. Interest expense on the new debt includes cash
     interest expense on the new revolving credit facility and non-cash
     (additional notes) interest expense on the term loan and the new secured
     notes. Non cash interest expense is calculated at 9% on the term loan and
     at an imputed rate of 8.6% on the new notes based on the carrying value of
     the exchanged notes of $128.4 million. See note 5 to the unaudited pro
     forma condensed consolidated balance sheet for the calculation of the
     carrying value of the new notes. Additionally, in connection with the
     exchange offer, Abraxas incurred expenses of $3.8 million of non-recurring
     cost which are not reflected in these pro forma financial statements.

(6)  To reflect the issuance of 5.63 million shares of common stock as part of
     the financial restructuring.

     Notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet:

(1)  To adjust balance sheet for disposal of Canadian operations and repayment
     of the Old Grey Wolf credit facility.

(2)  To adjust the balance sheet for the issuance of 5.63 million shares of
     common stock as part of the financial restructuring at an assumed market
     price of $0.67.

(3)  To adjust the balance sheet for the retirement of the existing first lien
     notes and accrued interest.

(4)  To adjust the balance sheet for borrowings under the new senior credit
     agreement.

(5)  To adjust the balance sheet for the restructuring of the second lien notes
     and old notes, to recognize $4.4 million in financing fees which were
     incurred in connection with the new senior credit agreement and to write
     off $1.2 million of deferred financing fees relating to the retired first
     lien notes and the Old Grey Wolf credit facility. For financial reporting
     purposes, the new notes are reflected on the books at the carrying value of
     the second lien notes and old notes prior to the exchange ($191.0 million),
     net of the cash offered in the exchange ($47.4 million) and net of the
     fair market value related to equity ($3.8 million) offered in the exchange.
     In conjunction with this transaction, Abraxas paid cash of $11.8 million
     to redeem certain of the outstanding notes and accrued interest. The result
     of all of these items is a remaining carrying value of the new notes of
     $128.4 million.

(6)  To adjust the accumulated deficit for the estimated gain on the sale of
     Canadian operations. Net proceeds of the sale of the common stock of Old
     Grey Wolf and Canadian Abraxas were $132.1 million reduced by the book
     value of the assets sold ($66.9 million) and accrued interest and debt
     discount on the Old Grey Wolf credit facility retired ($3.6 million).

                                       28
<Page>

                       SELECTED HISTORICAL FINANCIAL DATA

     The following historical selected consolidated financial data are derived
from our Consolidated Financial Statements and the notes thereto included in
this prospectus. Separate financial statements for Old Grey Wolf, as of December
31, 2001 and 2000 and for the years ended December 31, 2001 , 2000 and 1999 are
included elsewhere in this prospectus. The statement of operations data for the
nine months ended September 30, 2002, is not necessarily indicative of results
of a full year. The consolidated financial data for each of the nine months
ended September 30, 2001 and 2002, are derived from our unaudited financial
statements and, in the opinion of management, include all adjustments (all of
which are of a normal and recurring nature) that are necessary for a fair
presentation. The selected historical consolidated financial information should
be read in conjunction with our Consolidated Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.

<Table>
<Caption>
                                                                                                         NINE MONTHS ENDED
                                                            YEAR ENDED DECEMBER 31,                         SEPTEMBER 30,
                                          ----------------------------------------------------------   ------------------
                                             1997       1998       1999        2000         2001         2001       2002
                                          ---------   --------   ---------   ---------   ----------    ---------   -------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>         <C>        <C>          <C>        <C>           <C>        <C>
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
Operating revenue:
  Oil and gas production revenues......   $  65,826   $  54,263  $  59,025    $ 72,973   $  73,201     $  62,043  $  34,158
  Gas processing revenues..............       3,568       3,159      4,244       2,717       2,438         1,711      1,933
  Other revenue........................       1,537       2,662      3,501         910       1,604         1,349      1,012
                                            -------     -------  ---------    --------   ---------     ---------   --------
          Total operating revenue......      70,931      60,084     66,770      76,600      77,243        65,103     37,103
                                            -------     -------  ---------    --------   ---------     ---------  ---------
Operating costs and expenses:
Lease operating and production taxes...      16,133      18,091     17,938      18,783      18,616        13,679     11,205
Depreciation, depletion and
     amortization expense..............      30,581      31,226     34,811      35,857      32,484        25,150     21,010
General and administrative expense.....       4,171       5,522      5,269       6,533       6,445         5,051      4,578
General and administrative (Stock-based
     compensation).....................          --          --         --       2,767      (2,767)       (2,767)        --
Other..................................         296         521        624         717         702           548        439
Proved property impairment.............       4,600      61,224     19,100          --       2,638            --    115,995
                                            -------     -------  ---------   ---------   ---------     ---------  ---------
          Total operating expenses.....      55,781     116,584     77,742      64,657      58,118        41,661    153,227
                                            -------     -------  ---------    --------   ---------     ---------  ---------
Operating income (loss)................      15,150     (56,500)   (10,972)     11,943      19,125        23,442   (116,124)
Net interest expense...................      24,300      30,043     36,149      30,610      31,445        23,626     25,734
Amortization of deferred financing
    fees...............................       1,260       1,571      1,915       2,091       2,268         1,315      1,283
(Gain) loss  on sale of equity                   --          --         --     (33,983)        845            --         --
investment
Other (income) expense.................         (34)          4                  1,563         207            16         --
                                            -------     -------  ---------    --------   ---------     ---------  ---------
Income (loss) from continuing
   operations before taxes and
   extraordinary items.................     (10,376)    (88,118)   (49,036)     11,662     (15,640)       (1,515)  (143,141)
Income tax (expense) benefit...........       3,891       4,158     12,625      (3,705)     (2,402)       (3,677)    30,314
Minority interest in (income) loss of
   consolidated foreign subsidiary....           --          --        269       1,281       1,676         1,676         --
                                            -------     -------   --------    --------   ---------     ---------  ---------
Income (loss) before extraordinary
   items...............................      (6,485)    (83,960)   (36,680)      6,676     (19,718)       (6,868)  (112,827)
Extraordinary items....................          --          --         --       1,773          --            --         --
                                            -------     -------   --------    --------   ---------     ---------  ---------
Net income (loss)......................      (6,485)    (83,960)   (36,680)      8,449     (19,178)       (6,868)  (112,827)
Preferred dividends....................        (183)         --         --          --          --            --         --
                                            -------     -------   --------    --------   ---------     ---------  ---------
Net income (loss) applicable to
   common  stockholders................   $  (6,668)  $ (83,960) $ (36,680)   $  8,449   $ (19,178)    $  (6,868) $(112,827)
                                            =======   =========  =========    ========   ==========    =========  ==========

Income (loss) before extraordinary item
per
   common share:
  Basic................................       (1.11)     (13.26)     (5.41)       0.29       (0.76)        (0.28)     (3.76)
  Diluted..............................       (1.11)     (13.26)     (5.41)       0.21       (0.76)        (0.28)     (3.76)
CONSOLIDATED BALANCE SHEET DATA:

Total assets...........................     338,528     291,498    322,284     335,560     303,616       310,868    183,893
Long-term debt - excluding current          228,617     299,698    273,421     266,441     285,184       270,635    231,199
maturities.............................
Stockholder's equity (deficit).........      26,813     (63,522)    (9,505)     (6,503)    (28,585)      (15,929)  (138,032)
</Table>

                                       29
<Page>

                     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 elsewhere in this prospectus.

GENERAL

     We have incurred net losses in four of the last five years and for the
first nine months of 2002, and there can be no assurance that operating income
and net earnings will be achieved in future periods. Our revenues, profitability
and future rate of growth are substantially dependent upon prevailing prices for
crude oil and natural gas and the volumes of crude oil, natural gas and natural
gas liquids we produce. Natural gas and crude oil prices weakened during 1998.
Crude oil and natural gas prices increased somewhat in 1999 and increased
substantially in 2000. During 2001, crude oil and natural gas prices weakened
substantially from the 2000 levels. During the first nine months of 2002, prices
began to increase. In addition, because our proved reserves will decline as
crude oil, natural gas and natural gas liquids are produced, unless we acquire
additional properties containing proved reserves or conduct successful
exploration and development activities, our reserves and production will
decrease. Our ability to acquire or find additional reserves in the near future
will be dependent, in part, upon the amount of available funds for acquisition,
exploitation, exploration and development projects. In order to provide us with
liquidity and capital resources, we have sold certain of our producing
properties. However, our production levels have declined as we have been unable
to replace the production represented by the properties we have sold with new
production from the producing properties we have invested in with the proceeds
of our property sales. If crude oil and natural gas prices return to the
depressed levels experienced in the last nine months of 2001, or if our
production levels continue to decrease, our revenues, cash flow from operations
and financial condition will be materially adversely affected. For more
information, see "Liquidity and Capital Resources--Current Liquidity
Requirements" and "--Future Capital Resources."

RESULTS OF OPERATIONS

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

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

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

       -  the ability to raise capital resources and provide liquidity to meet
          cash flow needs;

       -  the level of and interest rates on borrowings; and

       -  the level and success of exploration and development activity.

     Price volatility in the natural gas market has remained prevalent in the
last few years. In the first quarter of 2002, we experienced a decline in energy
commodity prices from the prices that we received in the first quarter of 2001.
During the first quarter of 2001, we had certain crude oil and natural gas
hedges in place that prevented us from realizing the full impact of a favorable
price environment. In January 2001, the market price of natural gas was at its
highest level in our operating history and the price of crude oil was also at a
high level. However, over the course of 2001 and the beginning of the first
quarter of 2002, prices again became depressed, primarily due to the economic
downturn. Beginning in March 2002, commodity prices began to increase and
continued higher through September 2002.

                                       30
<Page>

     The table below illustrates how natural gas prices fluctuated over the
course of 2001 and the first three quarters of 2002. The table below contains
the last three day average of NYMEX traded contracts price and the prices we
realized during each quarter for 2001 and the first three quarters of 2002,
including the impact of our hedging activities.

<Table>
<Caption>
                                              Natural Gas Prices by Quarter
                                                     (in $ per Mcf)
              -----------------------------------------------------------------------------------------------------
              Quarter Ended
              -----------------------------------------------------------------------------------------------------
                March 31,    June 30,    September 30,    December 31,     March 31,    June 30,    September 30,
                  2001         2001          2001             2001            2002        2002          2002
              ------------  ------------ -------------   -------------   -----------   ---------- ---------------
<S>                <C>            <C>        <C>              <C>        <C>           <C>        <C>
Index              $ 7.27         $ 4.82     $ 2.98           $ 2.47     $ 2.38        $ 3.36     $ 3.28
Realized             4.85           3.41       2.26             2.09       2.21          2.44       2.08
</Table>

     The NYMEX natural gas price on January 28, 2003 was $5.44 per Mcf.

     Prices for crude oil have followed a similar path as the commodity market
fell throughout 2001 and the first quarter of 2002. The table below contains the
last three day average of NYMEX traded contracts price and the prices we
realized during each quarter for 2001 and the first three quarters of 2002.

<Table>
<Caption>
                                              Crude Oil Prices by Quarter
                                                     (in $ per Bbl)

              Quarter Ended
              ------------------------------------------------------------------------------------------------------
                March 31,    June 30,   September 30,     December 31,    March 31,    June 30,     September 30,
                  2001         2001         2001             2001           2002         2002           2002
              -------------- --------- ----------------- --------------- ------------- ----------- -----------------
<S>               <C>            <C>       <C>               <C>         <C>           <C>          <C>
Index             $ 29.86        $ 27.94   $ 26.50           $ 22.12     $  19.48       $ 26.40      $    27.50
Realized            27.22          25.32     25.06             18.72        16.64         23.47           27.19
</Table>

     The NYMEX crude oil price on January 28, 2003 was $ 32.67 per Bbl.

     HEDGING ACTIVITIES. Our results of operations are significantly affected by
fluctuations in commodity prices and we seek to reduce our exposure to price
volatility by hedging our production through swaps, options and other commodity
derivative instruments.

     In 2000, 2001 and the nine month period ended September 30, 2002, we
experienced hedging losses of $20.2 million, $12.1 million and $2.8 million,
respectively. In October 2002, all of these hedge agreements expired. Under the
expired hedge agreements, we made total payments over the term of these
arrangements to various counterparties in the amount of $35.1 million.

     Under the terms of the new senior credit agreement, we are required to
enter into hedging transactions with respect to not less than 25% nor more than
75% of our crude oil and natural gas production on an ongoing basis. As of
January 23, 2003, we have entered into a collar option agreement with respect to
5,000 MMBtu per day, or approximately 25% of our production, at a maximum call
price of $6.25 per MMBtu and a minimum put price of $4.00 per MMBtu, for the
calendar months of February through July 2003. As of the date of this
prospectus, the fair market value of the collar option agreement is $0, which
may change if changes in commodity prices fluctuate outside the range of the
collar option.

                                       31
<Page>

     SELECTED OPERATING DATA. The following table sets forth certain of our
operating data for the periods presented:

<Table>
<Caption>
                                                                                          NINE MONTHS ENDED
                                                     YEAR ENDED DECEMBER 31,                SEPTEMBER 30,
                                                 1999         2000         2001           2001         2002
                                             --------    ---------     --------       --------      -------
                                                        (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S>                                         <C>             <C>         <C>            <C>           <C>
Operating revenue:
   Crude oil sales......................    $   11,330        11,899      11,184          9,674         4,799
   NGLs sales...........................         5,043         7,061       5,979          4,865         3,014
   Natural gas sales....................        42,652        54,013      56,038         47,504        26,345
   Gas processing revenue...............         4,244         2,717       2,438          1,711         1,933
   Other................................         3,501           910       1,604          1,349         1,012
                                            ----------      --------    --------       --------      --------
       Total operating revenue..........    $   66,770        76,600      77,243         65,103        37,103
                                            ==========      ========    ========       ========      ========
Operating income(loss)..................    $  (10,972)       11,943      19,125         23,442      (116,124)
Crude oil production(MBbls).............         777.9         636.7       454.1          373.4         215.5
NGLs production(MBbls)..................         376.5         314.9       278.0          202.5         182.3
Natural gas production(MMcf)............      25,697.9      19,962.5    17,495.6       13,420.3      11,692.0
Average crude oil sales prices(per Bbl)     $    14.57         18.69       24.63          25.91         22.27
Average NGLs sales price(per Bbl).......    $    13.40         22.42       21.51          24.02         16.53
Average natural gas sales price(per         $     1.66          2.71        3.20           3.54          2.25
Mcf)....................................
</Table>

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2001

     OPERATING REVENUE. During the nine months ended September 30, 2002,
operating revenue from crude oil, natural gas and natural gas liquid sales
decreased to $34.2 million as compared to $62.0 million in the nine months ended
September 30, 2001. The decrease in revenue was primarily due to decreased
prices realized during the period, as well as a decrease in production volumes.
Production volumes decreased primarily as a result of producing property sales
in the later part of 2001 and in the first nine months of 2002. Lower commodity
prices impacted crude oil and natural gas revenue by $20.1 million while reduced
production volumes had a $7.7 million negative impact on revenue.

     Average sales prices net of hedging losses for the nine months ended
September 30, 2002 were:

       -  $ 22.27 per Bbl of crude oil,

       -  $ 16.53 per Bbl of natural gas liquid, and

       -  $ 2.25 per Mcf of natural gas

     Average sales prices net of hedging losses for the nine months ended
September 30, 2001 were:

       -  $ 25.91 per Bbl of crude oil,

       -  $ 24.02 per Bbl of natural gas liquid, and

       -  $ 3.54 per Mcf of natural gas

     Crude oil production volumes declined from 373.4 MBbls during the nine
months ended September 30, 2001 to 215.5 MBbls for the same period of 2002,
primarily as a result of a de-emphasis on crude oil drilling in prior periods,
and the sale of crude oil producing properties in the later part of 2001 and in
the first half of 2002. Natural gas production volumes declined to 11,692 MMcf
for the nine months ended September 30, 2002 from 13,420 MMcf for the same
period of 2001. This decline was primarily due to the sale of properties in late
2001 and the first half of 2002 and the natural decline in production which was
partially offset by new production from current drilling activities.

                                       32
<Page>

     LEASE OPERATING EXPENSES. Lease operating expenses and natural gas
processing costs ("LOE") for the nine months ended September 30, 2002 decreased
to $11.2 million from $13.7 million for the same period in 2001. The decrease in
LOE was primarily due to a decrease in production tax expense due to higher
commodity prices in the nine months ended September 30, 2001 as compared to the
same period of 2002 and a reduction in the number of producing wells due to
property sales. LOE on a per MCFE basis for the nine months ended September 30,
2002 was $0.80 per MCFE as compared to $0.81 for the same period of 2001.

     GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES. G&A expenses decreased from
$5.1 million for the first nine months of 2001 to $4.6 million for the first
nine months of 2002. G&A expense on a per MCFE basis was $0.33 for the first
nine months of 2002 compared to $0.30 for the same period of 2001. The decrease
in G&A expense was primarily due to a decrease in consulting fees in 2002 as
compared to 2001.

     G&A - STOCK-BASED COMPENSATION. Effective July 1, 2000, the Financial
Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of Accounting
Principles Board Opinion No. ("APB") 25. Under the interpretation, certain
modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be accounted for as variable expenses until they are exercised,
forfeited, or expired. In March 1999, we amended the exercise price to $2.06 per
share on all options with an existing exercise price greater than $2.06 per
share. We recognized income of approximately $2.8 million during the nine months
ended September 30, 2001 related to these repricings. The income was recorded as
a reduction of expense. The income recognized in 2001 was due to a decline in
the price of our common stock. During 2002, we did not recognize any stock
-based compensation due to the decline in the price of our common stock.

     DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES. Depreciation, depletion
and amortization ("DD&A") expense decreased to $21.0 million for the nine months
ended September 30, 2002 from $25.2 million for the same period of 2001. Our
DD&A on a per MCFE basis for the nine months ended September 30, 2002 was $1.49
per MCFE as compared to $1.49 in 2001. These decreases were due to reduced
production volumes in 2002 and reduction in the full cost pool as a result of
prior ceiling limitation write-downs.

     INTEREST EXPENSE. Interest expense increased to $25.8 million for the first
nine months of 2002 compared to $23.7 million in 2001. The increase was due to
an increase in long-term debt primarily relating to the Old Grey Wolf credit
facility.

     PROVED PROPERTY IMPAIRMENT. We record the carrying value of our crude oil
and natural gas properties using the full cost method of accounting for crude
oil and natural gas properties. Under this method, we capitalize the cost to
acquire, explore for and develop crude oil and natural gas properties. Under the
full cost accounting rules, the net capitalized cost of crude oil and natural
gas properties less related deferred taxes, is limited by country, to the lower
of the unamortized cost or the cost ceiling, (defined as the sum of the present
value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes.) If the net
capitalized cost of crude oil and natural gas properties exceeds the ceiling
limit, we are subject to a ceiling limitation write-down to the extent of such
excess. A ceiling limitation write-down is a charge to earnings, which does not
impact cash flow from operating activities. However, such write-downs do impact
the amount of our stockholders' equity. An expense recorded in one period may
not be reversed in a subsequent period even though higher crude oil and natural
gas prices may have increased the ceiling applicable to the subsequent period.

     The risk that we will be required to write-down the carrying value of our
crude oil and natural gas assets increases when crude oil and natural gas prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. As of June 30, 2002, our net
capitalized costs of crude oil and natural gas properties exceeded the present
value of our estimated proved reserves by $138.7 million ($28.2 million on the
U.S. properties and $110.5 million on the Canadian properties). As a result,
during the nine months ended September 30, 2002, we incurred a proved-property
impairment write-down of approximately $116 million primarily due to volatile
commodity prices. These amounts were calculated considering June 30, 2002
period-end prices of $26.12 per Bbl for crude oil and $2.16 per Mcf for natural
gas as adjusted to reflect the expected realized prices for each of the full
cost pools. We used the subsequent prices to evaluate our

                                       33
<Page>

Canadian properties, and reduced the period end June 30, 2002 write-down to an
amount of $87.8 million on those properties. The subsequent prices in the U.S.
would not have resulted in a reduction of the write-down for the U.S.
properties. At September 30, 2002 our net capitalized cost of crude oil and
natural gas properties did not exceed the present value of our estimated
reserves, due to increased commodity prices during the third quarter and as such
no further write-down was recorded.

     We cannot assure you that we will not experience additional write-downs in
the future. Should commodity prices decline or if any of our proved reserves are
revised downward, a further write-down of the carrying value of our crude oil
and natural gas properties may be required.

     MINORITY INTEREST. We owned a 49% controlling interest in the earnings of
Old Grey Wolf through August 2001. The consolidated financial statements include
the results of Old Grey Wolf. The net income attributable to the minority
interest in Old Grey Wolf for the first nine months of 2001 was $1.7 million. As
of September 30, 2002, we owned 100% of the outstanding capital stock of Old
Grey Wolf. We obtained the additional interest in Old Grey Wolf pursuant to a
tender offer and subsequent compulsory merger, completed in September 2001.

     INCOME TAXES. Income taxes decreased to a benefit of $30.3 million for the
first nine months of 2002 compared to an expense of $3.7 million for the same
period of 2001. This decrease is due to reduced profitability in our operations,
primarily as a result of ceiling limitation write-downs and lower commodity
prices. There is no current or deferred income tax benefit for the U.S. net
losses and a portion of the Canadian net losses due to the valuation allowance
which has been recorded against such benefits. This results in a low
consolidated effective tax rate for the nine months ended September 30, 2002.

COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000

     OPERATING REVENUE. During the year ended December 31, 2001, operating
revenue from crude oil, natural gas and natural gas liquids sales increased by
$200,000 from $73.0 million in 2000 to $73.2 million in 2001. This increase was
primarily attributable to an increase in commodity prices offset by a decline in
production volumes. Increased prices contributed $12.9 million in additional
revenue, which was offset by $12.7 million due to a decrease in production
volumes. The decline in production was due to the disposition of certain
properties, primarily in Canada, natural field declines and our inability to
replace the production represented by the properties we have sold with new
production from the producing properties we invested in with the proceeds of our
property sales.

     Natural gas liquids volumes declined from 314.9 MBbls in 2000 to 278.0
MBbls in 2001. Crude oil sales volumes declined from 636.7 MBbls in 2000 to
454.1 MBbls during 2001. Natural gas sales volumes decreased from 20.0 Bcf in
2000 to 17.5 Bcf in 2001. Production declines were primarily attributable to our
disposition of assets during 2001 and our inability to replace the production
represented by the properties we have sold with new production from the
producing properties we invested in with the proceeds of our property sales.

     Average sales prices in 2001 net of hedging losses were:

       -  $ 24.63 per Bbl of crude oil,

       -  $ 21.51 per Bbl of natural gas liquids, and

       -  $ 3.20 per Mcf of natural gas.

     Average sales prices in 2000 net of hedging losses were:

       -  $18.69 per Bbl of crude oil,

       -  $22.42 per Bbl of natural gas liquids, and

       -  $2.71 per Mcf of natural gas.

     We also had natural gas processing revenue of $2.4 million in 2001 as
compared to $2.7 million in 2000. The decline in processing revenue is due to a
decrease in third party natural gas being processed. We are utilizing more of
the plant capacity to process our own natural gas, leaving less capacity for
third party processing.

                                       34
<Page>

     LEASE OPERATING EXPENSE. Lease operating expense ("LOE") and natural gas
processing costs decreased slightly from $18.8 million in 2000 to $18.6 million
in 2001. LOE on a per Mcfe basis for 2001 was $0.85 per Mcfe as compared to
$0.73 per Mcfe in 2000. The increase in the per Mcfe cost is due to a decline in
production volumes.

     G&A EXPENSE. General and administrative ("G&A") expense decreased from $6.5
million in 2000 to $6.4 million in 2001. The decline in G&A expenses is
primarily due to our efforts to control cost. Our G&A expense on a per Mcfe
basis increased from $0.27 in 2000 to $0.29 in 2001. The increase in the per
Mcfe cost was due primarily to lower production volumes in 2001 as compared to
2000.

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

     DD&A EXPENSE. Depreciation, depletion and amortization ("DD&A") expense
decreased by $3.4 million from $35.9 million in 2000 to $32.5 million in 2001.
Our DD&A expense on a per Mcfe basis for 2001 was $1.48 per Mcfe as compared to
$1.40 per Mcfe in 2000. The decline in DD&A is due to reductions in our full
cost pool resulting from ceiling test write-downs in prior years, as well as
lower production volumes.

     INTEREST EXPENSE. Interest expense increased by $400,000 from $31.1 million
to $31.5 million for 2001 compared to 2000. This increase resulted from an
increase in debt levels during 2001 compared to 2000. The increase in our debt
level was the result of additional sales pursuant to our production payment
arrangement with Mirant Americas, as well as additional funding from the Old
Grey Wolf credit facility.

     CEILING LIMITATION WRITE-DOWN. We record the carrying value of our crude
oil and natural gas properties using the full cost method of accounting for
crude oil and natural gas properties. Under this method, we capitalize the cost
to acquire, explore for and develop crude oil and natural gas properties. Under
the full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties less related deferred taxes, are limited by country, to
the lower of the unamortized cost or the cost ceiling, defined as the sum of the
present value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, we are
subject to a ceiling limitation write-down to the extent of such excess. A
ceiling limitation write-down is a charge to earnings which does not impact cash
flow from operating activities. However, such write-downs do impact the amount
of our stockholders' equity. The cost ceiling represents the present value
(discounted at 10%) of net cash flows from sales of future production, using
commodity prices on the last day of the quarter, or alternatively, if prices
subsequent to that date have increased, a price near the periodic filing date of
our financial statements. As of December 31, 2001, our net capitalized costs of
crude oil and natural gas properties exceeded the present value of its estimated
proved reserves by $71.3 million ($38.9 million on the U.S. properties and $32.4
million on the Canadian properties). These amounts were calculated considering
2001 year-end prices of $19.84 per Bbl for crude oil and $2.57 per Mcf for
natural gas as adjusted to reflect the expected realized prices for each of the
full cost pools. We did not adjust capitalized costs for our U.S. properties
because subsequent to December 31, 2001, crude oil and natural gas prices
increased such that capitalized costs for our U.S. properties did not exceed the
present value of the estimated proved crude oil and natural gas reserves for our
U.S. properties as determined using increased realized prices on March 22, 2002
of $24.16 per Bbl for crude oil and $2.89 per Mcf for natural gas. We also used
the subsequent prices to evaluate our Canadian properties, and reduced the 2001
year-end write-down to an amount of $2.6 million on those properties.

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

                                       35
<Page>

will not experience additional write-downs in the future. If commodity prices
decline or if any of our proved reserves are revised downward, a further
write-down of the carrying value of our crude oil and natural gas properties may
be required. See Note 18 of Notes to Consolidated Financial Statements.

     MINORITY INTEREST. We owned a 49% interest in the earnings of Old Grey Wolf
through August 2001. The consolidated financial statements include the results
of Old Grey Wolf. The net income attributable to the minority interest in Old
Grey Wolf through August 2001 increased to $1.7 million in 2001 from $1.3
million in 2000. This increase is due to improved profitability of Old Grey Wolf
as a result of improved commodity prices received in 2001 as compared to 2000.
As of December 31, 2001, we owned 100% of the outstanding capital stock of Old
Grey Wolf. We obtained the additional interest in Old Grey Wolf pursuant to a
tender offer and subsequent compulsory merger, completed in September 2001.

     INCOME TAXES. Income tax expense decreased from $3.7 million for the year
ended December 31, 2000 to $2.4 million for the year ended December 31, 2001.
The decrease was primarily due to the tax benefit relating to the ceiling
limitation write-down relating to Canadian producing properties in 2001.

     OTHER. In March 2000, Abraxas Wamsutter L.P. sold all of its interest in
its crude oil and natural gas properties to a third party. Prior to the sale of
these properties, effective January 1, 2000, Abraxas' equity investee share of
crude oil and natural gas property cost, results of operations and amortization
were not material to consolidated operations or financial position. As a result
of the sale, Abraxas received approximately $34 million, which represented a
proportional interest in Abraxas Wamsutter L.P.'s proved properties.

     In June 2000, we retired $3.5 million of the Old Notes and $3.6 million of
the Second Lien Notes at a discount of $1.8 million.

COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999

     OPERATING REVENUE. During the year ended December 31, 2000, operating
revenue from crude oil, natural gas and natural gas liquids sales increased by
$14.0 million from $59.0 million in 1999 to $73.0 million in 2000. This increase
was primarily attributable to an increase in commodity prices. Increased prices
contributed $26.5 million in additional revenue, which was offset by $12.5
million due to a decrease in production volumes. The decline in production was
due to the disposition of certain properties, primarily in Canada.

     Natural gas liquids volumes declined from 376.5 MBbls in 1999 to 314.9
MBbls in 2000. Crude oil sales volumes declined from 777.9 MBbls in 1999 to
636.7 MBbls during 2000. Natural gas sales volumes decreased from 25.7 Bcf in
1999 to 20.0 Bcf in 2000. Production declines were primarily attributable to our
disposition of assets during 2000.

     Average sales prices in 2000 net of hedging losses were:

       -  $18.69 per Bbl of crude oil,

       -  $22.42 per Bbl of natural gas liquids, and

       -  $2.71 per Mcf of natural gas.

     Average sales prices in 1999 net of hedging losses were:

       -  $14.57 per Bbl of crude oil,

       -  $13.40 per Bbl of natural gas liquids, and

       -  $1.66 per Mcf of natural gas.

     We also had natural gas processing revenue of $2.7 million in 2000 as
compared to $4.2 million in 1999. The decline in processing revenue is due to a
decrease in third party natural gas being processed. We are utilizing more of
the plant capacity to process our own natural gas, leaving less capacity for
third party processing.

     LEASE OPERATING EXPENSE. LOE and natural gas processing costs increased by
$0.8 million from $17.9 million for 1999 to $18.8 million for 2000. LOE on a per
Mcfe basis for 2000 was $0.73 per Mcfe as compared to

                                       36
<Page>

$0.55 per Mcfe in 1999. The increase was due primarily to a general increase in
the cost of services and increased production taxes due to higher commodity
prices in 2000 as compared to 1999. The increase in the per Mcfe cost is due to
a decline in production volumes.

     G&A EXPENSE. G&A expense increased from $5.3 million for the year ended
December 31, 1999 to $6.5 million for the year ended December 31, 2000. The
increase in G&A was due to the loss of approximately $600,000 of overhead billed
to Abraxas Wamsutter L.P., substantially all of the assets of which were sold in
March 2000, and an increase in director compensation as a result of our
restructuring in the fourth quarter of 1999. Our G&A expense on a per Mcfe basis
increased from $0.16 in 1999 to $0.27 in 2000. The increase in the per Mcfe cost
was due partly to lower production volumes in 2000 as compared to 1999 as well
as the increase in expense in 2000 as compared to 1999.

     G&A - STOCK-BASED COMPENSATION EXPENSE. Effective July 1, 2000, the
Financial Accounting Standards Board ("FASB") issued FIN 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of
Accounting Principles Board Opinion No. ("APB") 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be subject to variable accounting until they are exercised, forfeited, or
expired. In March 1999, we amended the exercise price to $2.06 on all options
with an existing exercise price greater than $2.06. We recognized approximately
$2.8 million as stock-based compensation expense during 2000 related to these
repricings.

     DD&A EXPENSE. DD&A expense increased by $1.1 million from $34.8 million for
the year ended December 31, 1999 to $35.9 million for the year ended December
31, 2000. Our DD&A expense on a per Mcfe basis for 1999 was $1.07 per Mcfe as
compared to $1.40 per Mcfe in 2000. The increase in DD&A is the result of higher
finding costs for 2000.

     INTEREST EXPENSE. Interest expense decreased by $5.7 million from $36.8
million to $31.1 million for the year ended December 31, 2000 compared to 1999.
This decrease resulted from reduced debt levels during 2000 compared to 1999.
The reduced debt level was the result of the exchange of approximately $269.7
million principal amount of our ld Notes for approximately $188.8 million
principal of our Second Lien Notes, shares of our common stock and contingent
value rights.

     CEILING LIMITATION WRITE-DOWN. We record the carrying value of our crude
oil and natural gas properties using the full cost method of accounting for
crude oil and natural gas properties. Under this method, we capitalize the cost
to acquire, explore for and develop crude oil and natural gas properties. Under
the full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties less related deferred taxes, is limited by country, to
the lower of the unamortized cost or the cost ceiling, defined as the sum of the
present value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, we are
subject to a ceiling limitation write-down to the extent of such excess. A
ceiling limitation write-down is a charge to earnings, which does not impact
cash flow from operating activities. However, such write-downs do impact the
amount of our stockholders' equity.

     The risk that we will be required to write-down the carrying value of our
crude oil and natural gas assets increases when crude oil and natural gas prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. For the year ended December 31, 1999,
we recorded a write-down of $19.1 million, $11.9 million after tax, related to
our Canadian properties. We cannot assure you that we will not experience
additional write-downs in the future. Should commodity prices decline or if any
of our proved reserves are revised downward , a further write-down of the
carrying value of our crude oil and natural gas properties may be required. See
Note 18 of Notes to Consolidated Financial Statements.

     MINORITY INTEREST. Minority interest in the net income of Old Grey Wolf,
our 49% owned subsidiary during 1999 and 2000, increased to $1.3 million in 2000
from $269,000 in 1999. This increase was due to improved profitability of Old
Grey Wolf as a result of improved commodity prices received in 2000 as compared
to 1999.

                                       37
<Page>

     INCOME TAXES. Income tax expense (benefit) increased from a benefit of
$12.6 million for the year ended December 31, 1999 to expense of $3.7 million
for the year ended December 31, 2000. The benefit for the year ended December
31, 1999 was primarily attributable to the ceiling limitation write down that
occurred in that year.

     OTHER. In March 2000, Abraxas Wamsutter L.P. sold all of its interest in
its crude oil and natural gas properties to a third party. Prior to the sale of
these properties, effective January 1, 2000, Abraxas' equity investee share of
crude oil and natural gas property cost, results of operations and amortization
were not material to consolidated operations or financial position. As a result
of the sale, Abraxas received approximately $34 million, which represented a
proportional interest in Abraxas Wamsutter L.P.'s proved properties.

     In June 2000, we retired $3.5 million of the Old Notes and $3.6 million of
the Second Lien Notes at a discount of $1.8 million.

SUBSEQUENT EVENT - FINANCIAL RESTRUCTURING

     In recent years, our cash flow from operations has been severely impacted
by volatile commodity prices and reduced production resulting from sales of
producing properties. Our reduced operating cash flow and high debt levels have
put significant strain on our liquidity and cash position. During 2002, in order
to address our need for additional liquidity and alternative sources of capital,
the Planning Committee of the Board of Directors of Abraxas engaged Jefferies &
Company, Inc. to assist with a strategic review of Abraxas' options to obtain
additional liquidity. As a result of this strategic review, the Board of
Directors approved an overall financial restructuring, comprised of the
transactions described below, which were completed as of January 23, 2003.

     EXCHANGE OFFER. On January 23, 2003 Abraxas completed an exchange offer,
pursuant to which it offered to exchange cash and securities for all of the
outstanding 11 1/2% Senior Secured Notes due 2004, Series A, or second lien
notes, and 11 1/2% Senior Notes due 2004, Series D, or old notes, issued by
Abraxas and Canadian Abraxas. In exchange for each $1,000 principal amount of
notes tendered in the exchange offer, tendering noteholders received

       -  cash in the amount of $264;

       -  an 11 1/2% Secured Note due 2007, Series A, with a principal amount
          equal to $610; and

       -  31.36 shares of Abraxas common stock.

     At the time the exchange offer was made, there were approximately $190.1
million of the second lien notes and $800,000 of the old notes outstanding.
Holders of approximately 94% of the aggregate outstanding principal amount of
the second lien notes and old notes tendered their notes for exchange in the
offer. Pursuant to the procedures for redemption under the applicable indenture
provisions, the remaining 6% of the aggregate outstanding principal amount of
the second lien notes and old notes were redeemed at 100% of the principal
amount plus accrued and unpaid interest, for approximately $11.8 million. The
indentures for the second lien notes and old notes have been duly discharged. In
connection with the exchange offer, Abraxas made cash payments of approximately
$47.4 million and issued approximately $109.5 million in principal amount of
notes and 5,633,291 shares of Abraxas common stock, each of which are being
offered for resale under this prospectus. Fees and expenses incurred in
connection with the exchange offer were approximately $3.8 million.

     SALE OF STOCK OF CANADIAN ABRAXAS AND OLD GREY WOLF. Contemporaneously with
the closing of the exchange offer, on January 23, 2003, Abraxas completed the
sale to a wholly-owned subsidiary of PrimeWest Energy Inc. of all of the
outstanding capital stock of two of Abraxas' former wholly-owned subsidiaries,
Canadian Abraxas and Old Grey Wolf for approximately $138 million before net
adjustments of $3.4 million. The aggregate purchase price was allocated to the
shares of capital stock of Canadian Abraxas and Old Grey Wolf as follows:

<Table>
<Caption>
                        NUMBER OF SHARES               PURCHASE PRICE
<S>                     <C>                            <C>
Canadian Abraxas        5,751 common shares            $68 million
Old Grey Wolf           12,804,628 common shares       $70 million

                             TOTAL PURCHASE PRICE:     $138  MILLION
                                                       -------------
</Table>

                                       38
<Page>

     After purchase price adjustments and related costs and expenses of
approximately $5.9 million were made, the purchase price realized for the sale
of Canadian Abraxas and Old Grey Wolf was $132.1 million. Upon consummation of
the sale, Old Grey Wolf repaid the outstanding indebtedness under its credit
agreement with Mirant Canada Energy Capital, Ltd. in the amount of $46.3
million, which reduced the net proceeds from the sale by a corresponding amount.
The net cash proceeds from the sale were $85.8 million, all of which has been
utilized in connection with the financial restructuring.

     The properties transferred in conjunction with the sale of Canadian Abraxas
and Old Grey Wolf amounted to approximately 35% of our total proved reserves at
June 30, 2002 and approximately 60% of our production for the quarter ended
September 30, 2002. Under the terms of the agreement with PrimeWest, Abraxas has
retained certain assets formerly held by Canadian Abraxas and Old Grey Wolf,
including all of Canadian Abraxas' and Old Grey Wolf's undeveloped acreage
existing at the time of the sale, which includes all of our interests in the
Ladyfern area. These assets have been contributed to New Grey Wolf, a new
wholly-owned Canadian subsidiary of Abraxas. Portions of this undeveloped
acreage will be developed by PrimeWest and New Grey Wolf under a farmout
arrangement. Under the farmout arrangements, PrimeWest has agreed to participate
in the development of certain lands of New Grey Wolf in the Caroline and Pouce
Coupe areas of Alberta. PrimeWest has the right to obtain a 60% interest in
certain wells if it bears 100% of the expense of drilling such wells. In
addition, New Grey Wolf and PrimeWest will have an area of mutual interest in
respect of the lands surrounding the Caroline area where each party will be
entitled to participate in the acquisition of the other, with New Grey Wolf
participating with a 40% interest and PrimeWest participating with a 60%
interest.

     REDEMPTION OF FIRST LIEN NOTES. On January 24, 2003, we completed the
redemption of 100% of our outstanding 12?% Senior Secured Notes, Series A, or
first lien notes, with approximately $66.4 million of the proceeds from the sale
of Canadian Abraxas and Old Grey Wolf. Prior to the redemption, we had $63.5
million of our first lien notes outstanding. Under the terms of the indenture
for the first lien notes, as of March 15, 2002, we had the right to redeem the
first lien notes at 100% of the outstanding principal amount of the notes, plus
accrued and unpaid interest to the date of redemption, and to discharge the
indenture upon call of the first lien notes for redemption and deposit of the
redemption funds with the trustee. We exercised these rights on January 23, and
upon the discharge of the indenture, the trustee released the collateral
securing our obligations under the first lien notes.

     NEW SENIOR CREDIT AGREEMENT. Contemporaneously with the closing of the
exchange offer and the sale of Canadian Abraxas and Old Grey Wolf, on January
23, 2003, Abraxas entered into a new senior credit agreement providing a term
loan facility of $4.2 million and a revolving credit facility with a maximum
borrowing base of up to $50 million. For a detailed description of the credit
facilities under the new senior credit agreement, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Indebtedness" beginning on page 43.

     SOURCES AND USES OF FUNDS IN FINANCIAL RESTRUCTURING

     The following table illustrates the sources and uses of funds for the
financial restructuring.

<Table>
<Caption>
                       SOURCES OF FUNDS                                         USES OF FUNDS
                                          (US DOLLARS IN MILLIONS)
<S>                                             <C>                                                    <C>
Sale of Canadian Abraxas and
Old Grey Wolf (1)......................         $ 132.1    Redemption of First Lien Notes (3).....      $ 66.4
New Senior Credit Agreement (2)........            46.7    Exchange Offer Cash Payments (4).......        59.2
                                                           Repayment of Old Grey Wolf

                                                           Credit Facility (5)....................        46.3
                                                           Fees and Expenses......................         6.9
                                                                                                        ------
Total Sources..........................         $ 178.8    Total Uses.............................      $178.8
                                                =======                                                =======
</Table>

----------
(1)  Represents CDN $205.9 million converted to US $134.6 million at an exchange
     rate of US $0.6538 per CDN $1.00, less fees and expenses of $2.5 million.

(2)  Includes term loan facility of $4.2 million and outstanding amounts under
     the revolving credit facility of $42.5 million at the time of the financial
     restructuring.

(3)  Represents $63.5 million in principal amount of the first lien notes and
     accrued interest of $2.9 million.

                                       39
<Page>

(4)  Represents payments of $47.4 million for the cash portion of the exchange
     offer consideration and payments of $11.8 million for the redemption of the
     second lien notes and old notes remaining outstanding upon closing of the
     exchange offer.

(5)  Represents CDN $70.8 million converted to US $46.3 million at an exchange
     rate of US $0.6538 per CDN $1.00.

LIQUIDITY AND CAPITAL RESOURCES

     GENERAL. The crude oil and natural gas 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:

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

       -  acquisition of interests in crude oil and natural gas properties; and

       -  production and transportation facilities.

     The amount of capital available to us will affect our ability to service
our existing 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 are primarily cash on hand, cash from operating
activities, the sale of properties and funding under the new revolving credit
facility. Our overall liquidity depends heavily on the prevailing prices of
crude oil and natural gas and our production volumes of crude oil and natural
gas. Significant downturns in commodity prices, such as that experienced in the
last nine months of 2001 and the first quarter of 2002, can reduce our cash from
operating activities. Although we have hedged a portion of our natural gas and
crude oil production and will continue this practice as required pursuant to the
new senior credit agreement, future crude oil and natural gas price declines
would have a material adverse effect on our overall results, and therefore, our
liquidity. Furthermore, low crude oil and natural gas prices could affect our
ability to raise capital on terms favorable to us. Similarly, our cash flow from
operations will decrease if the volume of crude oil and natural gas we produce
decreases. Our production volumes will decline as reserves are produced. In
addition, due to sales of properties in 2002 and January 2003, we now have
significantly reduced reserves and production levels. In the future we may sell
additional properties, which could further reduce our production volumes. To
offset the loss in production volumes resulting from natural field declines and
sales of producing properties, we must conduct successful exploration,
exploitation and development activities, acquire additional producing properties
or identify additional behind-pipe zones or secondary recovery reserves. While
we have had some success in pursuing these activities, historically, we have not
been able to fully replace the production volumes lost from natural field
declines and property sales.

     WORKING CAPITAL. At September 30, 2002, on a pro forma basis, we had
current assets of $13.3 million and current liabilities of $5.2 million
resulting in working capital of $8.1 million. The majority of our current
liabilities at September 30, 2002, on a pro forma basis, were trade accounts
payable of $2.6 million and revenues due third parties of $2.6 million. Our
capital resources and liquidity will be affected by realized crude oil and
natural gas prices, our production levels and by the timing and amount of our
cash interest payments under the revolving credit facility, which we estimate
will be approximately $3.5 million per year. We do not expect to make cash
interest payments with respect to the outstanding notes, and the issuance of new
notes in lieu of cash interest payments will not affect our working capital
balance.

                                       40
<Page>

     CAPITAL EXPENDITURES. Capital expenditures, excluding property divestitures
during the first nine months of 2002, were $33.4 million compared to $44.8
million during the same period of 2001. The table below sets forth the
components of these capital expenditures on a historical basis for the nine
months ended September 30, 2002 and 2001.

<Table>
<Caption>
                                                                             NINE MONTHS ENDED
                                                                               SEPTEMBER 30,
                                                                  -----------------------------------
                                                                        2002                 2001
                                                                  ------------------- ---------------
  <S>                                                              <C>                  <C>
  Expenditure category (in thousands):
    Acquisitions................................................   $           -        $         -
    Development.................................................          33,240             44,666
    Facilities and other........................................             152                327
                                                                  --------------        ------------
        Total...................................................         $33,392        $    44,793
                                                                  ==============        ============
</Table>

     Investing activities provided $286,000 net during the first nine months of
2002. $33.7 million was provided from the proceeds of property sales during the
period. $33.2 million was utilized primarily for the development of crude oil
and natural gas properties and other facilities. This compares to using $31.7
million net during the first nine months of 2001, $44.8 million of which was
utilized for the development of crude oil and natural gas properties and $15.4
million of which was provided from the sale of properties.

     Our capital expenditures are subject to limitations imposed under the
revolving credit facility, including a maximum annual capital expenditure budget
of $15 million for 2003, subject to reduction in the event of a reduction in our
net assets. We currently expect to have a capital expenditure budget of up to $8
million for the first quarter of 2003. Our capital expenditures could include
expenditures for acquisition of producing properties if such opportunities
arise, but we currently have no agreements, arrangements or undertakings
regarding any material acquisitions. We have no material long-term capital
commitments and are consequently able to adjust the level of our expenditures as
circumstances dictate. Additionally, the level of capital expenditures will vary
during future periods depending on market conditions and other related economic
factors. Should the prices of crude oil and natural gas decline from current
levels, our cash flows will decrease which may result in a reduction of the
capital expenditures budget. If we decrease our capital expenditures budget, we
may not be able to offset crude oil and natural gas production volumes decreases
caused by natural field declines and sales of producing properties.

     SOURCES OF CAPITAL. The net funds provided by and/or used in each of the
operating, investing and financing activities are summarized in the following
table and discussed in further detail below:

<Table>
<Caption>
                                                                            NINE MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                  -------------------------------------
                                                                         2002                2001
                                                                  ------------------- -----------------
                                                                              (IN THOUSANDS)
                                                                  -------------------------------------
  <S>                                                                <C>                 <C>
  Net cash (used) provided by operating activities                   $   (2,820)         $   26,089
  Net cash (used) provided by investing activities                          286             (31,680)
  Net cash provided by financing activities                               8,605               4,240
                                                                  ------------------- -----------------
  Total                                                              $    6,071              (1,351)
                                                                  =================== =================
</Table>

     Operating activities during the nine months ended September 30, 2002 used
$2.8 million cash compared to providing $26.1 million in the same period in
2001. The 2002 period included an operating loss from operations, after non-cash
items, of $4.6 million compared to 2001 results of a $19.8 million gain. Lower
commodity prices realized in 2002 compared to 2001 significantly reduced
operating cash flow. Investing activities provided $286,000 for the first nine
months of 2002 compared to requiring $31.7 million for the same period of 2001.
Capital expenditures for development activities required $44.8 million in the
2001 period compared to only $33.4 million in 2002. Asset sale proceeds total
$33.7 million in the first nine months of 2002, compared to only $15.4 million
in 2001. These additional proceeds were utilized to provide liquidity lost due
to lower commodity prices. Financing activities provided $8.6 million for the
first nine months of 2002 compared to providing $4.2 million for the same

                                       41
<Page>

period of 2001. Borrowings under the Old Grey Wolf credit facility were $4.2
million higher in 2002 as compared to 2001. These incremental borrowings were
utilized to fund drilling activities on Canadian assets.

     CURRENT LIQUIDITY REQUIREMENTS. We currently have substantial indebtedness
and debt service requirements and we have had recurring net losses in four of
the last five years and for the first nine months of 2002. Our loss of
approximately $112.8 million during the nine months ended September 30, 2002
($43.8 million on a pro forma basis) was due primarily to non-cash proved
property impairments of approximately $116 million ($28 million on a pro forma
basis) resulting from depressed commodity prices. At September 30, 2002,
Abraxas' current liabilities of approximately $86.7 million exceeded current
assets of $22.6 million resulting in a working capital deficit of $64.1 million.
At September 30, 2002, on a pro forma basis, our current assets of $13.3 million
exceeded liabilities of $5.2 million, resulting in working capital of $8.1
million. We also had a shareholders' deficit of $138.0 million ($67.5 million on
a pro forma basis). The success of our future operations will require us to meet
our debt obligations and to make substantial capital expenditures for the
exploitation, development, exploration and production of crude oil and natural
gas. We plan to use cash flow from operations and availability under the
revolving credit facility established under the new senior credit agreement to
continue developing our properties. However, our utilizable cash flow from
operations will be effectively limited by mandatory cash balance reductions
required under the revolving credit facility at the end of each quarter, which
are described in the section entitled "--Indebtedness--New Senior Credit
Agreement" on page 43 of this prospectus.

     FUTURE CAPITAL RESOURCES. We will have four principal sources of liquidity
going forward: (i) cash on hand, (ii) cash flow from operations, (iii)
availability under the revolving credit facility, and (iv) sales of producing
properties. In addition we may attempt to raise additional capital through the
issuance of additional debt or equity securities. However, the terms of the
indenture governing our outstanding notes and the new senior credit agreement
substantially restrict our ability to:

       -  incur additional indebtedness;

       -  incur liens;

       -  pay dividends or make certain other restricted payments;

       -  consummate certain asset sales;

       -  enter into certain transactions with affiliates;

       -  merge or consolidate with any other person; or

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

     Due to the restrictions contained in the indenture and new senior credit
agreement described above, our best opportunity for additional sources of
liquidity and capital will be through the issuance of equity securities or
through the disposition of assets.

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

       -  Long-term debt

       -  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
January 31, 2003.

<Table>
<Caption>
                                                                  Payments due in:
----------------------------------------------------------------------------------------------------------------------
Contractual Obligations
(dollars in thousands)              Total          2003          2004          2005          2006           2007
------------------------------- -------------- ------------- ------------- ------------- -------------- --------------
<S>                              <C>               <C>           <C>         <C>            <C>          <C>
Long-Term Debt (1)               $ 231,996             --            --          --         $ 47,996(2)  $  184,000(3)
Operating Leases (4)             $     885         $  236        $  236      $  236         $    177             --
</Table>

                                       42
<Page>

(1)  Includes the amounts outstanding under the term loan facility, the
     revolving credit facility and the outstanding notes.

(2)  Represents repayment of the term loan facility and the revolving credit
     facility and assumes that interest will be capitalized under the term loan
     facility and that periodic interest on the senior credit facility will be
     paid on a monthly basis and that we will not draw down additional funds
     thereunder.

(3)  Assumes that new notes will be issued in lieu of cash interest payments on
     the outstanding notes, through the date of maturity.

(4)  Office lease obligations. Leases for office space for Abraxas and New Grey
     Wolf expire in April 2006 and May 2003, respectively.

     OTHER OBLIGATIONS. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, 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. As cash flow permits our capital expenditure budget for
the remainder of 2002 for existing operations and leaseholds is approximately
$5.1 million.

     INDEBTEDNESS. The recently completed financial restructuring resulted in
the retirement of our first lien notes, second lien notes and old notes,
together with the Old Grey Wolf credit facility. Our existing indebtedness
consists of the senior credit facility and the notes issued in connection with
the financial restructuring.

     11 1/2% SECURED NOTES. On January 23, 2003, Abraxas issued $109.5 million
in principal amount of our 11 1/2% Secured Notes due 2007, Series A, in exchange
for the second lien notes and old notes tendered in the exchange offer. The
notes were issued under an indenture with U.S. Bank, N.A. For a more complete
description of the notes, see "Description of the Notes" beginning on page 79 of
this prospectus.

     NEW SENIOR CREDIT AGREEMENT. Contemporaneously with the closing of the
exchange offer and the sale of Abraxas' Canadian subsidiaries, Abraxas entered
into a new senior credit agreement providing a term loan facility and a
revolving credit facility as described below. Subject to earlier termination on
the occurrence of events of default or other events, the stated maturity date
for both the term loan facility and the revolving credit facility is January 22,
2006. In the event of an early termination, we will be required to pay a
prepayment premium, except in the limited circumstances described in the new
senior credit agreement. Outstanding amounts under both facilities bear interest
at the prime rate announced by Wells Fargo Bank, N.A. plus 4.5%. Any amounts in
default under the term loan facility will accrue interest at an additional 4%.
At no time will the amounts outstanding under the new senior credit agreement
bear interest at a rate less than 9%.

     TERM LOAN FACILITY. Abraxas has borrowed $4.2 million pursuant to a term
loan facility, all of which was used to make cash payments in connection with
the financial restructuring. Accrued interest under the term loan facility will
be capitalized and added to the principal amount of the term loan facility until
maturity.

     REVOLVING CREDIT FACILITY. Lenders under the new senior credit agreement
have provided a revolving credit facility to Abraxas with a maximum borrowing
base of up to $50 million. Our current borrowing base under the revolving credit
facility is $49.9 million, subject to adjustments based on periodic calculations
and mandatory prepayments under the senior credit agreement. Portions of accrued
interest under the revolving credit facility may be capitalized and added to the
principal amount of the revolving credit facility. As of the date of this
prospectus, we have borrowed $42.5 million under the revolving credit facility,
all of which was used to make cash payments in connection with the financial
restructuring. We plan to use the remaining borrowing availability under the new
senior credit agreement to fund our operations, including capital expenditures.

     COVENANTS. Under the new senior credit agreement, Abraxas is subject to
customary covenants and reporting requirements. Certain financial covenants
require Abraxas to maintain minimum levels of consolidated EBITDA (as defined in
the new senior credit agreement), minimum ratios of consolidated EBITDA to cash
interest expense and a limitation on annual capital expenditures. In addition,
at the end of each fiscal quarter, if the aggregate amount of our cash and cash
equivalents exceeds $2.0 million, we are required to repay the loans under the
new senior credit agreement in an amount equal to such excess. The new senior
credit agreement also requires

                                       43
<Page>

us to enter into hedging agreements on not less than 25% or more than 75% of our
projected oil and gas production. We are also required to establish deposit
accounts at financial institutions acceptable to the lenders and we are required
to direct our customers to make all payments into these accounts. The amounts in
these accounts will be transferred to the lenders upon the occurrence and during
the continuance of an event of default under the new senior credit agreement.

     In addition to the foregoing and other customary covenants, the new senior
credit agreement contains a number of covenants that, among other things,
restrict our ability to:

       -  incur additional indebtedness;

       -  create or permit to be created any liens on any of our properties;

       -  enter into any change of control transactions;

       -  dispose of our assets;

       -  change our name or the nature of our business;

       -  make any guarantees with respect to the obligations of third parties;

       -  enter into any forward sales contracts;

       -  make any payments in connection with distributions, dividends or
          redemptions relating to our outstanding securities, or

       -  make investments or incur liabilities.

     GUARANTEES. The obligations of Abraxas under the new senior credit
agreement are guaranteed by Sandia Oil & Gas, Sandia Operating, Wamsutter, New
Grey Wolf, Western Associated Energy and Eastside Coal. Obligations under the
new senior credit agreement are secured by a first lien security interest in
substantially all of Abraxas' and the guarantors' assets, including all crude
oil and natural gas properties.

     EVENTS OF DEFAULT. The new senior credit facility contains customary events
of default, including nonpayment of principal or interest, violations of
covenants, inaccuracy of representations or warranties in any material respect,
cross default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in our financial condition.

     The foregoing summary is qualified in its entirety by the terms of the new
senior credit agreement, which has been filed with the SEC as an exhibit to the
registration statement of which this prospectus is a part.

     HEDGING ACTIVITIES. Our results of operations are significantly affected by
fluctuations in commodity prices and we seek to reduce our exposure to price
volatility by hedging our production through swaps, options and other commodity
derivative instruments. Under the new senior credit agreement, we are required
to enter into hedging agreements on not less than 25% or more than 75% of our
projected oil and gas production on an on-going basis. See "--Quantitative and
Qualitative Disclosures about Market Risk; Commodity Price Risk--Hedging
Sensitivity" for further information.

     NET OPERATING LOSS CARRYFORWARDS. At December 31, 2001 we had, subject to
the limitation discussed below, $115,900,000 of net operating loss carryforwards
for U.S. tax purposes. These loss carryforwards will expire from 2002 through
2021 if not utilized. At December 31, 2001, we had approximately $6,700,000 of
net operating loss carryforwards for Canadian tax purposes. These carryforwards
will expire from 2002 through 2008 if not utilized. In connection with the
financial restructuring, a significant portion of the U.S. loss carryforwards
will be utilized.

     As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the

                                       44
<Page>

use of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $3,203,000 will be limited to approximately $235,000 per year.

     During 1992, we acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of the acquired
corporation of $257,000 acquired in the acquisition are limited to approximately
$115,000 per year.

     As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $6,590,000 will be limited as described above and in the following paragraph.

     An ownership change under Section 382 occurred in December 1999, following
the issuance of additional shares, as described in Note 5. It is expected that
the annual use of U.S. net operating loss carryforwards subject to this Section
382 limitation will be limited to approximately $363,000, subject to the lower
limitations described above. Future changes in ownership may further limit the
use of our carryforwards. In 2000 assets with built in gains were sold,
increasing the Section 382 limitation for 2001 by approximately $31,000,000.

     The annual Section 382 limitation may be increased during any year, within
5 years of a change in ownership, in which built-in gains that existed on the
date of the change in ownership are recognized.

     In addition to the Section 382 limitations, uncertainties exist as to the
future utilization of the operating loss carryforwards under the criteria set
forth under FASB Statement No. 109. Therefore, we have established a valuation
allowance of $39,670,000 and $62,496,000 for deferred tax assets at December 31,
2001 and September 30, 2002 respectively.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK; COMMODITY PRICE RISK

     COMMODITY PRICE RISK

     Our exposure to market risk rests primarily with the volatile nature of
crude oil, natural gas and natural gas liquids prices. We manage crude oil and
natural gas prices through the periodic use of commodity price hedging
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". Assuming the production
levels we attained during the nine months ended September 30, 2002, a 10%
decline in crude oil, natural gas and natural gas liquids prices would have
reduced our operating revenue, cash flow and net income (loss) by approximately
$1.4 million for the nine months ended September 30, 2002.

     HEDGING SENSITIVITY

     On January 1, 2001, we adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, we use only
cash flow hedges and the remaining discussion will relate exclusively to this
type of derivative instrument. If the derivative qualifies for hedge accounting,
the gain or loss on the derivative is deferred in Other Comprehensive
Income/Loss, a component of Stockholder's Equity, to the extent that the hedge
is effective.

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

                                       45
<Page>

     Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income and adjustments to carrying amounts on hedged production
are included in natural gas or crude oil production revenue in the period that
the related production is delivered.

     The following table sets forth our hedging position as of the date of this
prospectus.

<Table>
<Caption>
              Time Period                     Notional Quantities                   Price                Fair Value
---------------------------------------- ------------------------------ ------------------------------ ----------------
<S>                                      <C>                            <C>                                  <C>
February 1, 2003--July 31, 2003          5,000  MMBtu  of production    Option  Collar  with floor of        --
                                         per day                        $4.00 and ceiling of $6.25
</Table>

     In 2000, 2001 and the nine month period ended September 30, 2002, we
experienced hedging losses of $20.2 million, $12.1 million and $2.8 million,
respectively. In October 2002, all of these hedge agreements expired. Under the
expired hedge agreements, we made total payments to various counterparties in
the amount of $35.1 million.

     Under the terms of the new senior credit agreement, we are required to
enter into hedging transactions with respect to not less than 25% nor more than
75% of our crude oil and natural gas production on an ongoing basis. As of
January 23, 2003, we have entered into a collar option agreement with respect to
5,000 MMBtu per day, or approximately 25% of our production, at a maximum call
price of $6.25 per MMBtu and a minimum put price of $4.00 per MMBtu. As of the
date of this prospectus, the fair market value of the collar option agreement is
not material. For Abraxas, the fair value of the hedging instrument was
determined based on the base price of the hedged item and NYMEX forward price
quotes.

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

     INTEREST RATE RISK

     At September 30, 2002, substantially all of our long-term debt was at fixed
interest rates and not subject to fluctuations in market rates. At September 30,
2002, on pro forma basis, we had approximately $46.7 million in outstanding
indebtedness under the new senior credit agreement, accruing interest at a rate
of prime plus 4.5%, subject to a minimum interest rate of 9.0%. In the event
that the prime rate (currently 1.5%) rises above 4.5% the interest rate
applicable to our outstanding indebtedness under the new senior credit agreement
will rise accordingly. For every percentage point that the prime rate rises
above 4.5%, our interest expense would increase by approximately $467,000 on an
annual basis. The remainder of our long-term debt accrues interest at fixed
rates and is accordingly not subject to fluctuations in market rates.

     FOREIGN CURRENCY

     Our Canadian operations are measured in the local currency of Canada. As a
result, our financial results could be affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre tax loss of $94.4 million for the nine months ended
September 30, 2002. It is estimated that a 5% change in the value of the U.S.
dollar to the Canadian dollar would have changed our pre tax income by
approximately $4.7 million. We do not maintain any derivative instruments to
mitigate the exposure to translation risk. However, this does not preclude the
adoption of specific hedging strategies in the future.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires that management apply accounting
policies and make estimates and assumptions that affect results of

                                       46
<Page>

operations and the reported amounts of assets and liabilities in the financial
statements. The following represents those policies that management believes are
particularly important to the financial statements and that require the use of
estimates and assumptions to describe matters that are inherently uncertain.

     FULL COST METHOD OF ACCOUNTING FOR CRUDE OIL AND NATURAL GAS ACTIVITIES.
SEC Regulation S-X defines the financial accounting and reporting standards for
companies engaged in crude oil and natural gas activities. Two methods are
prescribed: the successful efforts method and the full cost method. Abraxas has
chosen to follow the full cost method. At the time it was adopted, management
believed that this method would be preferable, as earnings tend to be less
volatile than under the successful efforts method. See Note 1 of the Notes to
Consolidated Financial Statements.

     However, the full cost method makes us susceptible to significant non-cash
charges during times of volatile commodity prices because the full cost pool may
be impaired when prices are low. These charges are not recoverable when prices
return to higher levels. We have experienced this situation several times over
the years and experienced it again in 2001. Our crude oil and natural gas
reserves have a relatively long life. However, temporary drops in commodity
prices can have a material impact on our business including impact from the full
cost method of accounting.

     Under the full cost method of accounting, we record the carrying value of
our crude oil and natural gas properties, and capitalize the cost to acquire,
explore for and develop crude oil and natural gas properties. The net
capitalized cost of crude oil and natural gas properties less related deferred
taxes, is limited by country, to the lower of the unamortized cost or the cost
ceiling, defined as the sum of the present value of estimated unescalated future
net revenues from proved reserves, discounted at 10%, plus the cost of
properties not being amortized, if any, plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any, less
related income taxes. If the net capitalized cost of crude oil and natural gas
properties exceeds the ceiling limit, we are subject to a ceiling limitation
write-down to the extent of such excess. A ceiling limitation write-down is a
charge to earnings which does not impact cash flow from operating activities.
However, such write-downs do impact the amount of our stockholders' equity.

     The risk that we will be required to write-down the carrying value of our
crude oil and natural gas assets increases when crude oil and natural gas prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. As of June 30, 2002, we recorded a
write-down of approximately $116 million due to volatile commodity prices. For
the year ended December 31, 2001, we recorded a write-down of $2.6 million,
related to our Canadian proved reserves. The write-down in 2001 was due to low
commodity prices. For the year ended December 31, 1999, we recorded a write-down
of $19.1 million, related to our Canadian properties. We cannot assure you that
we will not experience additional write-downs in the future. Should commodity
prices decline, a further write-down of the carrying value of our crude oil and
natural gas properties may be required. See Note 18 of Notes to Consolidated
Financial Statements.

     HEDGE ACCOUNTING. Statement of Financial Accounting Standards, ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", was
effective for us on January 1, 2001. SFAS 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, will be required to be recorded on the balance sheet at fair value. If
the derivative is designated a fair-value hedge, the changes in the fair value
of the derivative and the hedged item will be recognized in earnings. If the
derivative is designated a cash-flow hedge, changes in the fair value of the
derivative will be recorded in other comprehensive income (OCI) and will be
recognized in the income statement when the hedged item affects earnings. SFAS
133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in fair
value will we recognized in earnings. The fair value of hedging instruments is
determined based on the base price of the hedged item and NYMEX forward price
quotes.

NEW ACCOUNTING STANDARDS

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to
be recorded at fair value during the period incurred and an equal

                                       47
<Page>

amount recorded as an increase in the value of the related long-lived asset. The
capitalized cost is depreciated over the useful life of the asset and the
obligation is accreted to its present value each period. SFAS No. 143 is
effective for us beginning January 1, 2003. We are currently evaluating the
impact the standard will have on our future results of operations and financial
condition.

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

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44,
and 64, Amendments of FASB Statement No. 13 and Technical Corrections." SFAS No.
145 clarifies guidance related to the reporting of gains and losses from
extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. SFAS No. 145 also amends
other existing pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions relating to the reporting of gains and losses from extinguishment of
debt become effective for us beginning January 1, 2003 with earlier adoption
encouraged. All other provisions of this standard have been effective for the us
as of May 15, 2002 and did not have a significant impact on our financial
condition or results of operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires costs
associated with exit of disposal activities to be recognized when they are
incurred rather than at the date of commitment to an exit or disposal plan. SFAS
No. 146 is effective for us beginning January 1, 2003. We are currently
evaluating the impact the standard will have on its results of operations and
financial condition.

     The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, " Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. We
are currently evaluating the impact on our results of operations and financial
condition if this Proposed Statement of Position is adopted in its current form.

     In January, 2003, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123 to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for annual financial statements for fiscal years ending after
December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. We have not
determined whether we will adopt the fair value based method of accounting for
stock-based employee compensation.

                                       48
<Page>

                                    BUSINESS

GENERAL

     We are an independent energy company engaged primarily in the exploration,
exploitation, development and production of crude oil and natural gas. Since
January 1, 1991, our principal means of growth has been through the acquisition
and subsequent development and exploitation of producing properties and related
assets. As a result of our historical acquisition activities, we believe we have
a substantial inventory of low risk opportunities, the exploitation and
development of which are critical to the maintenance and growth of our current
production levels. We seek to complement our exploitation and development
activities by selectively participating in exploration projects with experienced
industry partners.

     Our principal areas of operation are Texas, western Canada and Wyoming.
Since the beginning of 2002, we have sold a number of our producing properties.
For a description of these recent asset sales, see "--Recent Asset Sales - 2002"
and "--Recent Developments--Financial Restructuring--Sale of Stock of Canadian
Abraxas and Grey Wolf."

     At September 30, 2002, on a pro forma basis, we owned interests in 467,234
gross acres (372,860 net acres) and operated properties accounting for the
majority of our PV-10, affording us substantial control over the timing and
incurrence of operating and capital expenditures. At June 30, 2002, on a pro
forma basis, estimated total proved reserves were 111.6 Bcfe with an aggregate
PV-10 of $81.3 million.

BUSINESS STRATEGY

     Our primary business objectives are to increase reserves, production and
cash flow through the following:

       -  Low Cost Operations. We seek to maintain low lease operating and G&A
          expenses per Mcfe by operating a majority of our producing properties
          and by maintaining a high rate of production on a per well basis. As a
          result of this strategy, we have achieved per unit lease operating and
          G&A expenses that compare favorably with our peer companies.

       -  Exploitation of Existing Properties. We will continue to allocate a
          portion of our operating cash flow to the exploitation of our proved
          oil and natural gas properties. We believe that the proximity of our
          undeveloped reserves to existing production makes development of these
          properties less risky and more cost-effective than other drilling
          opportunities available to us. Given our high degree of operating
          control, the timing and incurrence of operating and capital
          expenditures is largely within our discretion. Abraxas' inventory of
          development opportunities is considerable and growing, our ability to
          exploit that inventory will depend on our ability to raise additional
          capital and on our discretionary cash flow, which in turn is highly
          dependent on future crude oil and natural gas prices.

RECENT DEVELOPMENTS

     FINANCIAL RESTRUCTURING

     In recent years, our cash flow from operations has been severely impacted
by volatile commodity prices and reduced production resulting from sales of
producing properties. Our reduced operating cash flow and high debt levels have
put significant strain on our liquidity and cash position. During 2002, in order
to address our need for additional liquidity and alternative sources of capital,
the Planning Committee of the Board of Directors of Abraxas engaged Jefferies &
Company, Inc. to assist with a strategic review of Abraxas' options to obtain
additional liquidity. As a result of this strategic review, the Board of
Directors approved an overall financial restructuring, comprised of the
transactions described below, which were completed as of January 23, 2003.

     EXCHANGE OFFER. On January 23, 2003 Abraxas completed an exchange offer,
pursuant to which it offered to exchange cash and securities for all of the
outstanding 11 1/2% Senior Secured Notes due 2004, Series A, or second lien
notes, and 11 1/2% Senior Notes due 2004, Series D, or old notes, issued by
Abraxas and Canadian Abraxas. In exchange for each $1,000 principal amount of
notes tendered in the exchange offer, tendering noteholders received

                                       49
<Page>

       -  cash in the amount of $264;

       -  an 11 1/2% Secured Note due 2007, Series A, with a principal amount
          equal to $610; and

       -  31.36 shares of Abraxas common stock.

     At the time the exchange offer was made, there were approximately $190.1
million of the second lien notes and $800,000 of the old notes outstanding.
Holders of approximately 94% of the aggregate outstanding principal amount of
the second lien notes and old notes tendered their notes for exchange in the
offer. Pursuant to the procedures for redemption under the applicable indenture
provisions, the remaining 6% of the aggregate outstanding principal amount of
the second lien notes and old notes were redeemed at 100% of the principal
amount plus accrued and unpaid interest, for approximately $11.8 million. The
indentures for the second lien notes and old notes have been duly discharged. In
connection with the exchange offer, Abraxas made cash payments of approximately
$47.4 million and issued approximately $109.5 million in principal amount of
notes and 5,633,291 shares of Abraxas common stock, each of which are being
offered for resale under this prospectus. Fees and expenses incurred in
connection with the exchange offer were approximately $3.8 million.

     SALE OF STOCK OF CANADIAN ABRAXAS AND OLD GREY WOLF. Contemporaneously with
the closing of the exchange offer, on January 23, 2003, Abraxas completed the
sale to a wholly-owned subsidiary of PrimeWest Energy Inc. of all of the
outstanding capital stock of two of Abraxas' former wholly-owned subsidiaries,
Canadian Abraxas and Old Grey Wolf for approximately $138 million before net
adjustments of $3.4 million. The aggregate purchase price was allocated to the
shares of capital stock of Canadian Abraxas and Old Grey Wolf as follows:

<Table>
<Caption>
                        NUMBER OF SHARES               PURCHASE PRICE
                        -----------------------        ---------------
<S>                     <C>                           <C>
Canadian Abraxas        5,751 common shares           $ 68 million
Old Grey Wolf           12,804,628 common shares      $ 70 million

                                TOTAL PURCHASE PRICE: $ 138  MILLION
                                                       -------------
</Table>

     After purchase price adjustments and related costs and expenses of
approximately $5.9 million were made, the purchase price realized for the sale
of Canadian Abraxas and Old Grey Wolf was $132.1 million. Upon consummation of
the sale, Old Grey Wolf repaid the outstanding indebtedness under its credit
agreement with Mirant Canada Energy Capital, Ltd. in the amount of $46.3
million, which reduced the net proceeds from the sale by a corresponding amount.
The net cash proceeds from the sale were $85.8 million, all of which has been
utilized in connection with the financial restructuring.

     The properties transferred in conjunction with the sale of Canadian Abraxas
and Old Grey Wolf amounted to approximately 35% of our total proved reserves at
June 30, 2002 and approximately 60% of our production for the quarter ended
September 30, 2002. Under the terms of the agreement with PrimeWest, Abraxas has
retained certain assets formerly held by Canadian Abraxas and Old Grey Wolf,
including all of Canadian Abraxas' and Old Grey Wolf's undeveloped acreage
existing at the time of the sale, which includes all of our interests in the
Ladyfern area. These assets have been contributed to New Grey Wolf, a new
wholly-owned Canadian subsidiary of Abraxas. Portions of this undeveloped
acreage will be developed by PrimeWest and New Grey Wolf under a farmout
arrangement. Under the farmout arrangements, PrimeWest has agreed to participate
in the development of certain lands of New Grey Wolf in the Caroline and Pouce
Coupe areas of Alberta. PrimeWest has the right to obtain a 60% interest in
certain wells if it bears 100% of the expense of drilling such wells. In
addition, New Grey Wolf and PrimeWest will have an area of mutual interest in
respect of the lands surrounding the Caroline area where each party will be
entitled to participate in the acquisition of the other, with New Grey Wolf
participating with a 40% interest and PrimeWest participating with a 60%
interest.

     REDEMPTION OF FIRST LIEN NOTES. On January 24, 2003, we completed the
redemption of 100% of our outstanding 12?% Senior Secured Notes, Series A, or
first lien notes, with approximately $66.4 million of the proceeds from the sale
of Canadian Abraxas and Old Grey Wolf. Prior to the redemption, we had $63.5
million of our first lien notes outstanding. Under the terms of the indenture
for the first lien notes, as of March 15, 2002, we had the right to redeem the
first lien notes at 100% of the outstanding principal amount of the notes, plus
accrued and unpaid interest to the date of redemption, and to discharge the
indenture upon call of the first lien notes for

                                       50
<Page>

redemption and deposit of the redemption funds with the trustee. We exercised
these rights on January 23, and upon the discharge of the indenture, the trustee
released the collateral securing our obligations under the first lien notes.

     NEW SENIOR CREDIT AGREEMENT. Contemporaneously with the closing of the
exchange offer and the sale of Canadian Abraxas and Old Grey Wolf, on January
23, 2003, Abraxas entered into a new senior credit agreement providing a term
loan facility of $4.2 million and a revolving credit facility with a maximum
borrowing base of up to $50 million. For a detailed description of the credit
facilities under the new senior credit agreement, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Indebtedness" beginning on page 43.

     SOURCES AND USES OF FUNDS IN FINANCIAL RESTRUCTURING

     The following table illustrates the sources and uses of funds for the
financial restructuring.

<Table>
<Caption>
                       SOURCES OF FUNDS                                         USES OF FUNDS
                       ----------------                                         -------------
                                              (US DOLLARS IN MILLIONS)
<S>                                              <C>                                                    <C>
Sale of Canadian Abraxas and
Old Grey Wolf (1)......................          $132.1    Redemption of First Lien Notes (3).....      $ 66.4
New Senior Credit Agreement (2)........            46.7    Exchange Offer Cash Payments (4).......        59.2
                                                           Repayment of Old Grey Wolf

                                                           Credit Facility (5)....................        46.3
                                                           Fees and Expenses......................         6.9
                                                                                                        ------
Total Sources..........................          $178.8    Total Uses.............................      $178.8
                                                 ======                                                 ======
</Table>

----------

(1)  Represents CDN $205.9 million converted to US $134.6 million at an exchange
     rate of US $0.6538 per CDN $1.00, less fees and expenses of $2.5 million.

(2)  Includes term loan facility of $4.2 million and outstanding amounts under
     the revolving credit facility of $42.5 million at the time of the financial
     restructuring.

(3)  Represents $63.5 million in principal amount of the first lien notes and
     accrued interest of $2.9 million.

(4)  Represents payments of $47.4 million for the cash portion of the exchange
     offer consideration and payments of $11.8 million for the redemption of the
     second lien notes and old notes remaining outstanding upon closing of the
     exchange offer.

(5)  Represents CDN $70.8 million converted to US $46.3 million at an exchange
     rate of US $0.6538 per CDN $1.00.

     RECENT ASSET SALES - 2002

     In May of 2002, our former wholly-owned Canadian subsidiaries, Old Grey
Wolf and Canadian Abraxas, sold their interest in a natural gas processing plant
and associated crude oil and natural gas reserves in the Quirk Creek and Mahaska
fields in Alberta, Canada for approximately $22.9 million.

     In June 2002, Abraxas sold its interest in the East White Point field Texas
for approximately $9.8 million.

     In July 2002, Canadian Abraxas and Old Grey Wolf sold their interest in the
Milarville field in Alberta, Canada for approximately $1.1 million.

     DRILLING RESULTS

     We have successfully completed two new 100% working interest wells in the
Peace River Arch area of Canada which were not included in the closed sale of
producing properties. Also, in the Ladyfern area of Northeastern British
Columbia we are participating for an approximate 17% working interest in two
wells actively drilling. Two additional Ladyfern wells, with approximately 17%
and 50% working interest ownership are expected to commence during this winters
drilling season.

                                       51
<Page>

     IMPROVED COMMODITY PRICES

     Since December 31, 2001, commodity prices have improved significantly. As a
point of reference, on January 28, 2003, the NYMEX natural gas price was $5.44
per Mcf, and the NYMEX crude oil price was $32.67 per Bbl as compared to
December 31, 2001 natural gas price of $2.57 per Mcf and crude oil price of
$19.84 per Bbl. The improvement in prices since December 31, 2001, has limited
our potential impairment write down of crude oil and natural gas properties at
year end 2001 and if such prices are sustained, should improve our liquidity and
cash flows. For a more detailed description of commodity prices, you should read
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations."

MARKETS AND CUSTOMERS

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

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

     Substantially all of our crude oil and natural gas is sold at current
market prices under short-term contracts, as is customary in the industry.
During the year ended December 31, 2001, three purchasers accounted for
approximately 41% of our crude oil and natural gas sales. We believe that there
are numerous other companies available to purchase our crude oil and natural gas
and that the loss of one or more of these purchasers would not materially affect
our ability to sell crude oil and natural gas. The prices we receive for the
sale of our crude oil and natural gas are subject to our hedging activities. You
should read the discussion under "Management's Discussion and Analysis of
Financial Condition And Results of Operations -- Liquidity and Capital
Resources" and "Quantitative and Qualitative Disclosures about Market Risk;
Commodity Price Risk" for more information regarding our hedging activities.

PRIMARY OPERATING AREAS

     TEXAS

     Our U.S. operations are concentrated in South and West Texas with over 99%
of the PV-10 of our U.S. crude oil and natural gas properties at December 31,
2001, located in those two regions. We operate 91% of our wells in Texas.
Operations in South Texas are concentrated along the Edwards trend in Live Oak
and Dewitt Counties and in the Frio/Vicksburg trend in San Patricio County. We
own an average 78% working interest in 57

                                       52
<Page>

wells with average daily production of 444 net Bbls of crude oil and NGLs and
14,057 net Mcf of natural gas per day for the year ended December 31, 2001. As
of December 31, 2001 we had estimated net proved reserves in South Texas of
46,521 Mmcfe (78% natural gas) with a PV-10 of $35.6 million, 80% of which was
attributable to proved developed reserves. Our West Texas operations are
concentrated along the deep Devonian/Ellenburger formations and shallow Cherry
Canyon sandstones in Ward County, the Spraberry trend in Midland County and in
the Sharon Ridge Clearfork Field in Scurry County. We own an average 76% working
interest in 154 wells with average daily production of 621 net Bbls of crude oil
and NGLs and 7,351 net Mcf of natural gas per day for the year ended December
31, 2001. As of December 31, 2001, we had estimated net proved reserves in West
Texas of 88,039 Mmcfe (82% natural gas) with a PV 10 of $41.6 million, 47% of
which was attributable to proved developed reserves. During 2001, we drilled a
total of 4 new wells (4 net) in Texas with a 100% success rate. For a
description of properties sold in 2002, see "--Recent Asset Sales - 2002" and
"--Recent Developments--Financial Restructuring--Sale of Stock of Canadian
Abraxas and Grey Wolf" on pages 51 and 49, respectively, of this prospectus

     WESTERN CANADA

     Prior to our property sales in 2002 and the financial restructuring in
which a large portion of our Canadian operations were sold, we owned producing
properties in western Canada, consisting primarily of natural gas reserves and
interests ranging from 10% to 100% in approximately 200 miles of natural gas
gathering systems and 12 natural gas processing plants. As of December 31, 2001,
Canadian Abraxas and Old Grey Wolf had estimated net proved reserves of 94,664
Mmcfe (85% natural gas) with a PV-10 of $132.5 million, 93% of which was
attributable to proved developed reserves. For the year ended December 31, 2001,
the Canadian properties produced an average of approximately 866 net Bbls of
crude oil and NGLs per day and 26,500 net Mcf of natural gas per day. The
natural gas processing plants had aggregate capacity of approximately 211 MMcf
of natural gas per day (107 net MMcf). During 2001, we drilled a total of 12 new
wells (9.3 net) in Canada with a 92% success rate.

EXPLORATORY AND DEVELOPMENTAL ACREAGE

     Our principal crude oil and natural gas properties consist of non-producing
and producing crude oil and natural gas leases, including reserves of crude oil
and natural gas in place. The following table indicates our interest in
developed and undeveloped acreage as of September 30, 2002, on a pro forma
basis:

<Table>
<Caption>
                                                      Developed and Undeveloped Acreage
                                                     Pro Forma As of September 30, 2002
                             ------------------------------------------------------------------------------------
                                         Developed Acreage                         Undeveloped Acreage
                             ------------------------------------------ -----------------------------------------
                                  Gross Acres            Net Acres        Gross Acres          Net Acres
                             ----------------------- ------------------ ------------------ -----------------------
<S>                                  <C>                     <C>             <C>                <C>
Canada                                9,698                   4,902          358,864            278,911
Texas                                25,257                  20,264           10,624              9,825
Wyoming                               3,200                   3,200           59,591             55,758
                             ----------------------- ------------------ ------------------ -----------------------
         Total                       38,155                  28,366          429,079            344,494
                             ======================= ================== ================== =======================
</Table>

PRODUCTIVE WELLS

     The following table sets forth our total gross and net productive wells,
expressed separately for crude oil and natural gas, as of September 30, 2002 on
a pro forma basis:

<Table>
<Caption>
                                                      Productive Wells
                                          Pro Forma As of September 30, 2002
                           ---------------------------------------------------------------------
  State/Country                       Crude Oil                          Natural Gas
                           --------------------------------   ----------------------------------
                               Gross              Net             Gross               Net
                           ---------------   --------------   ---------------   ----------------
  <S>                            <C>               <C>               <C>               <C>
  Canada                          22.0               3.1             30.0              14.2
  Texas                          137.0             109.3             55.0              42.9
  Wyoming                          5.0               5.0              0.0               0.0
                           ---------------   --------------   ---------------   ----------------
           Total                 164.0             117.4             85.0              57.1
                           ===============   ==============   ===============   ================
</Table>

                                       53
<Page>

     Substantially all of our existing crude oil and natural gas properties are
pledged to secure our indebtedness under the first lien notes and second lien
notes and Old Grey Wolf's credit facility. On a pro forma basis, substantially
all of our crude oil and natural gas properties will be pledged to secure our
indebtedness under the new senior credit agreement and the notes.

RESERVES INFORMATION

     The crude oil and natural gas reserves in the U.S. have been estimated as
of June 30, 2002 by DeGolyer and MacNaughton of Dallas, Texas and in Canada by
McDaniel and Associates Consultants Ltd. of Calgary, Alberta. Crude oil and
natural gas reserves, and the estimates of the present value of future net
revenues therefrom, were determined based on then current prices and costs.
Reserve calculations involve the estimate of future net recoverable reserves of
crude oil and natural gas and the timing and amount of future net revenues to be
received therefrom. Such estimates are not precise and are based on assumptions
regarding a variety of factors, many of which are variable and uncertain.

     The following table sets forth certain information regarding estimates of
our crude oil, natural gas liquids and natural gas reserves on both a historical
and pro forma basis:

<Table>
<Caption>
                                                                         Estimated Proved Reserves
                                                     ------------------------------------------------------------------
                                                          Proved                 Proved                    Total
                                                         Developed             Undeveloped                Proved
                                                     --------------------    -------------------    -------------------
     <S>                                                      <C>                   <C>                     <C>
     As of January 1, 1998(1)
       Crude oil (MBbls)                                        7,075                1,873                    8,948
       NGLs (MBbls)                                             7,178                1,651                    8,829
       Natural gas (MMcf)                                     186,490               34,824                  221,314

     As of January 1, 1999(1)(2)(3)
       Crude oil (MBbls)                                        3,985                1,628                    5,613
       NGLs (MBbls)                                             1,834                  248                    2,082
       Natural gas (MMcf)                                     144,588               52,890                  197,478

     As of January 1, 2000(1)(2)(3)(4)
       Crude oil (MBbls)                                        5,513                1,606                    7,119
       NGLs (MBbls)                                             4,961                  562                    5,523
       Natural gas (MMcf)                                     154,221               35,894                  190,115

     As of January 1, 2001 (1)(2)(3)
       Crude oil (MBbls)                                        3,866                1,407                    5,273
       NGLs (MBbls)                                             3,135                  436                    3,571
       Natural gas (MMcf)                                     119,737               71,590                  191,327

     As of January 1, 2002
       Crude oil (MBbls)                                        1,980                1,170                    3,150
       NGLs (MBbls)                                             3,067                  585                    3,652
       Natural gas (MMcf)                                     111,243               77,514                  188,757

     As of January 1, 2002 Pro Forma

       Crude oil (MBbls)                                        1,514                1,078                    2,592
       NGLs (MBbls)                                               755                  208                      963
       Natural gas (MMcf)                                      41,073               64,892                  105,965

     As of June 30, 2002
       Crude oil (MBbls)                                        1,687                1,282                    2,969
       NGLs (MBbls)                                             1,879                  245                    2,124
       Natural gas (MMcf)                                      90,565               51,398                  141,963

     As of June 30, 2002 Pro Forma

       Crude oil (MBbls)                                        1,557                1,282                    2,839
       NGLs (MBbls)                                               764                  209                      973
       Natural gas (MMcf)                                      41,041               47,734                   88,775
</Table>

                                       54
<Page>

----------
(1)  Includes 128,900, 31,900, 33,000 and 40,000 barrels of crude oil reserves
     owned by Old Grey Wolf of which 69,500, 16,400, 16,900 and 20,525 barrels
     are applicable to the minority interests share of these reserves as of
     January 1, 1998, 1999, 2000 and 2001 respectively.

(2)  Includes 131,300, 443,500, 236,000 and 692,000 barrels of natural gas
     liquids reserves owned by Old Grey Wolf of which 70,889, 227,600, 121,098
     and 355,083 barrels are applicable to the minority interests share of these
     reserves as of January 1, 1998, 1999, 2000 and 2001 respectively.

(3)  Includes 7,446, 28,610, 21,710 and 21,389 Mmcf of natural gas reserves
     owned by Old Grey Wolf of which 4,020, 14,700, 11,140 and 10,975 Mmcf are
     applicable to the minority interests share of these reserves as of January
     1, 1998, 1999, 2000 and 2001 respectively.

(4)  Includes 343,941 Bbls of crude oil reserves; 2,448.6 Mbbls of natural gas
     liquids reserves and 25,810 Mmcf of natural gas reserves, attributable to
     the Wyoming properties which were sold in March 2000. These reserves were
     estimated internally.

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

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

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

     The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of crude oil, NGL and natural gas reserves,
future net revenue from proved reserves and the PV-10 thereof for the crude oil,
NGL and natural gas properties described in this report are based on the
assumption that future crude oil, NGL and natural gas prices remain the same as
crude oil, NGL and natural gas prices at June 30, 2002. The average sales prices
as of such date used for purposes of such estimates were $26.15 per Bbl of crude
oil, $13.08 per Bbl of NGLs and $2.58 per Mcf of natural gas. These estimates
also assume that we will make future capital expenditures of approximately $48.1
million in the aggregate, which are necessary to develop and realize the value
of proved undeveloped reserves on our properties. Any significant variance in
actual results from these assumptions could also materially affect the estimated
quantity and value of reserves set forth herein.

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

                                       55
<Page>

CRUDE OIL, NATURAL GAS LIQUIDS, AND NATURAL GAS PRODUCTION AND SALES PRICES

     The following table presents our net crude oil, net natural gas liquids and
net natural gas production, the average sales price per Bbl of crude oil and
natural gas liquids and per Mcf of natural gas produced and the average cost of
production per BOE of production sold, for the three years ended December 31,
2001:

<Table>
<Caption>
                                                                                                       NINE MONTHS
                                                    YEAR ENDED DECEMBER 31,                         ENDED SEPTEMBER 30,
                                   ----------------------------------------------------     ----------------------------------
                                                                                   PRO                                    PRO
                                                                                  FORMA                                  FORMA
                                       1999           2000          2001          2001           2001        2002         2002
                                   ----------     ----------    ----------    ---------      ----------   ----------  --------
                                                            (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
PRODUCTION:
<S>                                <C>            <C>           <C>           <C>            <C>          <C>         <C>
   Crude oil (MBbls)...............      778            637           454           329            373          216         180
   NGLs (MBbls)....................      376            315           278            44            203          182           7
   Natural gas (MMcf)..............   25,698         19,962        17,496         7,006         13,420       11,692       4,080
     Mmcfe.........................   32,624         25,675        21,888         9,244         16,876       14,080       5,202
AVERAGE SALES PRICE:(1)

   Crude oil (per Bbl).............$   14.57      $   18.69     $   24.63     $   25.01      $   25.91    $   22.27   $   22.66
   NGLs (per Bbl)..................    13.40          22.42         21.51         16.02          24.03        16.53       13.52
   Natural gas (per Mcf)...........     1.66           3.71          3.20          2.94           3.54         2.25        2.33
     Per Mcfe......................     1.81           2.84          3.35          3.19           3.68         2.43        2.63
LOE (PER MCFE).....................$    0.55      $    0.73     $    0.85     $    0.93      $    0.81         0.80        1.07
</Table>

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

(2)  Crude oil and natural gas were combined by converting crude oil and natural
     gas liquids to a MCF equivalent ("MCF") on the basis of 1 Bbl of crude oil
     = 6 Mcf of natural gas.. Production costs include direct operating costs,
     ad valorem taxes and gross production taxes.

DRILLING ACTIVITIES

         The following table sets forth our gross and net working interests in
exploratory, development, and service wells drilled during the periods
indicated:

<Table>
<Caption>
                                           Years ended December 31,                        Nine Months Ended September 30,
                      ------------------------------------------------------------------- ----------------------------------
                                                                              2001                               2002
                           1999             2000            2001            Pro Forma          2002           Pro Forma
                      ---------------- --------------- ---------------- ----------------- ---------------- -----------------

                      Gross     Net     Gross    Net   Gross     Net     Gross     Net    Gross     Net     Gross     Net
                       (1)      (2)      (1)     (2)    (1)      (2)      (1)      (2)     (1)      (2)      (1)      (2)
                      ------- -------- -------- ------ ------- -------- -------- -------- ------- -------- -------- --------
<S>                     <C>      <C>      <C>    <C>     <C>      <C>       <C>      <C>    <C>      <C>       <C>      <C>
Exploratory (3)
  Productive (4)
   Crude Oil             2.0      2.0        -      -       -        -        -        -     1.0      1.0        -        -
   Natural gas           8.0      5.3      3.0    2.5     2.0      1.0        -        -     3.0      0.5      3.0      0.5
   Dry holes(5)         11.0      6.2      9.0    5.6     1.0       .5        -        -     3.0      1.5      3.0      1.5
                      ------- -------- -------- ------ ------- -------- -------- -------- ------- -------- -------- --------
               Total    21.0     13.5     12.0    8.1     3.0      1.5        -        -     7.0      3.0      6.0      2.0
                      ======= ======== ======== ====== ======= ======== ======== ======== ======= ======== ======== ========
Development(6)
  Productive (4)

     Crude oil           8.0      1.6      9.0    9.0     2.0      2.0      1.0      1.0       -        -        -        -
     Natural gas        20.0     13.1     16.0   12.2    13.0     11.0      5.0      4.3    14.0     11.8      3.0      1.1
     Dry holes (5)       9.0      4.5      3.0    3.0       -        -        -        -     1.0      1.0        -        -
                      ------- -------- -------- ------ ------- -------- -------- -------- ------- -------- -------- --------
               Total    37.0     19.2     28.0   24.2    15.0     13.0      6.0      5.3    15.0     12.8      3.0      1.1
                      ======= ======== ======== ====== ======= ======== ======== ======== ======= ======== ======== ========
</Table>

                                       56
<Page>

----------

(1)  A gross well is a well in which we own an interest.

(2)  The number of net wells represents the total percentage of working
     interests held in all wells (e.g., total working interest of 50% is
     equivalent to 0.5 net well. A total working interest of 100% is equivalent
     to 1.0 net well).

(3)  An exploratory well is a well drilled to find and produce crude oil or
     natural gas in an unproved area, to find a new reservoir in a field
     previously found to be producing crude oil or natural gas in another
     reservoir, or to extend a known reservoir.

(4)  A productive well is an exploratory or a development well that is not a dry
     hole.

(5)  A dry hole is an exploratory or development well found to be incapable of
     producing either crude oil or natural gas in sufficient quantities to
     justify completion as a crude oil or natural gas well.

(6)  A development well is a well drilled within the proved area of a crude oil
     or natural gas reservoir to the depth of stratigraphic horizon (rock layer
     or formation) noted to be productive for the purpose of extracting proved
     crude oil or natural gas reserves.

     As of January 28, 2003, we had 3 wells in process of drilling, 2 in the
Canada and 1 in the U.S. The two wells in Canada, in which we own an
approximately 17% interest are in the Ladyfern area of Northeastern British
Columbia. The U.S. well, in which we own a 25% carried interest is in west
Texas.

COMPETITION

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

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

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

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

REGULATION OF CRUDE OIL AND NATURAL GAS ACTIVITIES

     The exploration, production and transportation of all types of hydrocarbons
are subject to significant governmental regulations. Our operations are affected
from time to time in varying degrees by political developments and federal,
state, provincial and local laws and regulations. In particular, crude oil and
natural gas

                                       57
<Page>

production operations and economics are, or in the past have been, affected by
industry specific price controls, taxes, conservation, safety, environmental,
and other laws relating to the petroleum industry, by changes in such laws and
by constantly changing administrative regulations.

     PRICE REGULATIONS

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

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

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

     THE NORTH AMERICAN FREE TRADE AGREEMENT

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

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

     UNITED STATES NATURAL GAS REGULATION

     Historically, the natural gas industry as a whole has been more heavily
regulated than the crude oil or other liquid hydrocarbons market. Most
regulations focused on transportation practices. In the recent past interstate
pipeline companies in the United States generally acted as wholesale merchants
by purchasing natural gas from producers and reselling the natural gas to local
distribution companies and large end users. Commencing in late 1985, the Federal
Energy Regulatory Commission (the "FERC") issued a series of orders that have
had a major impact on interstate natural gas pipeline operations, services, and
rates, and thus have significantly altered the marketing and price of natural
gas. The FERC's key rule making action, Order No. 636 ("Order 636"), issued in
April 1992, required each interstate pipeline to, among other things, "unbundle"
its traditional bundled sales services and create and make available on an open
and nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and natural gas balancing services), and to adopt a new ratemaking
methodology to determine appropriate rates for those services. To the extent the
pipeline company or its sales affiliate markets natural gas as a merchant, it
does so pursuant to private contracts in direct competition with all of the
sellers, such as us; however, pipeline companies and their affiliates were not
required to remain "merchants" of natural gas, and most of the interstate
pipeline companies have

                                       58
<Page>

become "transporters only," although many have affiliated marketers. Order 636
and related FERC orders have resulted in increased competition within all phases
of the natural gas industry. We do not believe that Order 636 and the related
restructuring proceedings affect us any differently than other natural gas
producers and marketers with which we compete.

     Transportation pipeline availability and cost are major factors affecting
the production and sale of natural gas. Our physical sales of natural gas are
affected by the actual availability, terms and cost of pipeline transportation.
The price and terms for access onto the pipeline transportation systems remain
subject to extensive Federal regulation. Although Order 636 does not directly
regulate our production and marketing activities, it does affect how buyers and
sellers gain access to and use of the necessary transportation facilities and
how we and our competitors sell natural gas in the marketplace. The courts have
largely affirmed the significant features of Order No. 636 and the numerous
related orders pertaining to individual pipelines, although some appeals remain
pending and the FERC continues to review and modify its regulations regarding
the transportation of natural gas. For example, the FERC has recently begun a
broad review of its natural gas transportation regulations, including how its
regulations operate in conjunction with state proposals for natural gas
marketing restructuring and in the increasingly competitive marketplace for all
post-wellhead services related to natural gas.

     In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural gas
in the United States. Some of the more notable of these regulatory initiatives
include:

 (1) a series of orders in individual pipeline proceedings articulating a policy
     of generally approving the voluntary divestiture of interstate pipeline
     owned gathering facilities by interstate pipelines to their affiliates (the
     so-called "spin down" of previously regulated gathering facilities to the
     pipeline's nonregulated affiliates).

 (2) Order No. 497 involving the regulation of pipelines with marketing
     affiliates.

 (3) various FERC orders adopting rules proposed by the Gas Industry Standards
     Board which are designed to further standardize pipeline transportation
     tariffs and business practices.

 (4) a notice of proposed rulemaking that, among other things, proposes (a) to
     eliminate the cost-based price cap currently imposed on natural gas
     transactions of less than one year in duration, (b) to establish mandatory
     "transparent" capacity auctions of short-term capacity on a daily basis,
     and (c) to permit interstate pipelines to negotiate terms and conditions of
     service with individual customers.

 (5) issuance of Policy Statements regarding Alternate Rates and Negotiated
     Terms and Conditions of Service covering (a)the pricing of long-term
     pipeline transportation services by alternative rate mechanism options,
     including the pricing of interstate pipeline capacity utilizing
     market-based rates, incentive rates, or indexed rates, and (b)
     investigating of whether FERC should permit pipelines to negotiate the
     terms and conditions of service, in addition to rates of service.

 (6) a notice of proposed rulemaking that proposes generic procedures to
     expedite the FERC's handling of complaints against interstate pipelines
     with the goals of encouraging and supporting consensual resolutions of
     complaints and organizing the complaint procedures so that all complaints
     are handled in a timely and fair manner.

     Several of these initiatives are intended to enhance competition in natural
gas markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry, including us, as
a result of the geographic monopolization of those facilities by their new,
unregulated owners. As to all of these FERC initiatives, the ongoing, or, in
some instances, preliminary and evolving nature of these regulatory initiatives
makes it impossible at this time to predict their ultimate impact on our
business. However, we do not believe that these FERC initiatives will affect us
any differently than other natural gas producers and marketers with which we
compete.

     Since Order 636, FERC decisions involving onshore facilities have been more
liberal in their reliance upon traditional tests for determining what facilities
are "gathering" and therefore exempt from federal regulatory control. In many
instances, what was once classified as "transmission" may now be classified as
"gathering." We ship certain of our natural gas through gathering facilities
owned by others, including interstate pipelines, under existing

                                       59
<Page>

long term contractual arrangements. Although these FERC decisions have created
the potential for increasing the cost of shipping our natural gas on third party
gathering facilities, our shipping activities have not been materially affected
by these decisions.

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

     STATE AND OTHER REGULATION

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

     State and provincial regulation of gathering facilities generally includes
various safety, environmental, and in some circumstances, non-discriminatory
take requirements, but does not generally entail rate regulation. In the United
States, natural gas gathering has received greater regulatory scrutiny at both
the state and federal levels in the wake of the interstate pipeline
restructuring under Order 636. For example, the Texas Railroad Commission
enacted a Natural Gas Transportation Standards and Code of Conduct to provide
regulatory support for the State's more active review of rates, services and
practices associated with the gathering and transportation of natural gas by an
entity that provides such services to others for a fee, in order to prohibit
such entities from unduly discriminating in favor of their affiliates.

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

     CANADIAN ROYALTY MATTERS

     In addition to Canadian federal regulation, each province has legislation
and regulations that govern land tenure, royalties, production rates,
environmental protection and other matters. The royalty regime is a significant

                                       60
<Page>

factor in the profitability of crude oil and natural gas production. Royalties
payable on production from lands other than Crown lands are determined by
negotiations between the mineral owner and the lessee. Crown royalties are
determined by governmental regulation and are generally calculated as a
percentage of the value of the gross production, and the rate of royalties
payable generally depends in part on prescribed preference prices, well
productivity, geographical location, field discovery date and the type and
quality of the petroleum product produced.

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

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

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

     Effective January 1, 1994, the calculation and payment of natural gas
royalties became subject to a simplified process. The royalty reserved to the
Crown, subject to various incentives, is between 15% or 30%, in the case of new
natural gas, and between 15% and 35%, in the case of old natural gas, depending
upon a prescribed or corporate average reference price. Natural gas produced
from qualifying exploratory gas wells spudded or deepened after July 1, 1985 and
before June 1, 1988 are eligible for a royalty exemption for a period of 12
months, or such later time that the value of the exempted royalty quantity
equals a prescribed maximum amount. Natural gas produced from qualifying
intervals in eligible natural gas wells spudded or deepened to a depth below
2,500 meters is also subject to a royalty exemption, the amount of which depends
on the depth of the well.

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

     Producers of crude oil and natural gas in British Columbia are also
required to pay annual rental payments in respect of Crown leases and royalties
and freehold production taxes in respect of crude oil and natural gas produced
from Crown and freehold lands respectively. British Columbia also classifies
conventional crude oil into the three categories of Old Oil, New Oil and Third
Tier Oil. The amount payable as a royalty in respect of crude oil depends on the
vintage of the crude oil (whether it was produced from a pool discovered before
or after October 31, 1975) or a pool in which no well was completed on June 1,
1998), the quantity of crude oil produced in a month and the value of the crude
oil. Crude oil produced from a discovery well may be exempt from the payment of
a royalty for the first 36 months of production to a maximum production of
11,450 m3. The royalty payable on natural gas is determined by a sliding scale
based on a classification of the gas based on whether it is conservation gas
(gas associated with marketed oil production) and by drilling and land lease
date and on a reference price which is the

                                       61
<Page>

greater of the amount obtained by the producer and at prescribed minimum price.
Conservation gas has a minimum royalty of 8%. The royalty rate ranges from
between 9% and 27% for wells drilled on lands issued after May 31, 1998 and
before January 1, 2003 and completed within 5 years of the date the lands were
issued and between 12% and 27% for wells spudded after May 31, 1998 on lands
where rights had been issued as of May 31, 1998.

     ENVIRONMENTAL MATTERS

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

     In the United States, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as "Superfund," and
comparable state statutes impose strict, joint, and several liability on certain
classes of persons who are considered to have contributed to the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of a disposal site or sites where a release occurred and companies that
generated, disposed or arranged for the disposal of the hazardous substances
released at the site. Under CERCLA such persons or companies may be
retroactively liable for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is common for neighboring land owners and other third parties to file
claims for personal injury, property damage, and recovery of response costs
allegedly caused by the hazardous substances released into the environment. The
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes
govern the disposal of "solid waste" and "hazardous waste" and authorize
imposition of substantial civil and criminal penalties for failing to prevent
surface and subsurface pollution, as well as to control the generation,
transportation, treatment, storage and disposal of hazardous waste generated by
crude oil and natural gas operations. Although CERCLA currently contains a
"petroleum exclusion" from the definition of "hazardous substance," state laws
affecting our operations impose cleanup liability relating to petroleum and
petroleum related products, including crude oil cleanups. In addition, although
RCRA regulations currently classify certain oilfield wastes which are uniquely
associated with field operations as "non-hazardous," such exploration,
development and production wastes could be reclassified by regulation as
hazardous wastes thereby administratively making such wastes subject to more
stringent handling and disposal requirements.

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

                                       62
<Page>

adjoining property owners. Such claims are predicated on the damage to or
contamination of land resources occasioned by drilling and production operations
and the products derived therefrom, and are usually causes of action based on
negligence, trespass, nuisance, strict liability and fraud.

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

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

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

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

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

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

TITLE TO PROPERTIES

     As is customary in the crude oil and natural gas industry, we make only a
cursory review of title to undeveloped crude oil and natural gas leases at the
time we acquire them. However, before drilling commences, we require a thorough
title search to be conducted, and any material defects in title are remedied
prior to the time actual

                                       63
<Page>

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

EMPLOYEES

     As of January 28, 2003, we had 48 full-time employees in the United States,
including 3 executive officers, 3 non-executive officers, 1 petroleum engineer,
1 geologist, 6 managers, 1 landman, 12 secretarial and clerical personnel and 21
field personnel. Additionally, we retain contract pumpers on a month-to-month
basis. We retain independent geological and engineering consultants from time to
time on a limited basis and expect to continue to do so in the future.

     As of January 31, 2003, New Grey Wolf in Canada had 13 full-time employees,
including 3 executive officers, 1 non-executive officers, 2 petroleum engineers,
2 geologists, 1 geophysicist and, 4 technical and clerical personnel.

OFFICE FACILITIES

     Our executive and administrative offices are located at 500 North Loop 1604
East, Suite 100, San Antonio, Texas 78232. We also have an office in Midland,
Texas. These offices, consisting of approximately 12,650 square feet in San
Antonio and 960 square feet in Midland, are leased until April 2006 at an
aggregate rate of $20,000 per month.

     New Grey Wolf leases 17,000 square feet of office space in Calgary pursuant
to a lease which expires in April 2003.

OTHER PROPERTIES

     We own 10 acres of land, an office building, workshop, warehouse and house
in Sinton, Texas, 160 acres of land in Coke County, Texas and a 50% interest in
approximately two acres of land in Bexar County, Texas. All three properties are
used for the storage of tubulars and production equipment. We also own 23
vehicles which are used in the field by employees.

LITIGATION

     In 2001, Abraxas and Abraxas Wamsutter L.P. were named as defendants in a
lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by Abraxas and
Abraxas Wamsutter, L.P. related to the responsibility for year 2000 ad valorem
taxes on crude oil and natural gas properties sold by Abraxas and Abraxas
Wamsutter, L.P. In February 2002, a summary judgment was granted to the
plaintiff in this matter and a final judgment in the amount of $1.3 million was
entered. Abraxas has filed an appeal. We believe these charges are without
merit. We have established a reserve in the amount of $845,000, which represents
our estimated share of the judgment.

     In late 2000, Abraxas received a Final De Minimis Settlement Offer from the
United States Environmental Protection Agency concerning the Casmalia Disposal
Site, Santa Barbara County, California. Abraxas' liability for the cleanup at
the Superfund site is based on its acquisition of Bennett Petroleum Corporation,
which is alleged to have transported or arranged for the transportation of oil
field waste and drilling muds to the Superfund site. Abraxas has engaged
California counsel to evaluate the notice of proposed de minimis settlement and
its notice of potential strict liability under the Comprehensive Environmental
Response, Compensation and Liability Act. Defense of the action is handled
through a joint group of crude oil companies, all of which are claiming a
petroleum exclusion that limits Abraxas' liability. The potential financial
exposure and any settlement posture has yet not been developed, but is
considered by Abraxas to be immaterial.

                                       64
<Page>

     Additionally, from time to time, we are involved in litigation relating to
claims arising out of its operations in the normal course of business. At
December 31, 2001, we were not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on
our operations.

ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS

     New Grey Wolf is an Alberta corporation, certain of its officers and
directors may be residents of various jurisdictions outside the United States
and its Canadian counsel, Osler, Hoskin & Harcourt, LLP, are residents of
Canada. All or a substantial portion of the assets of New Grey Wolf and of such
persons may be located outside the United States. As a result, it may be
difficult for investors to effect service of process within the United States
upon such persons or to enforce judgments obtained against such persons in
United States courts and predicated upon the civil liability provisions of the
Securities Act. Notwithstanding the foregoing, New Grey Wolf has irrevocably
agreed that it may be served with process with respect to actions based on
offers and sales of securities made hereby in the United States by serving Chris
E. Williford, c/o Abraxas Petroleum Corporation, 500 North Loop 1604 East, Suite
100, San Antonio, Texas 78232, Canadian Abraxas' United States agent appointed
for that purpose. Canadian Abraxas has been advised by its Canadian counsel,
Osler, Hoskin & Harcourt, LLP, that there is doubt as to the enforceability in
Canada against Canadian Abraxas or against any of its directors, controlling
persons, officers or experts who are not residents of the United States, in
original actions for enforcement of judgments of United States courts, of
liabilities predicated solely upon United States federal securities laws.

                                       65
<Page>

                                   MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

     Set forth below are the names, ages, years of service and positions of the
executive officers and directors of Abraxas, as well as certain executive
officers of New Grey Wolf. The term of the Class I directors of Abraxas expires
in 2003, the term of the Class II directors expires in 2005 and the term of the
Class III directors expires in 2004.

<Table>
<Caption>
 NAME AND MUNICIPALITY OF RESIDENCE                   AGE  OFFICE                                        CLASS
 <S>                                                  <C>  <C>                                            <C>
 Robert L. G. Watson,                                      Chairman of the Board, President and Chief
 San Antonio, Texas.................................  52   Executive Officer                              III
 Chris E. Williford,                                       Executive Vice President, Chief Financial
 San Antonio, Texas.................................  51   Officer and Treasurer                          --
 Robert W. Carington, Jr.,
 San Antonio, Texas.................................  41   Executive Vice President                       --
 Craig S. Bartlett, Jr.,
 Montclair, New Jersey..............................  69   Director                                        II
 Franklin A. Burke,
 Doyleston, Pennsylvania............................  69   Director                                        I
 Ralph F. Cox,
 Ft. Worth, Texas...................................  70   Director                                        II
 Frederick M. Pevow, Jr.,
 Houston, Texas.....................................  40   Director                                        II
 James C. Phelps,
 San Antonio, Texas.................................  80   Director                                       III
 Joseph A. Wagda,
 Danville, California...............................  59   Director                                        II
</Table>

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

     CHRIS E. WILLIFORD was elected Vice President, Treasurer and Chief
Financial Officer of Abraxas in January 1993, and as Executive Vice President
and a director of Abraxas in May 1993. In November 1996, Mr. Williford was
elected Vice President and Assistant Secretary of Canadian Abraxas. In December
1999, Mr. Williford resigned as a director of Abraxas. Prior to joining Abraxas,
Mr. Williford was Chief Financial Officer of American Natural Energy
Corporation, a crude oil and natural gas exploration and production company,
from July 1989 to December 1992 and President of Clark Resources Corp., a crude
oil and natural gas exploration and production company, from January 1987 to May
1989. Mr. Williford received a Bachelor of Science degree in Business
Administration from Pittsburgh State University in 1973.

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

                                       66
<Page>

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

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

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

     FREDERICK M. PEVOW, JR., a director of Abraxas since December 1999, has
almost fifteen years of investment banking experience with firms such as Smith
Barney, Dillon Read, Salomon Smith Barney, and most recently CIBC World Markets
where he was Managing Director and headed the worldwide Investment Banking
practice covering the oilfield services and equipment industries. Mr. Pevow
currently pursues capital market transactions through Pevow & Associates, a
boutique investment and merchant banking firm. Mr. Pevow holds an undergraduate
degree from the University of Texas with further studies at Rice University.

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

     JOSEPH A. WAGDA, a director of Abraxas since December 1999, has had a
varied twenty-five year career involving the financial and legal aspects of
private and corporate business transactions. Currently Mr. Wagda is Chairman,
Chief Executive Officer and a director of BrightStar Information Technology
Group, Inc., and is also an attorney and president of Altamont Capital
Management, Inc. Mr. Wagda's business expertise emphasizes special situation
consulting and investing, including involvement in distressed investments and
venture capital opportunities. Previously, Mr. Wagda was a senior managing
director and co-founder of the Price Waterhouse corporate finance practice. He
also served with the finance staff of Chevron Corporation and in the general
counsel's office at Ford Motor Company. Mr. Wagda received an undergraduate
degree from Fordham College, a Masters of Business Administration, with
distinction, from the Johnson Graduate School of Management, Cornell University,
and a JD, with honors, from Rutgers University.

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<Page>

                             EXECUTIVE COMPENSATION

COMPENSATION SUMMARY

     The following table sets forth a summary of compensation for the fiscal
years ended December 31, 1999, 2000, and 2001 paid by Abraxas to Robert L.G.
Watson, Abraxas' Chairman of the Board, President and Chief Executive Officer,
Chris E. Williford, Abraxas' Executive Vice President, Chief Financial Officer
and Treasurer, Robert W. Carington, Jr., Abraxas' Executive Vice President, Lee
T. Billingsley, Abraxas' Vice President--Exploration, and to William H. Wallace,
Abraxas' Vice President--Operations.

                           SUMMARY COMPENSATION TABLE

<Table>
<Caption>
                                                                                                      LONG TERM
                                                                                                    COMPENSATION
                                                                                                      AWARDS -
                                                                                                     SECURITIES
                                                                                                     UNDERLYING
        NAME AND PRINCIPAL POSITION                   YEAR             SALARY($)        BONUS($)     OPTIONS(#)
                                                      ----             ---------        --------     ----------
                                                                ANNUAL COMPENSATION
        -------------------------------------------------------------------------------------------------------------
        <S>                                           <C>               <C>              <C>             <C>
        Robert  L. G. Watson,                         1999              $259,615         $43,750            4,688(1)
        Chairman of the Board,                        2000              $259,615         $29,175          962,562(2)
        President and Chief                           2001              $259,615         $27,388           60,000
        Executive Officer
        -------------------------------------------------------------------------------------------------------------
        Chris E. Williford,                           1999              $155,769         $26,250                0
        Executive Vice President,                     2000              $155,769         $17,505          392,701(2)
        Chief Financial Officer                       2001              $155,769         $16,433           20,000
        and Treasurer
        -------------------------------------------------------------------------------------------------------------
        Robert  W. Carington, Jr.,                    1999              $207,629         $35,000                0
        Executive Vice President                      2000              $207,629         $23,340          549,456(2)
                                                      2001              $207,629         $21,910           20,000
        -------------------------------------------------------------------------------------------------------------
        Lee T. Billingsley                            1999              $124,615         $22,500           30,000
        Vice President--                              2000              $134,077         $22,004           97,972(2)
        Exploration                                   2001              $147,327         $10,331           15,000
        -------------------------------------------------------------------------------------------------------------
        William H. Wallace,                           1999              $109,440         $13,750           30,000
        Vice President--                              2000              $131,577          $9,425           97,972(2)
        Operations                                    2001              $147,327         $10,331           15,000
        -------------------------------------------------------------------------------------------------------------
</Table>

----------
(1)  On January 7, 1999, Mr. Watson was granted options to purchase 4,688 Old
     Grey Wolf common shares at an exercise price of C$3.20 per share. Pursuant
     to the Old Grey Wolf exchange offer consummated in September 2001, such
     options were exchanged for options to purchase 2,812 shares of Abraxas
     common stock at an exercise price of $3.39 per share.

(2)  In March 2002, each of the named officers voluntarily forfeited a
     substantial number of options to purchase Abraxas common stock which were
     issued in 2000. The exercise price for the forfeited options was $5.02 per
     share, and the named officers each forfeited the following number of
     options: Mr. Watson - 842,562; Mr. Williford - 352,701; Mr. Carington -
     509,456; Mr. Billingsley - 97,972; Mr. Wallace - 97,972. See note (1) to
     the Option Exercises table on page 69.

GRANTS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS DURING THE FISCAL YEAR
ENDED DECEMBER 31, 2001

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

                                       68
<Page>

     The table below contains certain information concerning stock options
granted to Messrs. Watson, Williford, Carington and Wallace and Dr. Billingsley
during 2001:

                          OPTION GRANTS IN FISCAL YEAR

<Table>
<Caption>
                                                                                             POTENTIAL REALIZABLE
                                      NUMBER OF                                                VALUE AT ASSUMED
                                      SECURITIES                     EXERCISE                ANNUAL RATES OF STOCK
                                      UNDERLYING     % OF TOTAL      PRICE PER                PRICE APPRECIATION
                                       OPTIONS         OPTIONS         SHARE                          FOR
                                       GRANTED       GRANTED TO      (PRICE AT   EXPIRATION       OPTION TERM
NAME                                     (1)          EMPLOYEES       GRANT)        DATE            5% 10%
<S>                                     <C>             <C>            <C>         <C>        <C>        <C>
Robert L.G. Watson.........             60,000          14.79          $4.83       3/23/11    $182,400   $462,000
Chris E. Williford.........             20,000           4.93          $4.83       3/23/11    $ 60,800   $154,000
Robert W. Carington, Jr........         20,000           4.93          $4.83       3/23/11    $ 60,800   $154,000
Lee T. Billingsley.........             15,000            3.7          $4.83       3/23/11    $ 45,600   $115,000
William H. Wallace.........             15,000            3.7          $4.83       3/23/11    $ 45,600   $115,000
</Table>

----------
(1)  One-fourth of the options become exercisable on each of the first four
     anniversaries of the date of grant.

AGGREGATED OPTION EXERCISES IN FISCAL 2001 AND FISCAL YEAR END OPTION VALUES

     The table below contains certain information concerning exercises of stock
options during the fiscal year ended December 31, 2001, by Messrs. Watson,
Williford, Carington and Wallace and Dr. Billingsley and the fiscal year end
value of unexercised options held by Messrs. Watson, Williford, Carington and
Wallace and Dr. Billingsley.

                         OPTION EXERCISES IN FISCAL YEAR

<Table>
<Caption>
                                                             NUMBER OF UNEXERCISED
                                                            OPTIONS ON DECEMBER 31,    VALUE OF UNEXERCISABLE
                                       SHARES     VALUE             2001(#)            IN-THE-MONEY OPTIONS ON
                                    ACQUIRED BY  REALIZED  EXERCISABLE/UNEXERCISABLE    DECEMBER 31, 2001 ($)
NAME                                EXERCISE(#)    ($)                (1)             EXERCISABLE/UNEXERCISABLE
<S>                                      <C>        <C>       <C>                                <C>
Robert L. G. Watson..........            0          0         675,075 / 1,483,125                0/0
Chris E. Williford...........            0          0          248,175 / 567,701                 0/0
Robert W. Carington, Jr......            0          0          377,364 / 889,456                 0/0
Lee T. Billingsley...........            0          0          82,993 / 200,972                  0/0
William H. Wallace...........            0          0          56,868 / 163,472                  0/0
</Table>

----------
(1)  In March 2002 a significant number of stock options granted in 2000 were
     voluntarily forfeited by the named officers. All forfeited options had an
     exercise price in excess of the market price on the date of forfeiture.
     Such forfeitures reduce the total number of exercisable / unexercisable
     options held by each named officer as follows: Mr. Watson--464,435/851,203;
     Mr. Williford - 160,000/303,175; Mr. Carington - 250,000/507,364; Mr.
     Billingsley - 58,500/127,493; Mr. Wallace - 32,375/89,993.

EMPLOYMENT AGREEMENTS

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

     The employment agreements for Messrs. Watson, Williford, and Carington are
scheduled to terminate on December 21, 2002, and shall be automatically extended
for additional one-year terms unless Abraxas gives the officer 120 days notice
prior to the expiration of the original term or any extension thereof of its
intention not to renew the employment agreement. If, during the term of the
employment agreements for each of such

                                       69
<Page>

officers, the officer's employment is terminated by Abraxas other than for cause
or disability, by the officer other than by reason of such officer's death or
retirement, or by the officer, for "good reason" (as defined in each officer's
respective employment agreement), then such officer will be entitled to receive
a lump sum payment equal to the greater of (a) his annual base salary for the
last full year during which he was employed by Abraxas or (b) his annual base
salary for the remainder of the term of each of their respective employment
agreements.

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

     MR. WATSON:

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

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

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

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

     MR. WILLIFORD OR MR. CARINGTON:

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

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

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

     Abraxas has entered into employment agreements with Mr. Wallace and Dr.
Billingsley pursuant to which each of Mr. Wallace and Dr. Billingsley will
receive compensation as determined from time to time by the board in its sole
discretion. The employment agreements, originally scheduled to terminate on
December 31, 1998 for Dr. Billingsley and December 31, 2000 for Mr. Wallace,
were automatically extended and will terminate on December 31, 2002, and may be
automatically extended for an additional year if by December 1 of the prior year
neither Abraxas nor Mr. Wallace or Dr. Billingsley, as the case may be, has
given notice to the contrary. Except in the event of a change in control, at all
times during the term of the employment agreements, each of Mr. Wallace's and
Dr. Billingsley's employment is at will and may be terminated by Abraxas for any
reason without notice or cause. If a change in control occurs during the term of
the employment agreement or any extension thereof, the expiration date of Mr.
Wallace's and Dr. Billingsley's employment agreement is automatically extended
to a date no earlier than three years following the effective date of such
change in control. If, following a change in control, either Mr. Wallace's or
Dr. Billingsley's employment is terminated other than for Cause (as defined in
each of the employment agreements) or Disability (as defined in each of the
Employment Agreements), by reason of Mr. Wallace's or Dr. Billingsley's death or
retirement or by Mr. Wallace or Dr. Billingsley, as the case may be, for Good
Reason (as defined in each of the employment agreements), then the terminated
officer will be entitled to receive a lump sum payment equal to three times his
annual base salary.

     If any lump sum payment to Messrs. Watson, Williford, Carington, Wallace or
Dr. Billingsley would individually or together with any other amounts paid or
payable constitute an "excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended, and

                                       70
<Page>

applicable regulations there under, the amounts to be paid will be increased so
that Messrs. Watson, Williford, Carington, Wallace or Dr. Billingsley, as the
case may be, will be entitled to receive the amount of compensation provided in
his contract after payment of the tax imposed by Section 280G.

COMPENSATION OF DIRECTORS

     NON-QUALIFIED STOCK OPTION PLAN. Messrs. Burke and Phelps have previously
been granted options to purchase 8,900 shares of common stock under the Abraxas
1984 Non-Qualified Stock Option Plan (the "Non-Qualified Plan"). There are
currently outstanding options to purchase 8,900 shares of Abraxas common stock
under the Non-Qualified Plan. Mr. Burke holds an option to purchase 8,900
Abraxas shares of common stock at an exercise price of $2.06 per share.

     STOCK OPTIONS. In 1999, each of Messrs. Bartlett, Cox, Pevow and Wagda were
each granted options to purchase 75,000 shares of common stock at an exercise
price of $0.98 per share.

     OTHER COMPENSATION. During 2001, each director who was not an employee of
Abraxas or its affiliates, received an annual fee of $8,000 plus $1,000 for each
board meeting attended and $500 for each committee meeting attended. Aggregate
fees paid to directors in 2001 were $122,000. Except for the foregoing, the
directors of Abraxas received no other compensation for services as directors,
except for reimbursement of travel expenses to attend board meetings.

                              CERTAIN TRANSACTIONS

     Wind River Resources Corporation ("Wind River"), all of the capital stock
of which is owned by Mr. Watson, owns a twin-engine airplane. The airplane is
available for business use by our employees from time to time at Wind River's
cost. We paid Wind River a total of $344,737 for use of the plane during 2002.

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

                                       71
<Page>

                             PRINCIPAL STOCKHOLDERS

     Based upon information received from the persons concerned, each person
known to Abraxas to be the beneficial owner of more than five percent of the
outstanding shares of common stock of Abraxas, each director and nominee for
director, each of the named executive officers and all directors and officers of
Abraxas as a group, owned beneficially as of January 31, 2003, the number and
percentage of outstanding shares of common stock of Abraxas indicated in the
following table:

<Table>
<Caption>
         NAME AND ADDRESS OF BENEFICIAL OWNER        NUMBER OF SHARES (1)         PERCENTAGE (%)
    <S>                                                   <C>                          <C>
    Venture Securities Corp.
    P.O. Box 950 E
    516 N. Bethlehem Pike
    Spring House, PA 19477.....................           2,274,740 (2)                 6.4
    Longwood Investment Advisors, Inc.
    Three Radnor Corp. Center
    1000 Matsonford Road, Suite 300............           2,045,700                     5.7
    Peter S. Lynch
    82 Devonshire St. 58 A

    Boston, MA 02109...........................           1,840,000                     5.2
    Robert L. G. Watson........................             935,551 (3)                 2.6
    Franklin A. Burke..........................           2,583,261 (4)                 7.2
    James C. Phelps............................             456,512 (5)                 1.3
    Chris E. Williford.........................             203,003 (6)                   *
    Lee T. Billingsley.........................             154,425 (7)                   *
    Robert W. Carington, Jr....................             443,340 (8)                 1.2
    William H. Wallace.........................              51,725 (9)                   *
    Craig S. Bartlett, Jr......................              87,000 (10)                  *
    Ralph F. Cox...............................             335,000 (10)                1.0
    Joseph A. Wagda ...........................              75,000 (10)                  *
    Frederick M. Pevow, Jr.....................              75,000 (11)                  *
    All  Officers  and  Directors  as a Group  (11
    persons) (3)(4)(5)(6)(7)(8)(9)(10)(11).....           5,399,723
</Table>

----------
     *  Less than 1%

(1)  Unless otherwise indicated, all shares are held directly with sole voting
     and investment power.

(2)  Includes 1,188,154 shares with sole voting power held by Venture Securities
     and Franklin A. Burke, a director of Abraxas, the sole owner of Venture
     Securities, and 1,038,536 shares managed by Venture Securities on behalf of
     third parties.

(3)  Includes 41,353 shares issuable upon exercise of options granted pursuant
     to Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan,
     483,222 shares issuable upon exercise of options granted pursuant to the
     Abraxas Petroleum Corporation 1994 Long Term Incentive Plan and 300 shares
     in a retirement account. Does not include a total of 75,880 shares owned
     by the Robert L. G. Watson, Jr. Trust and the Carey B. Watson Trust, the
     trustees of which are Mr. Watson's brothers and the beneficiaries of which
     are Mr. Watson's children. Mr. Watson disclaims beneficial ownership of
     the shares owned by these trusts.

(4)  Includes 132,243 shares owned by Mr. Burke personally and 2,274,740 shares
     held by Venture Securities, a financial investment firm wholly owned by
     Mr. Burke. In addition, the number of shares includes 25,750 shares
     issuable upon exercise of options granted pursuant to the Amended and
     Restated Director Stock Option Plan (the "Director Option Plan"), and
     150,528 shares issued related to the exchange offer.

(5)  Includes 340,000 shares owned by Marie Phelps, Mr. Phelps' wife, 88,762
     shares owned by JMRR LP, 2,000 shares issuable upon exercise of options
     granted pursuant to an option agreement, 25,750 shares issuable upon
     exercise of options granted pursuant to the Director Option Plan

(6)  Includes 1,786 shares issuable upon exercise of options granted pursuant to
     the Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, 18,214
     shares issuable upon exercise of options granted pursuant to the Abraxas
     Petroleum Corporation 1993 Key Contributor Stock Option Plan and 160,000
     shares issuable upon exercise of options granted pursuant to the Abraxas
     Petroleum Corporation 1994 Long Term Incentive Plan.

                                       72
<Page>

(7)  Includes 84,250 shares issuable upon exercise of options granted pursuant
     to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan and
     5,000 shares in a retirement account.

(8)  Includes 345,000 shares issuable upon exercise of options granted pursuant
     to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.

(9)  Includes 46,750 shares issuable upon exercise of options granted pursuant
     to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.

(10) Includes 75,000 shares issuable upon exercise of certain options
     agreements.

(11) Includes 75,000 shares issuable upon exercise of options granted pursuant
     to the New Director Option Plan.

                                       73
<Page>
                            SELLING SECURITY HOLDERS

     The notes and shares of common stock are being offered by the selling
security holders listed in the table below or referred to in an a prospectus
supplement. The notes and 5,633,291 shares of common stock being offered were
issued in connection with an overall financial restructuring through a private
exchange offer exempt from, or not subject to, the registration requirements
of the Securities Act. The remaining 950,000 shares of common stock represent
shares issuable upon the exercise of outstanding warrants. The selling
security holders may offer and sell, from time to time, any or all of their
notes or common stock.

     No offer or sale under this prospectus may be made by a holder of the
securities unless that holder is listed in the table in this prospectus or until
that holder has notified us and a supplement to this prospectus has been filed
or an amendment to the related registration statement has become effective. We
will supplement or amend this prospectus to include additional selling security
holders upon request and upon provision of all required information to us.

     The following table sets forth the name, principal amount of notes, and
number of shares beneficially owned by the selling security holders intending to
sell the notes or common stock. Based on information provided to us by the
selling security holders, the table also discloses whether any selling security
holder selling in connection with the prospectus or prospectus supplement has
held any position or office with, been employed by, or otherwise has had a
material relationship with us or any of our affiliates during the three years
prior to the date of the prospectus or prospectus supplement.

<Table>
<Caption>
                                            PRINCIPAL AMOUNT OF
                                              NOTES THAT MAY BE      COMMON STOCK THAT        MATERIAL
                   NAME                           SOLD HEREBY       MAY BE SOLD HEREBY      RELATIONSHIP
                   ----                     --------------------    ------------------      ------------
<S>                                             <C>                     <C>                     <C>
ABN Amro Inc...............................      2,890,000              148,605                 None
Ahab International Ltd.....................        244,000               12,544                 None
Ahab Partners LP...........................        366,000               18,816                 None
Basil Street Company.......................              0              950,000                 None
BBH Broad Market Fixed Fund................        268,000               13,798                 None
BBH High Yield Fixed Income Fund...........        835,000               42,963                 None
Cathy A. Wichert Trustee...................         60,000                3,136                 None
Cebron Family Trust........................         27,000                1,411                 None
Charles Schwab & Co. Inc...................         21,000                1,097                 None
Concordian Partners........................      1,830,000               94,080                 None
Credit Suisse First Boston.................     11,586,000              595,651                 None
David Hilty................................         55,000                2,871                 None
David Stein IRA Bear Stearns Fee Corp Cust.          4,000                  219                 None
Dean Witter Reynolds.......................         30,000                1,568                 None
Deborah Z. Corson Family Trust.............         15,000                  784                 None
Delaware Charter Guar & Trust..............          7,000                  376                 None
Deutsche Bank Securities...................        305,000               15,680                 None
Embassy & Co...............................      1,387,000               71,344                 None
EV Emerald US High Yield Fund..............        771,000               39,670                 None
First Clearing Corporation.................      3,131,000              161,540                 (1)
Fishingboat & Co...........................        305,000               15,680                 None
Goldman Sachs..............................      1,169,000               60,117                 None
Hare & Co..................................     15,304,000              786,885                 None
Harriett L. Manning........................          6,000                  313                 None
Harry John Cornbleet.......................         15,000                  784                 None
Houlihan Lokey.............................        523,000               26,938                 None
</Table>

                                       74
<Page>

<Table>
<Caption>
                                            PRINCIPAL AMOUNT OF
                                              NOTES THAT MAY BE      COMMON STOCK THAT        MATERIAL
                   NAME                           SOLD HEREBY       MAY BE SOLD HEREBY      RELATIONSHIP
                   ----                     --------------------    ------------------      ------------
<S>                                             <C>                   <C>                       <C>
Ingalls & Snyder LLC.......................      7,137,000              366,912                 None
Irenc S. Zorensky Family Trust.............         15,000                  784                 None
Irwin Gold.................................        156,000                8,022                 None
Jeff Werbalowsky...........................        156,000                8,022                 None
Jesup & Lamont Holdings TNC. Inc. and
Charles K. Butler..........................              0              200,000                 None
JMB Capital Partners LP....................      3,050,000              156,800                 None
John S. Ingrilli And Janc Ann Ingrilli Jt
Wros.......................................         12,000                  627                 None
Jone Baker Macpherson Trustee Carington
2503 (C) Childrens.........................         40,000                2,068                 None
Joseph Manning Jr..........................          9,000                  470                 None
JP Morgan..................................      1,067,000               54,880                 None
Lami Trading Company.......................      3,050,000              156,800                 None
Lonestar Partners LP.......................      1,662,000               85,456                 None
Martin H. Orliner Trustee,.................         30,000                1,568                 None
Mary E Edwards.............................         30,000                1,568                 None
Maryjo Simjian Garre Trustee...............         15,000                  784                 None
Merrill Lynch Professional CC..............     23,954,000            1,232,038                 None
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................      2,154,000              110,855                 None
Milton L. Zorensky Insurance Trust #1......         12,000                  627                 None
Morgan Stanley & Co. Inc...................      2,962,000              152,715                 None
Morgan Stanley D W Inc.....................          3,000                  156                 None
Mr. Harold D. Carter Irra..................         21,000                1,097                 None
Mulberry Ltd...............................        410,000               21,109                 None
Murphy & Durien............................          5,000                  344                 None
Ned K. Ryder & Ann K. Ryder, Trustees......         42,000                2,195                 None
NFS/FMTC IRA FBO Herbert L Eisen...........         15,000                  784                 None
NFS/FMTC IRA FBO R. Scott Williams.........         61,000                3,136                 None
NFS/FMTC IRA FBO Samuel Garre III..........         15,000                  784                 None
Philip Lebovitz Marilyn Lebovitz...........         15,000                  784                 None
Recap International (Bvi) Ltd..............        796,000               40,972                 None
Recap Partners LP..........................        396,000               20,394                 None
Regiment Capital Ltd.......................      1,958,000              100,665                 None
Rosemary Jung..............................         15,000                  784                 None
Salomon Smith Barney.......................     15,702,000              807,360                 None
Saltship & Co..............................        115,000                5,958                 None
Sis Segainterse TTLE AG....................        152,000                7,840                 None
South Lake & Co............................      1,342,000               68,992                 None
Spindrift Investors (Bermuda), LP..........        405,000               20,854                 None
Spindrift Partners, LP.....................        406,000               20,885                 None
Stanley H. Shatz Geraloine A. Shatz........         30,000                1,568                 None
Sterneck Value & Opportunity LP............         97,000                5,017                 None
Venezuela Recovery FD NY...................        610,000               31,360                 None
Zurich Institutional Benchmark.............        240,000               12,387                 None
</Table>

(1) $2,928,000 in principal amount of the notes and 150,528 shares of common
stock held by First Clearing Corporation are held on behalf of Franklin A.
Burke, a current director of Abraxas.

                                       75
<Page>

     We prepared this table based on the information supplied to us by the
selling security holders named in the table, and we have not sought to verify
such information.

     The selling security holders listed in the above table may have sold or
transferred, in transactions exempt from the registration requirements of the
Securities Act, some or all of their notes or shares of common stock since the
date on which the information in the above table was provided to us. Information
about selling security holders may change over time.

     Because the selling security holders may offer all or some of their notes
or shares of common stock from time to time, we cannot estimate the amount of
notes or the number of shares of common stock that will be held by the selling
security holders upon the termination of any particular offering by such selling
security holder. Please refer to "Plan of Distribution" beginning on page 77 of
this prospectus.

                                       76
<Page>

                              PLAN OF DISTRIBUTION

     This prospectus covers the resale of the notes and the shares of Abraxas
common stock by the selling security holders and their donees, pledgees,
transferees or other successors in interest. The selling security holders may
sell their notes and shares of Abraxas common stock under this prospectus:

       -  through one or more broker-dealers acting as either principal or
          agent;

       -  through underwriters;

       -  directly to investors; or

       -  any combination of these methods.

     The selling security holders will fix a price or prices, and may change the
price, of the notes and shares of Abraxas common stock offered based upon:

       -  market prices prevailing at the time of sale;

       -  prices related to those market prices; or

       -  negotiated prices.

     These sales may be effected in one or more of the following transactions
(which may involve crosses and block transactions):

       -  on any securities exchange or U.S. inter-dealer system of a registered
          national securities association on which the common stock may be
          listed or quoted at the time of sale;

       -  in the over-the-counter market;

       -  in private transactions;

       -  through the writing of options, whether the options are listed on an
          option exchange or otherwise; or

       -  through the settlement of short sales.

     Broker-dealers, underwriters or agents may receive compensation in the form
of discounts or concessions from the selling security holders or the purchasers.
These discounts, concessions or commissions may be more than those customary for
the transaction involved. If any broker-dealer purchases the notes or shares of
common stock as principal, it may effect resales of the shares through other
broker-dealers, and other broker-dealers may receive compensation from the
purchasers for whom they act as agents.

     To comply with the securities laws of some states, if applicable, the
securities may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the securities may not
be sold unless they have been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.

     The selling security holders and any underwriters, broker-dealers or agents
that participate in the sale of the securities may be "underwriters" within the
meaning of the Securities Act. Any discounts, commissions, concessions or profit
they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Any selling security holders who are
"underwriters" within the meaning of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act.

     Any securities covered by this prospectus which qualify for sale under Rule
144 or Rule 144A of the Securities Act may be sold under Rule 144 rather than
under this prospectus. The selling security holders may not sell any securities
described in this prospectus and may not transfer, devise or gift these
securities by other means not described in this prospectus.

                                       77
<Page>

     To the extent required, the specific securities to be sold, the names of
the selling security holders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement of which this prospectus is a part.

     Under Abraxas' registration rights agreement with the selling security
holders, we have agreed to indemnify the selling security holders and each
underwriter, if any, against certain liabilities, including certain liabilities
under the Securities Act, or will contribute to payments the selling security
holders or underwriters may be required to make in respect of those liabilities.

     We have agreed to pay substantially all of the expenses in connection with
the registration, offering and sale of the securities covered by this
prospectus, other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.

     We have agreed to keep the registration statement, of which this prospectus
is a part, effective for two years from the time this registration statement
becomes effective, subject to extension for any suspension or blackout periods
during which securities covered by this prospectus can not be sold.

                                       78
<Page>

                            DESCRIPTION OF THE NOTES

     Abraxas issued an aggregate principal amount of $109,523,000 of notes on
January 23, 2003 under an indenture entered into on that date among Abraxas, the
subsidiary guarantors and U.S. Bank, N.A., as trustee. The indenture is governed
by certain provisions contained in the Trust Indenture Act of 1939, as amended.
The terms of the notes include those stated in the indenture and those made part
of the indenture by reference to the Trust Indenture Act.

     The indenture provides for original issuance of up to $118,250,000.00 of
notes, plus such additional principal amounts as may be necessary for the
issuance of additional notes in lieu of cash interest payments. The indenture
also provides for issuance of registered exchange notes to be issued only in
exchange for a like principal amount of outstanding notes issued on January 23,
2003 and any additional notes issued in lieu of cash interest payments on such
outstanding notes. All of the currently outstanding notes and the exchange notes
are referred to in this description as the "notes" and are deemed to be a single
class of securities under the indenture for purposes of any waiver, consent or
amendment.

     The following description is a summary of the material provisions of the
notes, the indenture and the documents providing for the security interests of
the holders of the notes. It does not restate those agreements in their
entirety. You can find definitions of certain terms used in this description
under the subheading "Certain Definitions" beginning on page 107 of this
prospectus.

BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES

     THE NOTES

     The notes:

       -  provide that the Issuer will make current payments of interest in cash
          to the extent not prohibited by the terms of the Senior Credit
          Agreement or the Intercreditor Agreement;

       -  provide for interest not paid in cash to be paid in the form of
          additional notes;

       -  are general obligations of the Issuer;

       -  are secured by a second Lien on all of the current and future Oil and
          Gas Assets of the Issuer and its Subsidiaries, and substantially all
          other current and future assets of the Issuer and its Subsidiaries;

       -  are subordinate to Indebtedness of Issuer under the Senior Credit
          Agreement and Qualified Senior Affiliate Indebtedness (as described
          under the discussion below entitled "Intercreditor Agreement"), and
          rank equally with all of the Issuer's other current and future senior
          Indebtedness, if any;

       -  rank senior to all of the Issuer's current and future Subordinated
          Indebtedness, if any; and

       -  are unconditionally guaranteed by the Subsidiary Guarantors.

     THE GUARANTEES

     The notes are jointly and severally guaranteed (the "Guarantees") by all
current and future Subsidiaries of the Issuer, including (but not limited to)
the following:

       -  Sandia;

       -  Wamsutter;

       -  Sandia Operating;

       -  Eastside Coal;

                                       79
<Page>

       -  Western Associated; and

       -  New Grey Wolf.

     The Guarantees of the notes are:

       -  general obligations of each current and future Subsidiary Guarantor;

       -  senior in right of payment to all existing and future Subordinated
          Indebtedness, if any, of each Subsidiary Guarantor;

       -  subordinate to Indebtedness of each Subsidiary Guarantor under the
          Senior Credit Agreement and Qualified Senior Affiliate Indebtedness
          (as described under the discussion below entitled "Intercreditor
          Agreement"), and rank equally with all other existing and future
          senior Indebtedness of each Subsidiary Guarantor, if any;

       -  secured by a second lien on all of the current and future Oil and Gas
          Assets of each Subsidiary Guarantor, and on substantially all other
          current and future assets of each Subsidiary Guarantor; and

       -  limited for each Subsidiary Guarantor to the maximum amount which will
          result in each Guarantee not being a fraudulent conveyance or
          fraudulent transfer.

     Each Subsidiary Guarantor that makes a payment or distribution under its
Guarantee will be entitled to a contribution from each other Subsidiary
Guarantor in a prorata amount based on the net assets of each Subsidiary
Guarantor.

     Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Issuer or another Subsidiary Guarantor that is a Wholly Owned
Subsidiary without limitation, or with or to other Persons upon the terms and
conditions set forth in the indenture. See the description of the covenant in
"Merger, Consolidation and Sale of Assets" below. In the event all of the
Capital Stock of a Subsidiary Guarantor is sold by the Issuer and/or one or more
of its Subsidiaries and the sale complies with the provisions set forth in
"Limitation on Asset Sales," such Subsidiary Guarantor's Guarantee and any
related Collateral owned by such Subsidiary Guarantor will be released.

PRINCIPAL, MATURITY AND INTEREST

     The indenture provides for original issuance of up to $118,250,000.00 of
notes, plus such additional principal amounts as may be necessary for the
issuance of additional notes in lieu of cash interest payments. The notes will
be issued in full registered form only, without coupons. The notes will mature
on May 1, 2007. The indenture also provides for issuance of exchange notes.

     Interest on the notes will accrue at the rate of 11.5% per annum and, to
the extent not prohibited by the terms of the Senior Credit Agreement or the
Intercreditor Agreement, is payable in cash semi-annually on each May 1 and
November 1, commencing on May 1, 2003, to the Persons who are registered holders
at the close of business on the April 15 and October 15 immediately preceding
the applicable interest payment date. If the payment of such interest in cash is
prohibited by the terms of the Senior Credit Agreement or the Intercreditor
Agreement, that interest will be paid in the form of notes (the "PIK notes") in
a principal amount equal to the amount of accrued and unpaid interest on the
notes plus an additional 1% per annum accrued interest for the applicable
period, on each May 1 and November 1, commencing on May 1, 2003, to the Persons
who are registered holders at the close of business on the April 15 and October
15 immediately preceding the applicable interest payment date.

     Additional interest is payable on the notes, pursuant to a registration
rights agreement, under the circumstances described in "Registration Rights;
Liquidated Damages." All references to interest in this description include such
additional interest, unless the context otherwise requires.

     Upon and during the continuation of an Event of Default, interest on the
notes will accrue at the rate of 16.5% per annum, unless the terms of the
registration rights agreement apply and provide for a

                                       80
<Page>

higher rate of interest. See "Registration Rights; Liquidated Damages" for a
summary of the registration rights agreement.

     Unpaid interest shall be due and payable at stated maturity or, to the
extent the notes are earlier redeemed or repurchased, on the date of such early
redemption or repurchase. Interest due and payable at the maturity of the notes
shall be paid to the Persons to whom principal is paid. Interest shall accrue
and be payable both before and after the filing of any bankruptcy petition at
the rates stated above.

     Interest on the notes will accrue from and including the issue date of the
notes. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.

PAYING AGENT AND REGISTRAR; TRANSFER AND EXCHANGE

     Initially, the Trustee will act as registrar for the notes and as paying
agent. The notes may be presented for registration of transfer and exchange at
the office of the registrar, which currently is the Trustee's corporate trust
office at 180 East Fifth Street, Saint Paul, Minnesota 55101. The Issuer will
pay principal (and premium, if any) and interest on the notes upon surrender of
the notes at the office of the paying agent in the Borough of Manhattan in the
City of New York, State of New York. The Issuer may change the paying agent,
registrar, and the agent for service of demands and notices in connection with
the notes and the guarantees without notice to the holders of the notes.

REDEMPTION

     OPTIONAL REDEMPTION

     The Issuer may redeem the notes, at its option, in whole at any time or in
part from time to time, at redemption prices expressed as percentages of the
principal amount set forth below. If the Issuer redeems all or any notes, the
Issuer must also pay all interest accrued and unpaid to the applicable
redemption date. The redemption prices for the notes during the indicated time
periods are as follows:

<Table>
<Caption>
  PERIOD                                                                                   PERCENTAGE
  ------                                                                                   ----------

  <S>                                                                                      <C>
  From January 24, 2003 to June 23, 2003........................................             80.0429%
  From June 24, 2003 to January 23, 2004........................................             91.4592%
  From January 24, 2004 to June 23, 2004........................................             97.1674%
  From June 24, 2004 to January 23, 2005........................................             98.5837%
  Thereafter....................................................................            100.0000%
</Table>

     Notwithstanding the foregoing, the redemption price for notes to be
redeemed will in no event be less than the then current Adjusted Issued Price.

     The Issuer can call notes for redemption on the Issue Date without giving
any notice of redemption to the holders, and notes called for redemption on the
Issue Date will be deemed not to have accrued interest.

     If the Issuer redeems less than all of the notes, selection of notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the notes are
listed or, if the notes are not then listed on a national securities exchange,
on a pro rata basis, by lot or by such other method as the Trustee deems fair
and appropriate. The Issuer will not redeem in part notes in principal amounts
of less than $1,000. Except as provided above, the Issuer will mail notice of
redemption at least 30 and not more than 60 days before the redemption date. The
notice will describe the amount of notes being redeemed, if less than the entire
principal amount. Interest will cease to accrue on notes which are redeemed on
the redemption date.

                                       81
<Page>

SECURITY

     All of the Obligations of the Issuer under the notes and the indenture and
the Guarantees are secured by a second priority Lien, but subject to certain
Permitted Liens, on all of the current and future Oil and Gas Assets of the
Issuer and its Subsidiaries, and substantially all other current and future
assets of the Issuer and the Subsidiary Guarantors (other than assets securing
Acquired Indebtedness to the extent granting additional Liens would be
prohibited by the terms of the instruments relating to such Acquired
Indebtedness). The Oil and Gas Assets included in the assets that initially
secure such Obligations represent approximately 100% of the PV-10 value at June
30, 2002 attributable to Oil and Gas Assets that remain Property of the Issuer
and its Subsidiaries after the sale of stock described under the discussion
above entitled "Business--Recent Developments--Financial Restructuring--Sale of
Stock of Canadian Abraxas and Old Grey Wolf."

     If the notes become due and payable prior to maturity or are not paid in
full at maturity, the Trustee may take all actions it deems necessary or
appropriate, including, but not limited to, foreclosing upon the Collateral in
accordance with the security documents and applicable law. The right to
foreclose on the Collateral is, however, subject to certain limitations for the
benefit of the Senior Credit Facility Lenders described below under the
discussion entitled "Intercreditor Agreement." Subject to the rights of the
Senior Credit Facility Lenders and the holder of any Qualified Senior Affiliate
Indebtedness, the proceeds received from the sale of any Collateral that is the
subject of a foreclosure or collection suit will be applied first to pay the
expenses of such foreclosure or suit and amounts then payable to the Trustee,
then to pay the principal of and interest on the notes. Subject to the rights of
the Senior Credit Facility Lenders, the Trustee has the power to institute and
maintain such suits and proceedings as it may deem expedient to prevent
impairment of, or to preserve or protect its and the holders' interest in, the
Collateral.

     We cannot assure you that the Trustee will be able to sell the Collateral
without substantial delays or compromises in addition to delays resulting from
limitations on the right to foreclose on the Collateral described below under
the discussion entitled "Intercreditor Agreement," or that the proceeds obtained
will be sufficient to pay all amounts owing to holders of the notes or. You
should read the discussion under the heading "Risk Factors --The security for
the notes may be inadequate to satisfy all amounts due and owing under the
Senior Credit Agreement and the notes" for a further discussion regarding the
adequacy of the collateral securing the notes. Third parties that have Permitted
Liens (including, without limitation, the Senior Credit Facility Lenders) may
have rights and remedies with respect to the property subject to such Liens
that, if exercised, could adversely affect the value of the Collateral. In
addition, the ability of the holders to realize upon the Collateral may be
subject to certain bankruptcy law limitations in the event of a bankruptcy. You
should read the discussion under the heading "Risk Factors" for more information
regarding these bankruptcy law limitations.

     The collateral release provisions of the indenture permit the release of
Collateral without substitution of collateral of equal value under certain
circumstances. See "Possession, Use and Release of Collateral." As described
under the summary of the covenant "Limitation on Asset Sales," the Net Cash
Proceeds of Asset Sales will be required to be utilized to Pay Down Debt.

CHANGE OF CONTROL

     If a Change of Control occurs, each holder will have the right to require
that the Issuer purchase all or a portion of such holder's notes pursuant to the
offer described below (the "Change of Control Offer"), at a purchase price equal
to the percentage of the principal amount thereof then applicable to optional
redemptions by the Issuer, plus all accrued and unpaid interest to the date of
purchase.

     The Issuer must mail a notice of any Change of Control to each holder and
the Trustee no later than 30 days after the Change of Control occurs. The notice
will state, among other things, the purchase date, which must be no earlier than
30 days nor later than 45 days from the date such notice is mailed, other than
as may be required by law (the "Change of Control Payment Date"). A Change of
Control Offer must remain open for a period of 20 Business Days or such longer
period as may be required by law. Holders electing to have a new secured note
purchased pursuant to a Change of Control Offer will be required to surrender
the new secured note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse

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of the new secured note completed, to the paying agent for the notes at the
address specified in the notice prior to the close of business on the third
Business Day prior to the Change of Control Payment Date.

     The Issuer will not be required to make a Change of Control Offer if a
third party makes the Change of Control Offer at the Change of Control purchase
price, at the same times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Issuer and purchases the
notes validly tendered and not withdrawn under such Change of Control Offer.

     If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay the Change of Control
purchase price for all the notes that might be delivered by holders seeking to
accept the Change of Control Offer. In addition, the Senior Credit Agreement may
have similar change of control provisions as the indenture, which may further
restrict the ability of the Issuer to purchase the notes. Also, the terms of the
Intercreditor Agreement will limit the Issuer's ability to make a Change of
Control Offer under certain circumstances. See the discussion below entitled
"Intercreditor Agreement." In the event the Issuer is required to purchase notes
pursuant to a Change of Control Offer, the Issuer expects that it would seek
third party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Issuer would
be able to obtain such financing.

     Neither the Board of Directors of the Issuer nor the Trustee may waive the
covenant relating to the Issuer's obligation to make a Change of Control Offer.
Restrictions in the indenture described in this Description of the notes on the
ability of the Issuer and its Subsidiaries to incur additional Indebtedness, to
grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Issuer,
whether favored or opposed by the management of the Issuer. Consummation of any
such transaction in certain circumstances may require repurchase of the notes,
and there can be no assurance that the Issuer or the acquiring party will have
sufficient financial resources to effect such repurchase. Such restrictions and
the restrictions on transactions with Affiliates may, in certain circumstances,
make more difficult or discourage any leveraged buyout of the Issuer by the
management of the Issuer. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the indenture may not afford the holders of notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.

     The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Change of Control Offer. These rules require
that the Issuer keep the offer open for 20 Business Days. They also require that
the Issuer notify holders of notes of changes in the offer and extend the offer
for specified time periods if the Issuer amends the offer. If the provisions of
any securities laws or regulations conflict with the "Change of Control"
provisions in the indenture, the Issuer will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the "Change of Control" provisions of the indenture.

INTERCREDITOR AGREEMENT

     The notes are subject to an intercreditor and subordination agreement. In
general, the Junior Indebtedness will be subordinated to the Senior
Indebtedness. The liens securing the Junior Indebtedness will also be
subordinated to the liens securing the Senior Indebtedness. The following
description is a summary of the material provisions of the intercreditor and
subordination agreement. It does not restate that agreement in its entirety. The
description is qualified in its entirety by the terms of the intercreditor and
subordination agreement.

     The intercreditor and subordination agreement has the following material
terms:

       -  Upon a payment default under the Senior Credit Agreement, the holders
          of the notes will not be entitled to be paid until all Senior
          Indebtedness is paid in full in cash.

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       -  Upon a default (other than a payment default) under the Senior Credit
          Agreement, for a period of 180 days commencing upon receipt by the
          Trustee of written notice of such non-payment default (each a "Payment
          Blockage Period"), the holders of the notes will not be entitled to be
          paid. There will be at least 180 consecutive days during which no
          Payment Blockage Period is in effect during any period of 365
          consecutive days.

       -  Upon any acceleration of the Junior Indebtedness or any payment or
          distribution of assets of the Issuer or any of its Subsidiaries
          following a bankruptcy or insolvency proceeding, all amounts due or to
          become due upon the Senior Indebtedness shall be first paid in full in
          cash before any payment is made on account of any of the Junior
          Indebtedness. Following the commencement of a bankruptcy or insolvency
          proceeding, any payment or distribution of assets of the Issuer or any
          of its Subsidiaries to which the holders of the notes would be
          entitled (excluding securities that are subordinated to the Senior
          Indebtedness to the same extent as, or more deeply than, the Junior
          Indebtedness is subordinated to the Senior Indebtedness pursuant to
          the intercreditor and subordination agreement), will be paid by the
          Issuer or its Subsidiaries, or by the holders of the notes or the
          Trustee if received by them or it, directly to the Senior Credit
          Facility Lenders until the Senior Indebtedness is paid in full in
          cash.

       -  During a bankruptcy or insolvency proceeding, (a) the Senior Credit
          Facility Lenders will be permitted to file claims and proofs of claims
          in respect of the Junior Indebtedness if there shall remain not more
          than 30 days before such action is barred, prohibited or otherwise
          cannot be taken and (b) the holders of the notes and the Trustee will
          use commercially reasonable best efforts to take such actions as the
          Senior Credit Facility Lenders may reasonably request (at the Senior
          Credit Facility Lenders' expense) to collect the Junior Indebtedness
          for the account of the Senior Credit Facility Lenders and file claims
          or proof of claims with respect thereto, to execute such documents or
          instruments to enable the Senior Credit Facility Lenders to enforce
          any and all claims and the liens and security interests securing
          payment of the Junior Indebtedness and to collect and receive for the
          account of the Senior Credit Facility Lenders any and all payments or
          distributions which may be payable or deliverable upon or with respect
          to the Junior Indebtedness.

       -  Any payment or other distribution of assets of the Issuer or any of
          its Subsidiaries received by the holders of the notes or the Trustee
          prior to the payment in full of the Senior Indebtedness will be held
          by the holders of the notes or the Trustee, as the case may be, in
          trust and paid over to the Senior Credit Facility Lenders.

       -  As between the Senior Credit Facility Lenders and the holders of the
          notes, the liens and security interests of the Senior Credit Facility
          Lenders securing the Senior Indebtedness will be a first priority lien
          on and security interest in all of the property and assets on the
          Issuer and its Subsidiaries (the "Collateral") and the liens and
          security interests of the holders of the notes securing the Junior
          Indebtedness will be a second priority lien on and security interest
          in the Collateral. Neither the holders of the notes nor the Trustee
          will challenge or contest the validity, legality, perfection,
          priority, availability or enforceability of the security interests and
          liens of the Senior Credit Facility Lenders upon the Collateral or
          seek to have the same avoided, disallowed, set aside, or otherwise
          invalidated in any judicial proceeding or otherwise.

       -  Until the payment in full in cash of the Senior Indebtedness, the
          Senior Credit Facility Lenders shall have the exclusive right to
          exercise and enforce all privileges and rights to the Collateral and
          to manage the disposition of the Collateral and neither the holders of
          the notes nor the Trustee will exercise any Secured Creditor Remedies
          or commence a bankruptcy, insolvency or other proceeding against the
          Issuer or any of its Subsidiaries; provided, however, that, upon the
          occurrence and during an event of default with respect to the Junior
          Indebtedness, commencing 180 days after receipt by the Senior Credit
          Facility Lenders of written notice of such default and intention to
          exercise remedies, the holders of the notes or the Trustee may
          commence a bankruptcy, insolvency or other

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          proceeding against the Issuer or any of its Subsidiaries or exercise
          any Secured Creditor Remedies unless, in the case of any exercise of
          Secured Creditor Remedies, only so long as the Senior Credit Facility
          Lenders are not diligently pursuing in good faith the exercise of
          their Secured Creditor Remedies, or attempting to vacate any stay of
          enforcement of their liens on a material portion of the Collateral.
          The holders of the notes and the Trustee will waive any and all rights
          to affect the method or challenge the appropriateness of any action by
          the Senior Credit Facility Lenders with respect to the Collateral.
          Upon an event of default with respect to the Senior Indebtedness, the
          holders of the notes and the Trustees will, immediately upon the
          request of the Senior Credit Facility Lenders, release or otherwise
          terminate their liens and security interests upon the Collateral, to
          permit the Senior Credit Facility Lenders or the Issuer or its
          Subsidiaries (with the consent of the Senior Credit Facility Lenders)
          to sell or otherwise dispose of the Collateral to the extent the
          proceeds of such sale or other disposition is used to repay in full
          and in cash the Senior Indebtedness. If such sale or other disposition
          of the Collateral by the Senior Credit Facility Lenders or the Issuer
          or its Subsidiaries (with the consent of the Senior Credit Facility
          Lenders) result in a surplus after the payment in full of the Senior
          Indebtedness, such surplus will be paid to the holders of the notes or
          the Trustee.

       -  The intercreditor and subordination agreement will remain applicable
          if the Issuer or any of its Subsidiaries is subject to a bankruptcy or
          insolvency proceeding.

       -  If, during a bankruptcy or insolvency proceeding of the Issuer or any
          of its Subsidiaries, the Senior Credit Facility Lenders decide to
          permit the use of cash collateral or provide post-petition financing
          to the Issuer or any of its Subsidiaries, the holders of the notes and
          the Trustee will not object to the use of such cash collateral or
          post-petition financing by the Senior Credit Facility Lenders (or
          their agent), provided that (i) the holders of the notes or the
          Trustee are granted the same liens and security interests on the
          post-petition Collateral that may be granted to or for the benefit of
          the Senior Credit Facility Lenders (or their agent), junior only to
          the liens and security interests of the Senior Credit Facility Lenders
          (or their agent) and (ii) the aggregate principal amount of
          pre-petition secured indebtedness together with the aggregate
          principal amount of financing in such bankruptcy or insolvency
          proceeding will not exceed, at the time of determination, the sum of
          (a) $50 million less the aggregate amount applied from time to time to
          repay the principal amount of the Senior Indebtedness which is
          accompanied by a corresponding permanent reduction of the Revolver
          Commitment under the Senior Credit Agreement plus (b) (x) $15 million,
          if the then applicable Revolver Commitment under the Senior Credit
          Agreement is $25 million or greater, (y) $10 million, if the then
          applicable Revolver Commitment under the Senior Credit Agreement is
          less than $25 million and greater than or equal to $15 million or (z)
          $5 million, if the then applicable Revolver Commitment under the
          Senior Credit Agreement is less than $15 million (the sum of the
          immediately preceding clauses (a) and (b), the "Maximum Senior
          Indebtedness"); provided, however, that in no event shall Indebtedness
          constituting Bank Product Obligations or Related Senior Indebtedness
          (as such terms are defined in the Intercreditor Agreement) be included
          in the calculation of Maximum Senior Indebtedness. Neither the holders
          of the notes nor the Trustee will object to a motion for relief from
          the automatic stay in any proceeding to foreclose on and sell the
          Collateral.

       -  The Senior Credit Facility Lenders will have absolute power and
          discretion, without notice to the holders of the notes or the Trustee,
          to deal in any manner with the Senior Indebtedness including, without
          limitation, amendments, modifications, supplements, refinancings,
          renewals, refundings, extensions or terminations of the documents
          related to the Senior Indebtedness, provided that the Senior Credit
          Facility Lenders may not (i) increase the principal amount of the
          Senior Indebtedness to a principal amount in excess of the Maximum
          Senior Indebtedness, less the outstanding Term Loan under the Senior
          Credit Agreement or (ii) extend the final maturity of the Senior
          Indebtedness beyond January 23, 2008. Neither the holders of the notes
          nor the Trustee will amend, modify or

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          supplement any terms of the documents related to such notes in a
          manner adverse to the Senior Credit Facility Lenders without the prior
          written consent of the Senior Credit Facility Lenders.

       -  Until the payment in full of the Senior Secured Obligations, neither
          the holders of the notes nor the Trustee will cancel or otherwise
          discharge any of the indebtedness evidenced by the notes or
          subordinate such indebtedness to any other indebtedness of the Issuer
          or any of its Subsidiaries, other than the Senior Indebtedness.

     CERTAIN DEFINITIONS WITH RESPECT TO THE INTERCREDITOR AGREEMENT

     "BANK PRODUCT AGREEMENT" means any agreement for any service or facility
extended to the Issuer or any of its Subsidiaries by the Senior Credit Facility
Representative or any Senior Credit Facility Lender or any Affiliate of the
Senior Credit Facility Representative or any such lender including: (a) credit
cards, (b) credit card processing services, (c) debit cards, (d) purchase cards,
(e) cash management or related services (including the Automated Clearing House
processing of electronic funds transfers through the direct Federal Reserve
Fedline system), (f) cash management, including controlled disbursement,
accounts or services, or (g) Hedging Agreements.

     "HEDGING AGREEMENT" means any Currency Protection Agreement (a currency
swap, cap or collar agreement or similar arrangement entered into with the
intent of protecting against fluctuations in currency values, either generally
or under specific contingencies), any Interest Rate Protection Agreement (an
interest rate swap, cap or collar agreement or similar arrangement entered into
with the intent of protecting against fluctuations in interest rates or the
exchange of notional interest obligations, either generally or under specific
contingencies), or Commodity Hedging Agreement (a commodity hedging or purchase
agreement or similar arrangement entered into with the intent of protecting
against fluctuations in commodity prices or the exchange of notional commodity
obligations, either generally or under specific contingencies).

     "JUNIOR INDEBTEDNESS" means any and all presently existing or hereafter
arising Indebtedness, claims, debts, liabilities, obligations (including,
without limitation, any prepayment premium), fees, expenses or indemnities of
the Issuer or any of its Subsidiaries owing to the holders of the notes (or
their agents or trustees) under the indenture, the notes and any other
agreement, instrument or document related thereto, whether direct or indirect,
whether contingent (including in respect of any guaranty or the registration
rights agreement) or of any other nature, character, or description (including
all interest and other amounts accruing after commencement of any bankruptcy or
insolvency proceeding, and any interest and other amounts that, but for the
provisions of the bankruptcy code, would have accrued and become due or
otherwise would have been allowed), and any refinancings, renewals, refundings,
or extensions of such amounts to the extent permitted under the Intercreditor
Agreement.

     "SECURED CREDITOR REMEDIES" means any action by the Senior Credit Facility
Representative, the Senior Credit Facility Lenders, the holders of the notes or
their trustee (each a "Secured Creditor") in furtherance of the sale,
foreclosure, realization upon, or the repossession or liquidation of any of the
Collateral, including, without limitation: (i) the exercise of any remedies or
rights of a "Secured Creditor" under Article 9 of the applicable Uniform
Commercial Code, such as, without limitation, the notification of account
debtors; (ii) the exercise of any remedies or rights as a mortgagee or
beneficiary (or by the trustee on behalf of the beneficiary), including, without
limitation, the appointment of a receiver, or the commencement of any
foreclosure proceedings or the exercise of any power of sale, including, without
limitation, the placing of any advertisement for the sale of any Collateral;
(iii) the exercise of any remedies available to a judgment creditor; (iv) the
exercise of any rights of forfeiture, recession or repossession of any assets,
or (v) any other remedy available in respect of the Collateral available to such
Secured Creditor under any agreement, instrument or other document to which it
is a party or under applicable law, provided that Secured Creditor Remedies
shall not include any action taken by a Secured Creditor solely to (A) correct
any mistake or ambiguity in any agreement, instrument or other document or (B)
remedy or cure any defect in or lapse of perfection of the lien of a Secured
Creditor in the Collateral.

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     "SENIOR INDEBTEDNESS" means any and all presently existing or hereafter
arising indebtedness, reimbursement obligations, claims, debts, liabilities,
obligations (including, without limitation, any prepayment premium), expenses,
fees or indemnities of the Issuer or any of its Subsidiaries owing to the Senior
Credit Facility Lenders (or their agents) under the Senior Credit Agreement or
any other agreement, instrument or document related thereto (including under any
Bank Product Agreement), whether direct or indirect, whether contingent
(including in respect of any guaranty) or of any other nature, character, or
description (including all interest and other amounts accruing after
commencement of any bankruptcy or insolvency proceeding, and all interest and
other amounts that, but for the provisions of the bankruptcy code, would have
accrued and become due or otherwise would have been allowed), and any
refinancings, renewals, refundings, or, to the extent permitted in the
intercreditor and subordination agreement, extensions of such amounts.

CERTAIN COVENANTS

     The indenture contains, among others, the following covenants:

     LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS

     Other than Permitted Indebtedness, the Issuer may not, and may not cause or
permit any of its Subsidiaries to, directly or indirectly, create, incur,
assume, guarantee, acquire, become liable, contingently or otherwise, with
respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness.

     Indebtedness of a Person existing at the time such Person becomes a
Subsidiary (whether by merger, consolidation, acquisition of Capital Stock or
otherwise) or is merged with or into the Issuer or any Subsidiary or which is
secured by a Lien on an asset acquired by the Issuer or a Subsidiary (whether or
not such Indebtedness is assumed by the acquiring Person) shall be deemed
incurred at the time the Person becomes a Subsidiary or at the time of the asset
acquisition.

     The Issuer will not, and will not permit any Subsidiary Guarantor, to incur
any Indebtedness which by its terms (or by the terms of any agreement governing
such Indebtedness) is subordinated in right of payment to any other Indebtedness
(other than to senior Indebtedness under the Senior Credit Agreement and
Qualified Senior Affiliate Indebtedness) of the Issuer or such Subsidiary
Guarantor unless such Indebtedness is also by its terms (or by the terms of any
agreement governing such Indebtedness) made expressly subordinate in right of
payment to the notes or the Guarantee of such Subsidiary Guarantor, as the case
may be, pursuant to subordination provisions that are substantively identical to
the subordination provisions of such Indebtedness (or such agreement) that are
most favorable to the holders of any other Indebtedness (other than to senior
Indebtedness under the Senior Credit Agreement and Qualified Senior Affiliate
Indebtedness) of the Issuer or such Subsidiary Guarantor, as the case may be.
Notwithstanding the foregoing, the provisions of this paragraph do not prohibit
tranches of Indebtedness under the Senior Credit Agreement being subordinated to
other tranches of Indebtedness under the Senior Credit Agreement. The Issuer
will not, and will not permit any Subsidiary to, incur or suffer to exist
Indebtedness that is senior in right of payment to the notes or any Guarantee,
as the case may be, and expressly contractually subordinate in right of payment
to any other Indebtedness of the Issuer or such Subsidiary, as the case may be.

     LIMITATION ON RESTRICTED PAYMENTS

     The indenture defines the following as Restricted Payments if done by the
Issuer or any of its Subsidiaries:

       -  declare or pay any dividend or make any distribution (other than
          dividends or distributions payable solely in Qualified Capital Stock
          of the Issuer) on or in respect of shares of the Issuer's Capital
          Stock to holders of such Capital Stock;

       -  purchase, redeem or otherwise acquire or retire for value any Capital
          Stock of the Issuer or any warrants, rights or options to purchase or
          acquire shares of any class of such Capital Stock other than through
          the exchange therefore solely of Qualified Capital Stock

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          of the Issuer or warrants, rights or options to purchase or
          acquire shares of Qualified Capital Stock of the Issuer;

       -  make any principal payment on, purchase, defease, redeem, prepay,
          decrease or otherwise acquire or retire for value, prior to any
          scheduled final maturity, scheduled repayment or scheduled sinking
          fund payment, any Subordinated Indebtedness of the Issuer or a
          Subsidiary Guarantor; or

       -  make any Investment (other than a Permitted Investment).

     However, the Issuer may take the following actions:

       -  if no Default or Event of Default shall have occurred and be
          continuing, the acquisition of any shares of Capital Stock of the
          Issuer solely in exchange for shares of Qualified Capital Stock of the
          Issuer, and

       -  if no Default or Event of Default shall have occurred and be
          continuing, the acquisition of any Indebtedness of the Issuer or a
          Subsidiary Guarantor that is subordinate or junior in right of payment
          to the notes or such Subsidiary Guarantor's Guarantee, as the case may
          be, the incurrence of which was not in violation of the indenture,
          solely in exchange for shares of Qualified Capital Stock of the
          Issuer.

     LIMITATION ON ASSET SALES

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
consummate an Asset Sale unless the consideration received is at least equal to
the fair market value of the assets sold or otherwise disposed of, as determined
in good faith by the Issuer's Board of Directors or senior management of the
Issuer, and at least 95% of the consideration received is cash or Cash
Equivalents and is received at the time of such disposition.

     The Issuer will be required to apply Net Cash Proceeds received from any
Asset Sale to Pay Down Debt.

     If at any time any consideration (other than cash or Cash Equivalents)
received in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash, then such conversion or disposition shall be
treated like an Asset Sale and the Net Cash Proceeds will be applied as
described above.

     The Issuer may defer the action to Pay Down Debt until there is an
aggregate Available Proceeds Amount equal to or in excess of $500,000.00
resulting from one or more Asset Sales (at which time the entire unutilized
Available Proceeds Amount, and not just the amount in excess of $500,000.00,
will be applied as required pursuant to this paragraph).

     All Collateral Proceeds delivered to the Trustee will constitute Trust
Moneys, and all Collateral Proceeds will be delivered by the Issuer:

       -  so long as any Indebtedness under the Senior Credit Agreement or any
          Qualified Senior Affiliate Indebtedness remains outstanding, to the
          Senior Credit Facility Representative; and

       -  otherwise to the Trustee and all Collateral Proceeds delivered to the
          Trustee will be deposited in the Collateral Account in accordance with
          the indenture. These Collateral Proceeds may be withdrawn from the
          Collateral Account for application by the Issuer as set forth above or
          otherwise pursuant to the indenture as summarized in "Deposit; Use and
          Release of Trust MONEYS."

     In the event of the transfer of substantially all (but not all) of the
consolidated assets of the Issuer as an entirety to a Person in a transaction
permitted under the covenant described in "Merger, Consolidation and Sale of
Assets," the successor corporation will be deemed to have sold the consolidated
assets of the Issuer not so transferred and must comply with the provisions of
this covenant as if it were an Asset Sale.

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In addition, the fair market value of the consolidated assets of the Issuer
deemed to be sold will be deemed to be Net Cash Proceeds.

     The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes as a result of an action to Pay Down Debt.

     LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or permit to exist or become
effective any encumbrance or restriction (each, a "Payment Restriction") on the
ability of any Subsidiary to:

       -  pay dividends or make any other distributions on or in respect of its
          Capital Stock;

       -  make loans or advances, or to pay any Indebtedness or other obligation
          owed, to the Issuer or any other Subsidiary;

       -  guarantee any Indebtedness or any other obligation of the Issuer or
          any Subsidiary; or

       -  transfer any of its property or assets to the Issuer or any other
          Subsidiary.

     The preceding will not apply, however, to encumbrances or restrictions
existing under or by reason of the following (which are excluded from the term
"Payment Restriction"):

     (1) applicable law;

     (2) the indenture, the Senior Credit Agreement, any security document or
any of the security documents entered into in connection with the Senior Credit
Agreement, and any document or instrument evidencing, governing or securing any
of the Qualified Senior Affiliate Indebtedness;

     (3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Subsidiary;

     (4) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to such Subsidiary, or the properties or assets of
such Subsidiary, other than the Person or the properties or assets of the Person
so acquired;

     (5) agreements existing on the Issue Date to the extent and in the manner
such agreements were in effect on the Issue Date;

     (6) customary restrictions with respect to a Subsidiary pursuant to an
agreement that has been entered into for the sale or disposition of Capital
Stock or assets of such Subsidiary to be consummated in accordance with the
terms of the indenture solely in respect of the assets or Capital Stock to be
sold or disposed of;

     (7) any instrument governing a Permitted Lien, to the extent and only to
the extent such instrument restricts the transfer or other disposition of assets
subject to such Permitted Lien; or

     (8) an agreement governing Refinancing Indebtedness incurred to Refinance
the Indebtedness issued, assumed or incurred pursuant to an agreement referred
to in clause (2), (4) or (5) above; provided, however, that the provisions
relating to such encumbrance or restriction contained in any such Refinancing
Indebtedness are no less favorable to the holders in any material respect as
determined by the Board of Directors of the Issuer in its reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in the applicable agreement referred to in such clause (2), (4) or
(5).

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     LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES

     The Subsidiaries may not issue any Preferred Stock (other than to the
Issuer or to a Wholly Owned Subsidiary) or permit any Person (other than the
Issuer or a Wholly Owned Subsidiary) to own any Preferred Stock of any
Subsidiary.

     LIMITATION ON LIENS

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume or permit or suffer to exist or
remain in effect any Liens upon any properties or assets of the Issuer or of any
of its Subsidiaries, whether owned on the Issue Date or acquired after the Issue
Date, or on any income or profits therefrom, or assign or otherwise convey any
right to receive income or profits thereon, other than Permitted Liens.

     MERGER, CONSOLIDATION AND SALE OF ASSETS

     The Issuer shall not, in a single transaction or series of related
transactions;

       -  consolidate or merge with or into any Person,

       -  or sell, assign, transfer, lease, convey or otherwise dispose of (or
          cause or permit any Subsidiary to sell, assign, transfer, lease,
          convey or otherwise dispose of) all or substantially all of the assets
          owned directly or indirectly by the Issuer (determined on a
          consolidated basis for the Issuer and its Subsidiaries), whether as an
          entirety or substantially as an entirety to any Person,

          unless:

       -  either

          (A) the Issuer shall be the surviving or continuing corporation, or

          (B) the Person (if other than the Issuer) formed by such consolidation
     or into which the Issuer is merged or the Person which acquires by sale,
     assignment, transfer, lease, conveyance or other disposition the assets of
     the Issuer and its Subsidiaries substantially as an entirety (the
     "Surviving Entity")

               (i) shall be a corporation organized and validly existing under
     the laws of the United States or any state thereof or the District of
     Columbia; and

               (ii) shall expressly assume, by supplemental indenture (in form
     and substance satisfactory to the Trustee), executed and delivered to the
     Trustee, the due and punctual payment of the principal of, premium, if any,
     and interest on all of the notes and the performance of every covenant of
     the notes, the indenture, and the security documents on the part of the
     Issuer to be performed or observed;

     -    immediately after giving effect to such transaction and the assumption
          contemplated above (including giving effect to any Indebtedness
          incurred or anticipated to be incurred and any Lien granted in
          connection with or in respect of such transaction), the Issuer or such
          Surviving Entity, as the case may be,

               (A) shall have a Consolidated Net Worth equal to or greater than
     the Consolidated Net Worth of the Issuer immediately prior to such
     transaction, and

               (B) both (i) the Issuer's or such Surviving Entity's (calculated
     as if such Surviving Entity was the Issuer), as the case may be,
     Consolidated EBITDA Coverage Ratio is at least equal to 2.5 to 1.0; and
     (ii) the Issuer's or such Surviving Entity's (calculated as if such
     Surviving Entity was the Issuer), as the case may be, Adjusted Consolidated
     Net Tangible Assets are equal to or greater than 150% of the aggregate
     consolidated Indebtedness of the Issuer and its Subsidiaries;

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       -  immediately before and immediately after giving effect to such
          transaction and the assumption contemplated above (including, without
          limitation, giving effect to any Indebtedness incurred or anticipated
          to be incurred and any Lien granted in connection with or in respect
          of the transaction), no Default or Event of Default shall have
          occurred or be continuing; and

       -  the Issuer or the Surviving Entity, as the case may be, shall have
          delivered to the Trustee an officer's certificate and an opinion of
          counsel, each stating that such consolidation, merger, sale,
          assignment, transfer, lease, conveyance or other disposition and, if a
          supplemental indenture is required in connection with such
          transaction, such supplemental indenture comply with the applicable
          provisions of the indenture and that all conditions precedent in the
          indenture relating to such transaction have been satisfied.

     For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the assets of one or more Subsidiaries the Capital Stock of
which constitutes all or substantially all of the assets of the Issuer, shall be
deemed to be the transfer of all or substantially all of the assets of the
Issuer.

     Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Issuer in accordance with the foregoing, in which the
Issuer is not the continuing corporation, the successor Person formed by such
consolidation or into which the Issuer is merged or to which such transfer is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Issuer under the indenture and the notes and thereafter (except in
the case of a lease), the Issuer will be relieved of all further obligations and
covenants under the indenture and the notes.

     Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the indenture in connection with any transaction complying with the provisions
of the indenture described under "Merger, Consolidation and Sale of Assets") may
not, and the Issuer may not cause or permit any Subsidiary Guarantor to,
consolidate with or merge with or into any Person other than the Issuer or
another Subsidiary Guarantor that is a Wholly Owned Subsidiary unless:

       -  the entity formed by or surviving any such consolidation or merger (if
          other than the Subsidiary Guarantor) is a Person organized and
          existing under the laws of the United States or any state thereof or
          the District of Columbia (or if such Subsidiary Guarantor was formed
          under the laws of Canada or any province or territory thereof, such
          Surviving Entity shall be a Person organized and validly existing
          under the laws of Canada or any province or territory thereof);

       -  such entity assumes by execution of a supplemental indenture all of
          the obligations of the Subsidiary Guarantor under its Guarantee;

       -  immediately after giving effect to such transaction, no Default or
          Event of Default shall have occurred and be continuing; and

       -  immediately after giving effect to such transaction and the use of any
          net proceeds therefrom on a pro forma basis, the Issuer could satisfy
          the Consolidated Net Worth and Consolidated EBITDA Coverage Ratio and
          Adjusted Consolidated Net Tangible Assets tests set forth above.

     Any merger or consolidation of a Subsidiary Guarantor with and into the
Issuer (with the Issuer being the Surviving Entity) need only comply with the
officer's certificate and opinion of counsel provisions set forth above.

     LIMITATIONS ON TRANSACTIONS WITH AFFILIATES

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
directly or indirectly, engage in any transaction or series of related
transactions (including, without limitation, the purchase, sale,

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lease or exchange of any property, the guaranteeing of any Indebtedness or the
rendering of any service) with any of its Affiliates unless:

       -  such transaction or series of related transactions is not otherwise
          prohibited by the terms of the indenture and is on terms that are fair
          and reasonable to the Issuer or the applicable Subsidiary and are no
          less favorable to the Issuer or the applicable Subsidiary than would
          have been obtained in a comparable transaction at such time on an
          arm's-length basis from a Person that is not an Affiliate; and

       -  with respect to a transaction or series of related transactions
          involving aggregate payments or other property with a fair market
          value in excess of $250,000.00, the Issuer obtains Board approval
          which is evidenced by a resolution stating that the Board has
          determined that such transaction complies with the foregoing
          provisions.

     In addition, if the transaction or series of related transactions involves
an aggregate fair market value of more than $2,000,000.00, the Issuer must,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such transaction or series of related transactions to the Issuer or the
relevant Subsidiary, as the case may be, from a financial point of view, from an
Independent Advisor and file the same with the Trustee.

     The foregoing shall not apply to:

       -  reasonable fees and compensation paid to and indemnity provided on
          behalf of, officers, directors, employees or consultants of the Issuer
          or any Subsidiary as determined in good faith by the Board of
          Directors or senior management of the Issuer or such Subsidiary, as
          the case may be;

       -  transactions exclusively between or among the Issuer and any of its
          Subsidiaries or exclusively between or among such Subsidiaries if such
          transactions are not otherwise prohibited by the indenture; and

       -  Restricted Payments permitted by the indenture, or any guarantee or
          assumption by the Issuer or any of its Subsidiaries of Indebtedness of
          the Issuer or any of its Subsidiaries if the incurrence of such
          Indebtedness was not prohibited by the indenture.

     ADDITIONAL SUBSIDIARY GUARANTEES

     All Subsidiaries of the Issuer shall be Subsidiary Guarantors. If any
Subsidiary of the Issuer is formed after the Issue Date, or if a Person
otherwise becomes a Subsidiary of the Issuer after the Issue Date, the Issuer
shall cause such Subsidiary to:

       -  execute and deliver to the Trustee a supplemental indenture in form
          reasonably satisfactory to the Trustee pursuant to which such
          Subsidiary shall unconditionally guarantee all of the Issuer's
          obligations under the notes and the indenture on the terms set forth
          in the indenture;

       -  grant to the Trustee a second priority Lien (subject to certain
          Permitted Liens) on all of the current and future Oil and Gas Assets
          of such Subsidiary, and substantially all of its other current and
          future assets using applicable security documents substantially in the
          same form as those executed and delivered on January 23, 2003; and

       -  deliver to the Trustee an opinion of counsel and an officers'
          certificate, stating that no event of default shall occur as a result
          of such supplemental indenture or security documents, that each such
          instrument complies with the terms of the indenture and that each such
          instrument has been duly authorized, executed and delivered by such
          Subsidiary and constitutes a legal, valid, binding and enforceable
          obligation of such Subsidiary.

     Thereafter, such Subsidiary shall be a Subsidiary Guarantor for all
purposes of the indenture.

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     LIMITATION ON IMPAIRMENT OF SECURITY INTEREST

     Neither the Issuer nor any of its Subsidiaries may take or omit to take any
action which would have the result of adversely affecting or impairing the
security interest in favor of the Trustee, on behalf of itself and the holders,
with respect to the Collateral, and neither the Issuer nor any of its
Subsidiaries may grant to any Person, or suffer any Person (other than the
Issuer and its Subsidiaries) to have (other than to the Trustee on behalf of the
Trustee and the holders) any interest whatsoever in the Collateral other than
Permitted Liens. Neither the Issuer nor any of its Subsidiaries may enter into
any agreement or instrument that by its terms requires the proceeds received
from any sale of Collateral to be applied to repay, redeem, defease or otherwise
acquire or retire any Indebtedness, other than Indebtedness under the Senior
Credit Agreement, Qualified Senior Affiliate Indebtedness, and the security
documents entered into in connection therewith, and other than pursuant to the
indenture and the security documents.

     LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF SUBSIDIARIES

     The Issuer may not, and may not permit any Subsidiary to, sell or otherwise
dispose of any shares of Capital Stock of any Subsidiary, and shall not permit
any of its Subsidiaries, directly or indirectly, to issue or sell or otherwise
dispose of any of its Capital Stock except:

       -  to the Issuer or a Wholly Owned Subsidiary; or

       -  if all shares of Capital Stock of such Subsidiary owned by the Issuer
          and its Subsidiary are sold or otherwise disposed of.

     In connection with any sale or disposition of Capital Stock of any
Subsidiary, the Issuer will be required to comply with the covenant described
under the caption "Limitation on Asset Sales."

     LIMITATION ON CONDUCT OF BUSINESS

     The Issuer will not, and will not permit any of its Subsidiaries to, engage
in the conduct of any business other than the Crude Oil and Natural Gas
Business.

     REPORTS TO HOLDERS

     The Issuer will deliver to the Trustee within 15 days after the filing of
the same with the SEC, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the Issuer is required
to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that the Issuer may not be subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act, the Issuer will file with the SEC,
to the extent permitted, and provide the Trustee and Holders with such annual
reports and such information, documents and other reports specified in Sections
13 and 15(d) of the Exchange Act. The Issuer will also comply with the other
provisions of Section 314(a) of the Trust Indenture Act.

     The reports and information delivered pursuant to the preceding paragraph
shall include quarterly financials, including details regarding sources and uses
of cash or of any assets of the Issuer and its Subsidiaries. Such financials
will provide details on both a consolidated and unconsolidated basis.

     WAIVER OF STAY, EXTENSION OR USURY LAWS

     The Issuer and each Subsidiary Guarantor will covenant (to the extent that
they may lawfully do so) that they will not at any time insist upon, plead, or
in any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law that would prohibit or forgive the
Issuer or such Subsidiary Guarantor from paying all or any portion of the
principal of or interest on the notes as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of the indenture; and (to the extent that they may lawfully do so)
the Issuer and each Subsidiary Guarantor will expressly waive in the indenture
all benefit or advantage of any such law, and covenant that they will not
hinder, delay or impede the execution of any power herein

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granted to the trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.

     LEVERAGE COVENANT

     The Issuer must not allow the Issuer's Consolidated EBITDA to Cash Interest
Expense Ratio, as of the last day of any calendar quarter after the Issue Date,
to be less than 3.0:1, except on the last day of the first calendar quarter of
2003, at which time this ratio must not be less than 2.0:1.

     EXCESS CASH FLOW AND EXCESS CASH

     Without duplication with respect to the requirement to Pay Down Debt set
forth in the next paragraph, within 30 days after the last day of each calendar
quarter ending after the Issue Date, the Issuer must apply an amount to Pay Down
Debt equal to 90% of the Excess Cash Flow of the Issuer for such calendar
quarter.

         Without duplication with respect to the requirement to Pay Down Debt
set forth in the previous paragraph, with respect to each calendar quarter
ending after the Issue Date and on the same date that the Issuer applies an
amount to Pay Down Debt pursuant to the preceding paragraph with respect to such
calendar quarter, and on a date that is 7 days after the Issue Date, the Issuer
must apply an amount to Pay Down Debt equal to all cash of the Issuer and its
Subsidiaries as of such date (each such date a "Cash Sweep Payment Date"), after
the application of an amount to Pay Down Debt pursuant to the preceding
paragraph, on that date (provided that if there is no Excess Cash Flow with
respect to such calendar quarter, the Cash Sweep Payment Date with respect to
such calendar quarter shall be the first business day that is 30 days after the
last day of such calendar quarter), minus

       -  $2.5 million,

       -  Restricted Cash as of such Cash Sweep Payment Date,

       -  the amount of Capital Expenditures the Issuer is permitted to make
          pursuant to the terms of the indenture during the next calendar
          quarter pursuant to the covenant described below under the heading
          "Limitations on Capital Expenditures," minus amounts available for
          making Capital Expenditures under any revolving credit facility under
          the Senior Credit Agreement as of such Cash Sweep Payment Date,

       -  cash of the Issuer as of such Cash Sweep Payment Date otherwise
          applied or required to be applied to Pay Down Debt, and

       -  without duplication with respect to the previous bullet point, any
          such cash of the Issuer and its Subsidiaries as of the Cash Sweep
          Payment Date constituting proceeds of any equity offering by the
          Issuer or proceeds of any Subordinated Indebtedness of the Issuer or
          any of its Subsidiaries complying with the provisions of the indenture
          described below under "Proceeds from Issuances of Equity and
          Subordinated Debt."

     The Issuer will manage the cash of the Issuer and its Subsidiaries in the
ordinary course of business consistent with past practices and in compliance
with the terms of the Senior Credit Agreement.

     LIMITATION ON EXPENDITURES FOR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     The Issuer must observe the following covenants with respect to
expenditures by the Issuer and its Subsidiaries on SG&A:

       -  The amount expended by the Issuer and its Subsidiaries on SG&A in any
          calendar quarter ending after the Issue Date shall not exceed the
          applicable SG&A Quarterly Amount, subject, however, to the following
          carryforward and carryback provisions:

          -    to the extent the SG&A in any one quarter (excluding the amount
               of SG&A due to any Rollover Increase because of a prior quarter's
               SG&A Deficit Amount) exceeds the

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               applicable SG&A Quarterly Amount, the SG&A Quarterly Amount for
               the two succeeding quarters shall be reduced in the aggregate by
               an amount equal to the applicable SG&A Excess Amount, and

          -    to the extent the SG&A in any one quarter (excluding the amount
               of SG&A due to any Rollover Decrease because of a prior quarter's
               SG&A Excess Amount) is less than the applicable SG&A Quarterly
               Amount, the SG&A Quarterly Amount for the two succeeding quarters
               shall be increased in the aggregate by an amount equal to the
               applicable SG&A Deficit Amount,

       -  In no event shall the amount expended by the Issuer and its
          Subsidiaries on SG&A in any calendar year ending after the Issue Date
          exceed the SG&A Annual Amount.

     LIMITATIONS ON CAPITAL EXPENDITURES

     The Issuer must observe the following covenants with respect to Capital
Expenditures by the Issuer and its Subsidiaries:

       -  For the first calendar quarter in 2003, Capital Expenditures of the
          Issuer and its Subsidiaries shall not exceed the Q1-2003 CapEx Amount,
          and for each other calendar quarter in 2003, Capital Expenditures of
          the Issuer and its Subsidiaries shall not exceed the Q2,3,4-2003 CapEx
          Amount, subject, however, to the following carryforward and carryback
          provisions:

          -    to the extent Capital Expenditures in the first calendar quarter
               of 2003 (excluding the amount of Capital Expenditures due to any
               Rollover Increase because of a prior quarter's CapEx Deficit
               Amount) exceed the Q1-2003 CapEx Amount or to the extent Capital
               Expenditures in any other calendar quarter of 2003 (excluding the
               amount of Capital Expenditures due to any Rollover Increase
               because of a prior quarter's CapEx Deficit Amount) exceed the
               Q2,3,4-2003 CapEx Amount, as applicable, the CapEx Quarterly
               Amount for the two succeeding quarters shall be decreased in the
               aggregate by an amount equal to the applicable CapEx Excess
               Amount, and

          -    to the extent Capital Expenditures in the first calendar quarter
               of 2003 (excluding the amount of Capital Expenditures due to any
               Rollover Decrease because of a prior quarter's CapEx Excess
               Amount) fall below the Q1-2003 CapEx Amount or to the extent
               Capital Expenditures in any other calendar quarter of 2003
               (excluding the amount of Capital Expenditures due to any Rollover
               Decrease because of a prior quarter's CapEx Excess Amount) fall
               below the Q2,3,4-2003 CapEx Amount, as applicable, the CapEx
               Quarterly Amount for the two succeeding quarters shall be
               increased in the aggregate by an amount equal to the applicable
               CapEx Deficit Amount.

       -  In no event shall the Capital Expenditures of the Issuer and its
          Subsidiaries for calendar year 2003 exceed the 2003 CapEx Amount.

       -  For each calendar quarter in calendar year 2004 and each calendar
          quarter in any following calendar year, Capital Expenditures of the
          Issuer and its Subsidiaries shall not exceed the applicable 2004-Plus
          CapEx Quarterly Amount, subject, however, to the following
          carryforward and carryback provisions:

          -    to the extent Capital Expenditures in any such quarter (excluding
               the amount of Capital Expenditures due to any Rollover Increase
               because of a prior quarter's CapEx Deficit Amount) exceed the
               applicable 2004-Plus CapEx Quarterly Amount, the 2004-Plus CapEx
               Quarterly Amount for the two succeeding quarters shall be
               decreased in the aggregate by an amount equal to the applicable
               CapEx Excess Amount, and

          -    to the extent the Capital Expenditures in any such quarter
               (excluding the amount of Capital Expenditures due to any Rollover
               Decrease because of a prior quarter's CapEx Excess Amount) fall
               below the applicable 2004-Plus CapEx Quarterly Amount, the
               2004-Plus CapEx Quarterly Amount for the two succeeding quarters
               shall be increased in the aggregate by an amount equal to the
               applicable CapEx Deficit Amount.

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          -    In no event shall the Capital Expenditures of the Issuer and its
               Subsidiaries for calendar year 2004 or any following calendar
               year exceed the 2004-Plus CapEx Annual Amount.

         With respect to the limitations on Capital Expenditures set forth
above, the Issuer will be allowed to reallocate capacity for making up to an
aggregate of $3 million of Capital Expenditures which are to be used for
satisfying capital calls with respect to non-operating mineral interests of the
Issuer and its Subsidiaries for development expenses with respect to such
non-operating mineral interests as follows:

          -    any such reallocation will increase the annual permissible
               Capital Expenditures by the amount of such reallocation for the
               calendar year to which such reallocation was made, and will
               decrease the annual permissible Capital Expenditures by the
               amount of such reallocation for the calendar year from which such
               reallocation was made;

          -    the amount reallocated to a calendar year must be allocated by
               the Issuer to the calendar quarters within that calendar year to
               increase the permissible Capital Expenditures for such calendar
               quarters, and the amount reallocated from a calendar year must be
               allocated by the Issuer to the calendar quarters within that
               calendar year to decrease the permissible Capital Expenditures
               for such calendar quarters.

          -    any amount reallocated to a particular period (i.e., to a
               particular calendar year or a particular calendar quarter) can be
               used only for Capital Expenditures to satisfy capital calls with
               respect to non-operating mineral interests of the Issuer and its
               Subsidiaries for development expenses with respect to such
               non-operating mineral interests

     LIMITATION ON TAX SHARING ARRANGEMENTS

     Neither the Issuer nor any of its Subsidiaries may enter into any
agreement, arrangement or understanding with respect to liability for payment or
sharing of any other Person's taxes, including any tax sharing or similar
arrangement, except to the extent of any covenant pursuant to which funds or
money actually paid or transferred to or from the Issuer or its Subsidiary, as
the case may be, are thereupon actually used to pay the applicable taxes.

     LIMITATION ON USES OF CASH

     The indenture provides that the Issuer and its Subsidiaries will make cash
expenditures only for the following and only to the extent not otherwise
prohibited by the terms of the indenture:

     -    Qualified Lease Operating Costs, SG&A costs, taxes (e.g., income,
          severance, ad valorem, franchise) in each case not prohibited by the
          terms of the indenture;

     -    cash interest requirements;

     -    Capital Expenditures not prohibited by the terms of the indenture;

     -    any oil and gas hedge settlements requiring a cash payment from the
          Issuer pursuant to oil and gas hedge agreements entered into (a)
          pursuant to approval by the Board of Directors of the Issuer, (b) in
          the ordinary course of business, and (c) to provide protection against
          oil and gas price fluctuations with respect to reasonably anticipated
          oil and gas production of the Issuer and its Subsidiaries and not for
          the purpose of speculating;

     -    any payment to reduce debt to the extent such payment is not
          prohibited by the terms of the indenture, provided that the average
          days outstanding for payables paid shall not be less than the greater
          of (a) 45 days and (b) the industry standard therefor, subject to
          adjustment by the Board of Directors of the Issuer;

     -    payments due to the settling of a natural gas balancing deficiency not
          to exceed $45,000 in the aggregate in any calendar year unless a
          higher amount is approved by the Board of Directors of the Issuer;

     -    payment of judgments rendered by a court of law;

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     -    assessments issued by any governmental entity;

     -    additional cash expenditures not to exceed $2 million in the aggregate
          in any calendar year; provided, however, that the Issuer and its
          Subsidiaries may make aggregate cash expenditures in excess of $2
          million in any calendar year under this provision if the Board of
          Directors of the Issuer approves such expenditures;

     -    obligations under the Senior Credit Agreement and Qualified Senior
          Affiliate Indebtedness including, but not limited to, fees and
          expenses incurred in connection therewith and fees related to any
          amendment, waiver, consent or similar actions taken by the agent and
          lenders related thereto (the payment of which obligations will not be
          prohibited by the terms of the indenture); and

     -    payment of any Stark Fees.

     PROCEEDS FROM ISSUANCES OF EQUITY AND SUBORDINATED DEBT

               The Issuer may issue common equity, or preferred equity with no
maturity or required or allowed cash dividend, at any time and may use the net
proceeds from any such issuance in any manner consistent with other provisions
of the indenture. Such net proceeds will not be included in the calculation of
Excess Cash Flow.

               The Issuer may also issue preferred equity with a maturity or
required or allowed cash dividends if such issuance complies with the following
requirements:

          -    no portion of any such equity may be redeemed or repurchased or,
               except as permitted pursuant to the third bullet point, have any
               other cash distribution or dividend until the notes are
               completely repaid,

          -    at least 50% of the proceeds of such issuance must immediately be
               used to Pay Down Debt, and

          -    no cash dividends can be paid on such equity unless:

               -    at least 75% of such proceeds are used to Pay Down Debt,

               -    the cash dividend payable to the holders of such equity does
                    not exceed the Cash Coupon on the notes, and

               -    the holders of the notes receive in cash (in full) current
                    interest payments due and payable.

     The Issuer and its Subsidiaries may also incur Subordinated Indebtedness
that complies with the following requirements (such Indebtedness is referred to
as "Permitted Subordinated Indebtedness"):

          -    no portion of any principal of any such Subordinated Indebtedness
               may be repaid, or refinanced if such refinancing results in a
               shorter Weighted Average Life to Maturity or in the terms of such
               Subordinated Indebtedness being less favorable to the holders of
               the notes, until the notes are completely repaid,

          -    at least 50% of the proceeds of such issuance must immediately be
               used to Pay Down Debt, and

          -    no cash interest can be paid on such Subordinated Indebtedness
               unless:

               -    at least 75% of such proceeds are used to Pay Down Debt,

               -    the cash portion of any interest payable to the holders of
                    such Subordinated Indebtedness does not exceed the Cash
                    Coupon on the notes, and

               -    the holders of the notes receive in cash (in full) current
                    interest payments due and payable.

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     ACCOUNTING

     The Issuer will keep its financial accounts in accordance with GAAP and,
except as GAAP may require, consistent with past practices.

     FARMOUTS

     The indenture provides that the Issuer and its Subsidiaries will be able to
enter into and perform with respect to farmouts covering any of their
undeveloped wells and properties, provided that the Issuer must, prior to any
properties being transferred pursuant to such farmout, obtain written
confirmation from F. John Stark, III stating that such farmout is in the best
interests of the holders of the notes, and file the same with the Trustee,
further provided that such written confirmation will not be required for any
farmout with a farmout value (as determined as provided below) of less than
$100,000, but the total aggregate farmout value of farmouts so exempted from the
written confirmation requirement cannot exceed $500,000 in any twelve calendar
month period. For the purposes of this provision, the value of a farmout will be
the portion of the capital commitments made by the farmee(s) under the farmout
relating to the interests of the Issuer or its Subsidiaries being farmed out.
The Issuer anticipates entering into a retainer arrangement with F. John Stark,
III in connection with his services with respect to such written confirmations,
with such retainer arrangement calling for the payment to him of fees for his
services with respect to such written confirmations (the "Stark Fees"), with the
Stark Fees being excluded from the calculation of SG&A.

     In addition, the indenture provides that the Issuer and its Subsidiaries
will be able to enter into and perform farmouts not complying with the preceding
paragraph if consent to such farmout is obtained from the holders of not less
than a majority of the principal amount of the then outstanding notes issued
under the indenture.

     Furthermore, the indenture provides that the farmout referenced in the
Purchase and Sale Agreement dated November 21, 2002 between the Issuer, as
seller, and PrimeWest Gas Inc., as purchaser, as the Farmout Agreement and
included as Schedule P in such agreement, are permitted farmouts under the
indenture.

     Farmouts permitted by the preceding three paragraphs are referred to as
"Permitted Farmout Agreements." The following shall apply to each Permitted
Farmout Agreement:

     -    the applicable portions of Liens of the security documents securing
          the notes will be released with respect to the undeveloped wells
          and/or properties that are subject to such Permitted Farmout
          Agreement, provided that all retained interests of the Issuer and the
          Subsidiaries in such wells and/or properties will remain subject to
          such Liens;

     -    such Permitted Farmout Agreement will be deemed not to be an Asset
          Sale, including, but not limited to, the purchase options in the
          farmout agreements referenced above in connection with the November
          21, 2002 Purchase and Sale Agreement with PrimeWest Gas Inc.;

     -    obligations of the Issuer and its Subsidiaries under such Permitted
          Farmout Agreement that constitute Indebtedness will be Permitted
          Indebtedness so long as any such Indebtedness is non-recourse with
          respect to the Issuer and its Subsidiaries and their properties and
          assets other than the wells and/or properties that are the subject of
          such Permitted Farmout Agreement; and

     -    to the extent such Permitted Farmout Agreement would constitute an
          Investment by the Issuer or any of its Subsidiaries, such Investment
          will be a Permitted Investment.

     CEO NOTE OPTIONS

     The Issuer may issue to its Chief Executive Officer (the "Issuer's CEO")
options to purchase notes ("CEO Note Options") as follows:

  -  Issuance to the Issuer's CEO on the Issue Date of options to purchase
     $750,000 principal amount of notes for the market price therefor at the
     Issue Date;

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  -  Issuance to the Issuer's CEO of options to purchase $250,000 principal
     amount of notes for the market price therefor at the Issue Date if the
     notes trade for greater than 70% of the face amount thereof for 60
     consecutive trading days, with the first of such consecutive 60 days being
     in January of 2003;

  -  Issuance to the Issuer's CEO of options to purchase $500,000 principal
     amount of notes for the market price therefor at the Issue Date if the
     notes trade for greater than 70% of the face amount thereof for any 60
     consecutive trading days during the first 365 calendar days after the Issue
     Date; and

  -  Issuance to the Issuer's CEO of options to purchase $250,000 principal
     amount of notes for the market price therefor at the Issue Date if the
     notes trade for greater than 90% of the face amount thereof for any 60
     consecutive trading days during the 365 calendar day period commencing on
     the 366th day after the Issue Date, provided that if the condition set
     forth in the previous bullet point is not achieved, the amount applicable
     for this bulletin point shall be increased from $250,000 to $750,000.

     For determining consecutive trading days with respect to the notes, a
trading day will be a day on which there are at least $500,000 in aggregate
principal amount of notes traded and either Jefferies & Company, Inc., or its
successor, or Imperial Capital, LLC, or its successor, (as long as they did not
execute the trade) confirms to the Issuer that the trade was in the context of
the market.

     LIMITATION ON ABRAXAS WAMSUTTER, LTD.

     So long as the Issuer continues to have a partnership interest in Abraxas
Wamsutter, Ltd., the Issuer will not permit Abraxas Wamsutter, Ltd. to be an
operating entity.

     CONDUCT OF BUSINESS IN THE INTERIM PERIOD

     The Issuer shall have, and shall have caused its Subsidiaries to conduct
business consistent with past practices during the interim period between the
date that the Offer to Exchange was made and the Issue Date.

     CALCULATION OF ORIGINAL ISSUE DISCOUNT

     The Issuer will file with the Trustee promptly at the end of each calendar
year (a) a written notice specifying the amount of original issue discount
accrued on the outstanding notes as of the end of such year and (b) such other
specific information relating to such original issue discount as may then be
relevant under the Internal Revenue Code or applicable U.S. Treasury regulation.

EVENTS OF DEFAULT

     Each of the following is an "Event of Default":

     -    the failure to pay interest on any notes when the same becomes due and
          payable;

     -    the failure to pay the principal on any notes, when such principal
          becomes due and payable, at maturity, upon redemption or otherwise
          (including the failure to make a payment to purchase notes tendered
          pursuant to a Change of Control Offer or to Pay Down Debt in
          connection with an Asset Sale);

     -    a default in the observance or performance of any other covenant or
          agreement contained in the indenture which default continues for a
          period of 30 days after the Issuer or any Subsidiary Guarantor
          receives written notice specifying the default (and demanding that
          such default be remedied) from the Trustee or the holders of at least
          25% of the outstanding principal amount of the notes (except in the
          case of a default with respect to observance or performance of any of
          the terms or provisions of the covenants described above under "Change
          of Control" or "Merger, Consolidation and Sale of Assets" or
          "Limitation on Asset

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          Sales" which will constitute an Event of Default with such notice
          requirement but without such passage of time requirement);

     -    a default under any mortgage, indenture or instrument under which
          there may be issued or by which there may be secured or evidenced any
          Indebtedness of the Issuer or of any Subsidiary (or the payment of
          which is guaranteed by the Issuer or any Subsidiary), whether such
          Indebtedness now exists or is created after the Issue Date, which
          default:

               (A)  is caused by a failure to pay principal of or premium, if
                    any, or interest on such Indebtedness after any applicable
                    grace period provided in such Indebtedness (a "payment
                    default"), or

               (B)  results in the acceleration of such Indebtedness prior to
                    its express maturity,

                and, in each case, the principal amount of any such
           Indebtedness, together with the principal amount of any other such
           Indebtedness under which there has been a payment default or the
           maturity of which has been so accelerated, aggregates at least
           $2,000,000.00;

     -    one or more judgments in an aggregate amount in excess of
          $2,000,000.00 (unless covered by insurance by a reputable insurer as
          to which the insurer has acknowledged coverage) are rendered against
          the Issuer or any of its Subsidiaries and such judgments remain
          undischarged, unvacated, unpaid or unstayed for a period of 60 days
          after such judgment or judgments become final and non-appealable;

     -    certain events of bankruptcy; or

     -    any of the Guarantees or any of the security documents ceases to be in
          full force and effect or any of the Guarantees or any of the security
          documents is declared to be null and void or invalid and unenforceable
          or any of the Subsidiary Guarantors denies or disaffirms its liability
          under its Guarantees (other than by reason of release of a Subsidiary
          Guarantor in accordance with the terms of the indenture) or any
          obligor or any Related Person denies or disaffirms its liability under
          any security document to which it is a party.

     If any Event of Default (other than the Event of Default relating to
certain events of bankruptcy) occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of outstanding notes may declare the
principal of, premium, if any, and accrued and unpaid interest on all the notes
to be due and payable by notice in writing to the Issuer and the Trustee
specifying the Event of Default and that it is a "notice of acceleration", and
the same shall become immediately due and payable. If an Event of Default
relating to certain events of bankruptcy occurs and is continuing, then all
unpaid principal of, and premium, if any, and accrued and unpaid interest on all
of the outstanding notes will be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.

     After a declaration of acceleration with respect to the notes as described
in the preceding paragraph, the holders of a majority in principal amount of the
notes may rescind and cancel such declaration if:

     -    the rescission would not conflict with any judgment or decree;

     -    all existing Events of Default have been cured or waived except
          nonpayment of principal or interest that has become due solely because
          of such acceleration;

     -    to the extent the payment of such interest is lawful, interest on
          overdue installments of interest and overdue principal, which has
          become due otherwise than by such declaration of acceleration, has
          been paid;

     -    the Issuer has paid the Trustee its reasonable compensation and
          reimbursed the Trustee for its expenses, disbursements and advances;
          and

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     -    the Trustee shall have received an officer's certificate and an
          opinion of counsel that such Event of Default has been cured or waived
          in the event of the cure or waiver of an Event of Default relating to
          certain events of bankruptcy.

     No such rescission shall affect any subsequent Default or impair any right
consequent thereto.

     Prior to the declaration of acceleration of the notes, the holders of a
majority in principal amount of the notes may waive any existing Default or
Event of Default under the indenture, and its consequences, except a default in
the payment of the principal of or interest on any notes.

     Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture and under the Trust Indenture Act. During the
existence of an Event of Default, the Trustee is required to exercise such
rights and powers vested in it under the indenture and use the same degree of
care and skill in its exercise thereof as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs. Subject to the
provisions of the indenture relating to the duties of the Trustee, whether or
not an Event of Default shall occur and be continuing, the Trustee is under no
obligation to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless such holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
indenture, the Intercreditor Agreement and applicable law, the holders of a
majority in aggregate principal amount of the then outstanding notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee.

     The Issuer is required to provide an officer's certificate to the Trustee
promptly upon any such officer obtaining knowledge of any Default or Event of
Default (provided that such officers shall provide such certification at least
annually whether or not they know of any Default or Event of Default) that has
occurred and, if applicable, describe such Default or Event of Default and the
status thereof.

POSSESSION, USE AND RELEASE OF COLLATERAL

     Unless an Event of Default shall have occurred and be continuing, the
Issuer and the Subsidiary Guarantors will have the right to remain in possession
and retain exclusive control of the Collateral securing the notes (other than
any cash, securities, obligations and Cash Equivalents constituting part of the
Collateral and deposited with the Trustee in the Collateral Account or with the
Senior Credit Facility Representative and other than as set forth in the
security documents), to freely operate the Collateral and to collect, invest and
dispose of any income thereon.

     RELEASE OF COLLATERAL

     Upon compliance by the Issuer with the conditions set forth below in
respect of any sale, transfer or other disposition, the Trustee will release the
Released Interests (as defined below) from the Lien of the indenture and the
security documents and reconvey the Released Interests to the Issuer or the
grantor of the Lien on such property. The Issuer will have the right to obtain a
release of items of Collateral (the "Released Interests") subject to any sale,
transfer or other disposition, or owned by a Subsidiary the Capital Stock of
which is sold in compliance with the indenture such that it ceases to be a
Subsidiary, or that is the subject of a farmout allowed by the terms of the
indenture, upon compliance with the condition that the Issuer deliver to the
Trustee the following:

     -    a notice from the Issuer requesting the release of Released Interests:

               (A) describing the proposed Released Interests,

               (B) specifying the value of such Released Interests or such
          Capital Stock, as the case may be, on a date within 60 days of the
          Issuer notice (the "Valuation Date"),

               (C) stating that the consideration to be received is at least
          equal to the fair market value of the Released Interests, provided
          that this clause (C) is not applicable with

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          respect to a release to be given in connection with a farmout
          permitted pursuant to the indenture,

               (D) stating that the release of such Released Interests will not
          interfere with the Trustee's ability to realize the value of the
          remaining Collateral and will not impair the maintenance and operation
          of the remaining Collateral,

               (E) confirming the sale or exchange of, or an agreement to sell
          or exchange, such Released Interests or such Capital Stock, as the
          case may be, is a bona fide sale to or exchange with a Person that is
          not an Affiliate of the Issuer or, in the event that such sale or
          exchange is to or with a Person that is an Affiliate, confirming that
          such sale or exchange is made in compliance with the provisions
          summarized in the description of certain covenants under "Limitation
          on Transactions with Affiliates," provided that this clause (E) is not
          applicable with respect to a release to be given in connection with a
          farmout permitted pursuant to the indenture,

               (F) in the event there is to be a contemporaneous substitution of
          property for the Collateral subject to the sale, transfer or other
          disposition, specifying the property intended to be substituted for
          the Collateral to be disposed of; and

               (G) with respect to a release to be given in connection with a
          farmout permitted pursuant to the indenture stating that the farmout
          to which the released interests are (or are to be) subject complies
          with the indenture;

-    an officer's certificate of the Issuer stating that:

               (A) such sale, transfer or other disposition complies with the
          terms and conditions of the indenture, including the provisions
          summarized in the description of certain covenants under " Limitation
          on Asset Sales," "Limitation on Transactions with Affiliates,"
          "Farmouts" and "Limitation on Restricted Payments" above, to the
          extent any of the foregoing are applicable,

               (B) all Net Cash Proceeds from the sale, transfer or other
          disposition of any of the Released Interests or such Capital Stock, as
          the case may be, will be applied pursuant to the provisions of the
          indenture in respect of the deposit of proceeds into the Collateral
          Account or with the Senior Credit Facility Representative as
          contemplated by the indenture and in respect of Asset Sales, to the
          extent applicable, provided that this clause (B) is not applicable
          with respect to a release to be given in connection with a farmout
          permitted pursuant to the indenture,

               (C) there is no Default or Event of Default in effect or
          continuing on the date thereof or the date of such sale, transfer or
          other disposition,

               (D) the release of the Collateral will not result in a Default or
          Event of Default under the indenture,

               (E) upon delivery of such officer's certificate, all conditions
          precedent in the indenture relating to the release in question will
          have been complied with,

               (F) such sale, transfer or other disposition is not between the
          Issuer or any Subsidiary or between Subsidiaries, provided that this
          clause (F) is not applicable with respect to a release to be given in
          connection with a farmout permitted pursuant to the indenture, and

               (G) such sale, transfer or other disposition is not a sale,
          transfer or other disposition that is excluded from the definition of
          "Asset Sale" because it was a sale, lease, conveyance, disposition or
          other transfer of all or substantially all of the assets of the Issuer
          in a transaction which was made in compliance with the provisions of
          the

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          covenants described under "Merger, Consolidation and Sale of Assets,"
          provided that this clause (G) is not applicable with respect to a
          release to be given in connection with a farmout permitted pursuant to
          the indenture; and

     -  all documentation required by the Trust Indenture Act, if any, prior
        to the release of Collateral by the Trustee and, in the event there is
        to be a contemporaneous substitution of property for the Collateral
        subject to such sale, transfer or other disposition, all documentation
        necessary to effect the substitution of such new Collateral.

     Notwithstanding the provisions described above, so long as no Event of
Default shall have occurred and be continuing, the Issuer may, without
satisfaction of the conditions described above, dispose of Hydrocarbons or other
mineral products for value in the ordinary course and engage in any number of
ordinary course activities in respect of the Collateral, in limited dollar
amounts specified by the Trust Indenture Act, upon satisfaction of certain
conditions. For example, among other things, subject to certain dollar
limitations and conditions, the Issuer would be permitted to:

     -    sell or otherwise dispose of any property subject to the Lien of the
          indenture and the security documents, which may have become worn out
          or obsolete;

     -    abandon, terminate, cancel, release or make alterations in or
          substitutions of any leases or contracts subject to the Lien of the
          indenture or any of the security documents;

     -    surrender or modify any franchise, license or permit subject to the
          Lien of the indenture or any of the security documents which it may
          own or under which it may be operating;

     -    alter, repair, replace, change the location or position of and add to
          its structures, machinery, systems, equipment, fixtures and
          appurtenances;

     -    demolish, dismantle, tear down or scrap any obsolete Collateral or
          abandon any portion thereof; and

     -    grant leases or sub-leases in respect of real property to the extent
          the foregoing does not constitute an Asset Sale.

DEPOSIT; USE AND RELEASE OF TRUST MONEYS

     The Net Cash Proceeds associated with any Asset Sale and any Net Cash
Proceeds associated with any sale, transfer or other disposition of Collateral,
to the extent such sale, transfer or other disposition is not an Asset Sale by
virtue of clause (F) of the definition thereof, insurance proceeds with respect
to any Collateral and condemnation (or similar) proceeds with respect to any
Collateral shall be deposited so long as any Indebtedness under the Senior
Credit Agreement or any Qualified Senior Affiliate Indebtedness remains
outstanding, with the Senior Credit Facility Representative and otherwise into a
securities account maintained by the Trustee at its corporate trust offices or
at any securities intermediary selected by the Trustee having a combined capital
and surplus of at least $250,000,000 and having a long-term debt rating of at
least "A3" by Moody's and at least "A--" by S&P styled the "Abraxas Collateral
Account" (such account being the "COLLATERAL ACCOUNT") which shall be under the
exclusive dominion and control of the Trustee. All amounts on deposit in the
Collateral Account shall be treated as financial assets and cash funds on
deposit in the Collateral Account may be invested by the Trustee, at the
direction of the Issuer, in Cash Equivalents. The Issuer will not have the right
to withdraw funds or assets from the Collateral Account except in compliance
with the terms of the indenture and all assets credited to the Collateral
Account shall be subject to a Lien in favor of the Trustee and the holders.

     Any funds deposited with the Trustee may be released to the Issuer by its
delivering to the Trustee an officer's certificate stating:

     -    no Event of Default has occurred and is continuing as of the date of
          the proposed release;

                    (A) if such Trust Moneys represent Collateral Proceeds in
               respect of an Asset Sale, that such funds are otherwise being
               applied in accordance with the covenant "Limitation on Asset
               Sales" above, or

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                    (B) if such Trust Moneys represent proceeds in respect of a
               casualty, expropriation or taking, such funds will be applied to
               repair or replace property subject of a casualty or condemnation
               or reimburse the Issuer for amounts spent to repair or replace
               such property and that attached thereto are invoices or other
               evidence reflecting the amounts spent or to be spent, or

                    (C) if such Trust Moneys represent proceeds derived from any
               other manner, that such amounts are being utilized in connection
               with business of the Issuer and its Subsidiaries in compliance
               with the terms of the indenture; and

     -    all conditions precedent in the indenture relating to the release in
          question have been complied with; and

     -    all documentation required by the Trust Indenture Act, if any, prior
          to the release of such Trust Moneys by the Trustee has been delivered
          to the Trustee.

     Notwithstanding the foregoing,

     -    if the maturity of the notes has been accelerated, and the
          acceleration has not been rescinded as permitted by the indenture, the
          Trustee shall apply the Trust Moneys credited to the Collateral
          Account, subject to the rights of the Senior Credit Facility Lenders
          under the Intercreditor Agreement, to pay the principal of, premium,
          if any and accrued and unpaid interest on the notes to the extent of
          such Trust Moneys;

     -    if the Issuer so elects, by giving written notice to the Trustee, the
          Trustee shall apply Trust Moneys credited to the Collateral Account
          to the payment of interest due on any interest payment date; and

     -    if the Issuer so elects, by giving written notice to the Trustee,
          the Trustee shall apply Trust Moneys credited to the Collateral
          Account to Pay Down Debt.

LEGAL DEFEASANCE AND COVENANT DEFEASANCE

     As long as the Issuer takes steps to make sure that holders will
receive all of their payments under the notes and are able to transfer the
notes, the Issuer can elect to legally release itself and any of the Subsidiary
Guarantors for any Obligations on the notes (called "LEGAL DEFEASANCE") other
than:

     -    the rights of holders to receive payments from the trust described
          below in respect of the principal of, premium, if any, and interest
          on the notes when such payments are due;

     -    the Issuer's obligations with respect to the notes to issue temporary
          notes, register notes, replace mutilated, destroyed, lost or stolen
          notes and the maintenance of an office or agency for payments;

     -    the rights, powers, trust, duties and immunities of the Trustee; and

     -    the Legal Defeasance provisions of the indenture.

     In addition, the Issuer may, at its option and at any time, elect to have
the obligations of the Issuer and the Subsidiary Guarantors, if any, released
with respect to certain covenants that are described in the indenture ("COVENANT
DEFEASANCE"). In the event Covenant Defeasance occurs, certain events (other
than non-payment, bankruptcy, receivership, reorganization and insolvency events
and maintenance of the Guarantees) described under "Events of Default" will no
longer constitute an Event of Default with respect to the notes. The occurrence
of either Legal Defeasance or Covenant Defeasance would result in a release of
all Collateral from the Lien of the indenture and the security documents.

     In order to exercise either Legal Defeasance or Covenant Defeasance:

     -    the Issuer must irrevocably deposit with the Trustee, in trust, for
          the benefit of the holders cash in U.S. dollars and/or non-callable
          U.S. government obligations in such amounts as will

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          be sufficient, in the opinion of a nationally recognized firm of
          independent public accountants, to pay the principal of, premium, if
          any, and interest on the notes at maturity or redemption, as the case
          may be:

       -  in the case of Legal Defeasance, the Issuer must deliver to the
          Trustee an opinion of counsel in the United States reasonably
          acceptable to the Trustee confirming that:

                    (A) the Issuer has received from, or there has been
             published by, the Internal Revenue Service a ruling, or

                    (B) since the Issue Date, there has been a change in the
             applicable federal income tax law,

               in either case to the effect that the holders will not recognize
          income, gain or loss for federal income tax purposes as a result of
          such Legal Defeasance and will be subject to federal income tax on the
          same amounts, in the same manner and at the same times as would have
          been the case if such Legal Defeasance had not occurred;

       -  in the case of Covenant Defeasance, the Issuer must deliver to the
          Trustee an opinion of counsel in the United States reasonably
          acceptable to the Trustee confirming that the holders will not
          recognize income, gain or loss for federal income tax purposes as a
          result of such Covenant Defeasance and will be subject to federal
          income tax on the same amounts, in the same manner and at the same
          times as would have been the case if such Covenant Defeasance had not
          occurred;

       -  no Default or Event of Default shall have occurred and be continuing
          on the date of such deposit or insofar as Events of Default from
          bankruptcy or insolvency events are concerned, at any time in the
          period ending on the 91st day after the date of deposit;

       -  such Legal Defeasance or Covenant Defeasance shall not result in a
          breach or violation of, or constitute a default under the indenture or
          any other agreement or instrument to which the Issuer or any of its
          Subsidiaries is a party or by which the Issuer or any of its
          Subsidiaries is bound;

       -  the Issuer must deliver an officer's certificate to the Trustee
          stating that the deposit was not made by the Issuer with the intent of
          preferring the holders over any other creditors of the Issuer or with
          the intent of defeating, hindering, delaying or defrauding any other
          creditors of the Issuer or others;

       -  the Issuer must deliver an officer's certificate and an opinion of
          counsel to the Trustee, each stating that all conditions precedent
          provided for or relating to the Legal Defeasance or the Covenant
          Defeasance, as the case may be, have been complied with; and

       -  the Issuer must deliver an opinion of counsel to the Trustee to the
          effect that after the 91st day following the deposit, the trust funds
          will not be subject to the effect of any applicable bankruptcy,
          insolvency, reorganization or similar laws affecting creditors' rights
          generally.

SATISFACTION AND DISCHARGE

     The Issuer and the Subsidiary Guarantors will have no further obligations
under the indenture, the security documents and the Guarantees as to all
outstanding notes, other than surviving rights of registration of transfer or
exchange of the notes, when:

       -  either

                    (A) all the notes have been delivered to the Trustee for
            cancellation except for (i) lost, stolen or destroyed notes which
            have been replaced or paid, and (ii) notes for whose payment money
            has been deposited in trust by the Issuer or segregated and held in
            trust by the Issuer and thereafter repaid to the Issuer or
            discharged from such trust, or

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                    (B) all notes not theretofore delivered to the Trustee for
            cancellation have become due and payable, or are to become due and
            payable within 180 days, and the Issuer has deposited with the
            Trustee funds sufficient to pay and discharge the entire
            Indebtedness on such notes at maturity or redemption, as the case
            may be;

       -  the Issuer has paid all other sums payable under the indenture by the
          Issuer; and

       -  the Issuer has delivered to the Trustee an officer's certificate and
          an opinion of counsel stating that the Issuer has complied with all
          conditions precedent under the indenture relating to the satisfaction
          and discharge of the indenture.

MODIFICATION OF THE INDENTURE

     From time to time, the Issuer, the Subsidiary Guarantors and the Trustee,
without the consent of the holders, may amend the indenture, the notes, the
Guarantees, the Intercreditor Agreement or any security document for certain
specified purposes, including curing ambiguities, defects or inconsistencies, to
comply with any requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act or to make any
change that would provide any additional benefit or rights to the holders or
that does not adversely affect the rights of any holder. In formulating its
opinion on such matters, the Trustee will be entitled to rely on such evidence
as it deems appropriate, including, without limitation, solely on an opinion of
counsel.

     Other modifications and amendments of the indenture, the notes, the
Guarantees, the Intercreditor Agreement or any security document may be made
with the consent of the holders of not less than a majority of the principal
amount of the then outstanding notes issued under the indenture, except that,
without the consent of each holder affected thereby, no amendment may:

       -  reduce the amount of notes whose holders must consent to an amendment;

       -  reduce the rate of or change or have the effect of changing the time
          for payment of interest, including defaulted interest, on any notes or
          reduce the amount of liquidated damages payable under the registration
          rights agreement;

       -  reduce the principal of or change or have the effect of changing the
          fixed maturity of any notes, or change the date on which any notes may
          be subject to redemption or repurchase, or reduce the redemption or
          repurchase price therefor;

       -  make any notes payable in a currency other than that stated in the
          notes;

       -  make any change in provisions of the indenture, the notes, the
          Guarantees, the Intercreditor Agreement or any security document
          protecting the right of each holder to receive payment of principal of
          and interest on such new secured note on or after the due date thereof
          or to bring suit to enforce such payment, or permitting holders of a
          majority in principal amount of notes to waive Defaults or Events of
          Default;

       -  amend, change or modify in any material respect the obligation of the
          Issuer to make and consummate a Change of Control Offer in the event
          of a Change of Control or to Pay Down Debt with respect to any Asset
          Sale that has been consummated or modify any of the provisions or
          definitions with respect thereto;

       -  modify or change any provision of the indenture, the notes, the
          Guarantees, the Intercreditor Agreement, any security document or the
          related definitions affecting ranking of the notes or any Guarantee in
          a manner which adversely affects the holders; or

       -  release any Subsidiary Guarantor from any of its obligations under its
          Guarantee, in any case otherwise than in accordance with the terms of
          the indenture.

     Notwithstanding the foregoing, the indenture will provide that a farmout
not otherwise qualifying as a Permitted Farmout Agreement is a Permitted Farmout
Agreement if consent to such farmout is obtained from the holders of not less
than a majority of the principal amount of the then outstanding notes issued
under the indenture, as described in the discussion above entitled "Farmouts."

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     The provisions of the Intercreditor Agreement may not be amended without
the consent of the Senior Credit Facility Representative.

GOVERNING LAW

     The indenture, the notes, the Guarantees and the security documents are
governed by, and construed in accordance with, the laws of the State of New
York, except to the extent the laws of another jurisdiction may be mandatorily
applicable to certain matters under the security documents.

CONCERNING THE TRUSTEE

     U.S. Bank, N.A. acts as Trustee. Its address is 180 East Fifth Street,
Saint Paul, Minnesota 55101, attn: Corporate Trust Department.

     Except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the indenture. During
the existence of an Event of Default, the Trustee will exercise such rights and
powers vested in it by the indenture, and use the same degree of care and skill
in its exercise as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.

     The indenture and the provisions of the Trust Indenture Act incorporated by
reference into the indenture contain certain limitations on the rights of the
Trustee, should it become a creditor of the Issuer or any Subsidiary Guarantor,
to obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
Trust Indenture Act, the Trustee is permitted to engage in other transactions.
If the Trustee acquires any conflicting interest as described in the Trust
Indenture Act after a Default has occurred and is continuing, it must eliminate
such conflict or resign.

CERTAIN DEFINITIONS

     Set forth below is a summary of certain of the defined terms to be used in
the indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.

     "2003 CAPEX AMOUNT" equals the lesser of $15 million and the 2003 CapEx
Annual Budget.

     "2003 CAPEX ANNUAL BUDGET" equals the 2003 Closing CapEx Ratio multiplied
by Total Assets at December 31, 2003.

     "2003 CLOSING CAPEX RATIO" equals, for calendar year 2003, (a) $15 million
or such lower amount budgeted prior to the Issue Date by the Issuer for Capital
Expenditures for such calendar period, divided by (b) Total Assets at the end of
the calendar quarter in which the Issue Date occurs.

     "2004-PLUS CAPEX ANNUAL AMOUNT" equals for any annual calendar period, the
lesser of $10 million and the 2004-Plus CapEx Annual Budget.

     "2004-PLUS CAPEX ANNUAL BUDGET" equals, for any annual calendar period,
2004-Plus Closing CapEx Ratio multiplied by the Total Assets at the start of
such calendar period.

     "2004-PLUS CAPEX QUARTERLY AMOUNT" equals, the lesser of $2.5 million and
one quarter of the 2004-Plus CapEx Annual Amount.

     "2004-PLUS CLOSING CAPEX RATIO" equals, for any annual calendar period
starting January 1, 2004, (a) $10 million or such lower amount budgeted prior to
the Issue Date by the Issuer for Capital Expenditures for such calendar period,
divided by (b) the Total Assets at the end of the calendar quarter in which the
Issue Date occurs.

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     "ACQUIRED INDEBTEDNESS" means Subordinated Indebtedness of a Person or any
of its Subsidiaries the incurrence of which does not violate the terms of the
indenture:

     (1) existing at the time such Person becomes a Subsidiary of the Issuer or
at the time it merges or consolidates with the Issuer or any of its
Subsidiaries, or

     (2) which becomes Indebtedness of the Issuer or any of its Subsidiaries in
connection with the acquisition of assets from such Person.

     Acquired Indebtedness does not include Indebtedness incurred in connection
with, or in anticipation or contemplation of, such Person becoming a Subsidiary
of the Issuer or such acquisition, merger or consolidation.

     "ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means (without duplication), as
of the date of determination the sum of:

     (1) Discounted future net revenues from the proved oil and gas reserves of
the Issuer and its Subsidiaries, calculated in accordance with SEC guidelines,
but before any state or federal income tax, as estimated by a nationally
recognized firm of independent petroleum engineers as of a date no earlier than
the date of the Issuer's latest annual consolidated financial statements.

     Discounted future net revenues will be increased under clauses (a) and (b)
below and decreased under clauses (c) and (d) below, as of the date of
determination, by the estimated discounted future net revenues, calculated in
accordance with SEC guidelines but before any state of federal income taxes and
utilizing the prices utilized in the Issuer's year-end reserve report, from:

          (a) estimated proved oil and gas reserves acquired since the date of
     the Issuer's year-end reserve report;

          (b) estimated oil and gas reserves attributable to upward revisions of
     estimates of proved oil and gas reserves since the date of the Issuer's
     year-end reserve report due to exploration, development or exploitation
     activities,

          (c) estimated proved oil and gas reserves produced or disposed of
     since the date of the Issuer's year-end reserve report; and

          (d) estimated oil and gas reserves attributable to downward revisions
     of estimates of proved oil and gas reserves since the date of the Issuer's
     year-end reserve report due to changes in geological conditions or other
     factors which would, in accordance with standard industry practice, cause
     such revisions.

     In the case of each of the determinations made under clauses (a) through
(d), all increases and decreases will be as estimated by the Issuer's petroleum
engineers, except that in the event that there is a Material Change as a result
of acquisitions, dispositions or revisions, then the discounted future net
revenues utilized for purposes of this clause will be confirmed by a nationally
recognized firm of independent petroleum engineers.

     (2) The capitalized costs that are attributable to the oil and gas
properties of the Issuer and its Subsidiaries to which no proved oil and gas
reserves are attributable, based on the books and records of the Issuer and its
Subsidiaries as of a date no earlier than the date of the Issuer's latest annual
or quarterly financial statements.

     (3) The Net Working Capital plus cash of the Issuer and its Subsidiaries on
a date no earlier than the date of the Issuer's latest consolidated annual or
quarterly financial statements.

     (4) The greater of

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                    (a) the net book value of other tangible assets of the
     Issuer and its Subsidiaries on a date no earlier than the date of the
     Issuer's latest consolidated annual or quarterly financial statements, or

                    (b) the appraised value, as estimated by independent
     appraisers, of other tangible assets of the Issuer and its Subsidiaries as
     of a date no earlier than the date of the Issuer's latest audited financial
     statements.

     Minus the sum of

          (1) Minority interests; and

          (2) Any gas balancing liabilities as reflected in the Issuer's latest
              audited financial statements.

     Calculations of "Adjusted Consolidated Net Tangible Assets" will also give
effect, on a pro forma basis, to:

     -    Any Investment in another Person that becomes Subsidiary and which is
          not prohibited by the indenture, to and including the date of the
          transaction for which the calculation is necessary.

     -    The acquisition, to and including the date of the transaction, of any
          business or assets, including Permitted Industry Investments.

     -    Any sales or other dispositions of assets permitted by the indenture
          (except for sales of Hydrocarbons or other mineral products in the
          ordinary course of business) occurring on or after the date of the
          transaction.

     "ADJUSTED ISSUE PRICE" means an amount for the most recent accrual period
equal to the initial issue price of the notes increased by the amount of
original issue discount previously includable in the gross income of a holder,
reduced by the amount of any payment previously made on the notes other than a
payment of qualified stated interest on the notes.

     "AFFILIATE" of any specified Person means,

     (1) any other Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or under common control with, such
specified Person; and

     (2) any Related Person of such Person.

     For purposes of this definition, the term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.

     "ASSET ACQUISITION" means:

     (1) an Investment by the Issuer or any Subsidiary in any other Person in
which such Person becomes a Subsidiary, or merges with the Issuer or any
Subsidiary; or

     (2) the acquisition by the Issuer or any Subsidiary of the assets of any
Person (other than a Subsidiary) which constitute all or substantially all of
the assets of such Person or comprise any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.

     "ASSET SALE" means any sale, issuance, conveyance, transfer, exchange,
lease (other than operating leases entered into in the ordinary course of
business consistent with past practices), assignment or other transfer for value
by the Issuer or any Subsidiary to any Person other than the Issuer or any
Subsidiary of:

     (1) any Capital Stock of any Subsidiary; or

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     (2) any other property or assets of the Issuer or any Subsidiary and any
interests therein, including any disposition by a merger, consolidation or
similar transaction.

     For purposes of this definition, the term "Asset Sale" does not include:

     (A) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Issuer in a transaction which is made in
compliance with the provisions of the covenant described in "Merger,
Consolidation and Sale of Assets;"

     (B) disposals or replacements of obsolete equipment in the ordinary course
of business;

     (C) the sale, lease, conveyance, disposition or other transfer of assets or
property to the Issuer or one or more Wholly Owned Subsidiaries;

     (D) any disposition of Hydrocarbons or other mineral products for value in
the ordinary course of business;

     (E) the abandonment, surrender, termination, cancellation, release, lease
or sublease of undeveloped oil and gas properties in the ordinary course of
business or oil and gas properties which are not capable of production in
economic quantities;

  or

     (F) the sale, lease, conveyance, disposition or other transfer by the
Issuer or any Subsidiary of assets or property in the ordinary course of
business if the total fair market value of all the assets and property sold,
leased, conveyed, disposed or transferred since the Issue Date under this
exception does not exceed $200,000.00 in any one year.

     "AVAILABLE PROCEEDS AMOUNT" means:

     (1) The sum of all Collateral Proceeds and all Non-Collateral Proceeds
remaining after application to repay any Indebtedness secured by the assets that
are the subject of the Asset Sale giving rise to such Non-Collateral Proceeds.

     (2) For the purpose of determining whether the Issuer must Pay Down Debt in
connection with an Asset Sale and for determining the amount of such offer an
amount equal to the amount set forth under clause (1) above minus the total
amount of all of those Asset Sale proceeds previously spent in compliance with
the terms of the section described under "Deposit; Use and Release of Trust
Moneys."

     "CAPEX DEFICIT AMOUNT" equals, in any calendar quarter, the amount by which
the Capital Expenditures in any such calendar quarter (excluding the amount of
Capital Expenditures due to any Rollover Decrease because of a prior quarter's
CapEx Excess Amount) is less than the applicable CapEx Quarterly Amount.

     "CAPEX EXCESS AMOUNT" equals, in any calendar quarter, the amount by which
Capital Expenditures in any such quarter (excluding the amount of Capital
Expenditures due to any Rollover Increase because of a prior quarter's CapEx
Deficit Amount) exceed the applicable CapEx Quarterly Amount.

     "CAPEX QUARTERLY AMOUNT" means the Q1-2003 CapEx Amount, the Q2,3,4-2003
CapEx Amount or the 2004-Plus CapEx Quarterly Amount, as applicable.

     "CAPITAL EXPENDITURES" means, for any period, any direct or indirect
expenditure made in such period, in each case, whether expensed or capitalized,
in respect of the use of assets, including all Drilling Expenditures, and shall
include all investments and cash expenses and other cash outflows of the Issuer
and its Subsidiaries related to any Permitted Investments including but not
limited to those relating to joint ventures, royalty arrangements, off-balance
sheet financing, and farmout expenditures made by the Issuer or its
Subsidiaries, and expenditures made in such period in any Investment other than
Investments in cash

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equivalents or government backed securities, but excluding from the definition
of "Capital Expenditures" any expenditures by the Issuer or any of its
Subsidiaries to the extent the source of funds for which expenditures was the
proceeds of an equity offering by the Issuer consummated after the Issue Date or
the proceeds of any Subordinated Indebtedness incurred by the Issuer or any of
its Subsidiaries after the Issue Date in compliance with the terms of the
indenture, and further excluding from the definition of "Capital Expenditures"
any expenditures by the Issuer or any of its Subsidiaries to the extent such
expenditures constitute SG&A not prohibited by the terms of the indenture, and
further excluding from the definition of "Capital Expenditures" any expenditures
by the Issuer or any of its Subsidiaries for Qualified Lease Operating Costs.

     "CAPITALIZED LEASE OBLIGATION" means the discounted present value of the
rental obligations under a lease or similar agreement that is required to be
classified and accounted for as a capital lease under GAAP.

     "CAPITAL STOCK" means:

     (1) with respect to a corporation, any and all shares, interests,
participations or other equivalents of corporate stock, including each class of
common stock and Preferred Stock and including any warrants, options or rights
to acquire any of the foregoing and instruments convertible into any of the
foregoing, and

     (2) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.

     "CASH COUPON" means 11 1/2% or such higher coupon payable in cash to the
holders of the notes pursuant to the indenture.

     "CASH EQUIVALENTS" means:

     (1) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States Government or issued by one of its agencies and backed by
the full faith and credit of the United States, in each case maturing within one
year from the date of acquisition;

     (2) marketable direct obligations issued by any state of the United States
of America or any of its political subdivisions or public instrumentalities
maturing within one year from the date of acquisition and, at the time of
acquisition, having one of the two highest ratings obtainable from either S&P or
Moody's;

     (3) commercial paper maturing no more than one year from its date of
creation and, at the time of acquisition, having a rating of at least A-1 from
S&P or at least P-1 from Moody's;

     (4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition issued by any domestic bank or any United
States branch of a foreign bank having capital and surplus of at least
$250,000,000;

     (5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered into
with any bank meeting the qualifications specified in clause (4) above; and

     (6) money market mutual or similar funds having assets in excess of
$100,000,000.

     "CHANGE OF CONTROL" means the occurrence of any of the following:

     (1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Issuer to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act;

     (2) the adoption of any plan or proposal for the liquidation or dissolution
of the Issuer;

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     (3) any Person or group becomes the owner, directly or indirectly,
beneficially or of record, of shares representing more than 35% of the aggregate
ordinary voting power represented by the issued and outstanding Capital Stock of
the Issuer; or

     (4) the replacement of a majority of the Board of Directors of the Issuer
over a two-year period from the directors who constituted the Board of Directors
of the Issuer at the beginning of such period with directors whose replacement
was not approved by a vote of at least a majority of the Board of Directors of
the Issuer then still in office who either were members at the beginning of such
period or whose election as a member was previously so approved.

     "CLOSING SG&A RATIO" means, for any applicable calendar period, (a) $5
million or such lower amount budgeted prior to the Issue Date by the Issuer for
SG&A for such calendar period divided by (b) the Total Assets at the end of the
calendar quarter in which the Issue Date occurs.

     "COLLATERAL" means, collectively, all of the property and assets (including
Trust Moneys) that are from time to time subject to, or purported to be subject
to, the Lien of the indenture or any of the security documents.

     "COLLATERAL PROCEEDS" means any Net Cash Proceeds received from an Asset
Sale of Collateral.

     "CONSOLIDATED EBITDA" means, for any period, the sum (without duplication),
on a consolidated basis and determined in accordance with GAAP, of:

     (1) Consolidated Net Income, and

     (2) to the extent Consolidated Net Income has been reduced thereby,

               (a) all income taxes paid or accrued by the Issuer or any
     Subsidiary in accordance with GAAP for such period except for income taxes
     attributable to extraordinary, unusual or nonrecurring gains or losses or
     taxes attributable to sales or dispositions outside the ordinary course of
     business,

               (b) Consolidated Interest Expense,

               (c) the amount of any Preferred Stock dividends paid by the
     Issuer, and

               (d) Consolidated Non-cash Charges, less any non-cash items
     increasing Consolidated Net Income for such periods.

     "CONSOLIDATED EBITDA COVERAGE RATIO" means the ratio of:

     (1) Consolidated EBITDA during the four full fiscal quarters for which
financial information is available (the "Four Quarter Period") ending on or
prior to the date of the transaction giving rise to the need to calculate the
Consolidated EBITDA Coverage Ratio (the "Transaction Date") to;

     (2) Consolidated Fixed Charges for the Four Quarter Period.

     For purposes of this definition, "Consolidated EBITDA" and "Consolidated
Fixed Charges" will be calculated after giving effect, without duplication, on a
pro forma basis for the calculation period to:

     (1) the incurrence or repayment of

               (a) Indebtedness giving rise to the need to make such
     calculation, and

               (b) other Indebtedness, other than the incurrence or repayment of
     Indebtedness in the ordinary course of business for working capital
     purposes pursuant to working capital facilities,

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               occurring during the Four Quarter Period or at any time
     subsequent to the last day of the Four Quarter Period and on or prior to
     the Transaction Date, as if such incurrence or repayment, as the case may
     be, occurred on the first day of the Four Quarter Period, and

     (2) any Asset Sales or Asset Acquisitions occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
occurred on the first day of the Four Quarter Period. If the Issuer or any
Subsidiary guarantees Indebtedness of a third Person, the preceding sentence
will give effect to the incurrence of such guaranteed Indebtedness as if the
Issuer or such Subsidiary had directly incurred or otherwise assumed such
guaranteed Indebtedness.

     In addition, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of the Consolidated EBITDA
Coverage Ratio:

     (1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate equal to the rate of
interest on such Indebtedness in effect on the Transaction Date;

     (2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to have
been in effect during the Four Quarter Period;

     (3) notwithstanding clauses (1) and (2) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, will be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.

     "CONSOLIDATED EBITDA TO CASH INTEREST EXPENSE RATIO" means, with respect to
the last day of a particular fiscal quarter of the Issuer, the ratio of:

     (1) Consolidated EBITDA during such fiscal quarter to;

     (2) Consolidated Interest Expense paid in cash for such fiscal quarter.

     For purposes of this definition, "Consolidated EBITDA" and "Consolidated
Interest Expense" will be calculated after giving effect, without duplication,
on a pro forma basis for the calculation period to:

     (1) the incurrence or repayment of Indebtedness, other than the incurrence
or repayment of Indebtedness in the ordinary course of business for working
capital purposes pursuant to working capital facilities, occurring during the
relevant fiscal quarter as if such incurrence or repayment, as the case may be,
occurred on the first day of the relevant fiscal quarter, and

     (2) any Asset Sales or Asset Acquisitions occurring during the relevant
fiscal quarter as if such Asset Sale or Asset Acquisition occurred on the first
day of the relevant fiscal quarter. If the Issuer or any Subsidiary guarantees
Indebtedness of a third Person, the preceding sentence will give effect to the
incurrence of such guaranteed Indebtedness as if the Issuer or such Subsidiary
had directly incurred or otherwise assumed such guaranteed Indebtedness.

     In addition, in calculating "Consolidated Interest Expense" for purposes of
determining the denominator (but not the numerator) of the Consolidated EBITDA
to Cash Interest Expense Ratio:

     (1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the last day of the relevant fiscal quarter of the Issuer and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate equal to the rate of interest on such Indebtedness in effect on such
day;

     (2) if interest on any Indebtedness actually incurred on the last day of
the relevant fiscal quarter of the Issuer may optionally be determined at an
interest rate based upon a factor of a prime or similar rate, a

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eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on such day will be deemed to have been in effect during the relevant
fiscal quarter; and

     (3) notwithstanding clauses (1) and (2) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, will be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.

     "CONSOLIDATED FIXED CHARGES" means the sum, without duplication, of:

     (1) Consolidated Interest Expense including any premium or penalty paid in
connection with redeeming or retiring Indebtedness prior to the stated maturity,
and

     (2) the product of

               (a) the amount of all dividend payments on any series of the
     Issuer's Preferred Stock (other than dividends paid in Qualified Capital
     Stock) paid, accrued or scheduled to be paid or accrued during such period,
     times

               (b) a fraction, the numerator of which is one and the denominator
     of which is one minus the then current effective consolidated federal,
     state and local income tax rate of such Person, expressed as a decimal.

     "CONSOLIDATED INTEREST EXPENSE" for a period means the sum, without
duplication, of:

     (1) the total interest expense of the Issuer and its Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP, including

     (a) any amortization of original issue discount,

     (b) the net costs under Interest Swap Obligations,

     (c) all capitalized interest, and

     (d) the interest portion of any deferred payment obligation;

     plus

     (2) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Issuer and its Subsidiaries during
such period, as determined on a consolidated basis in accordance with GAAP.

     "CONSOLIDATED NET INCOME" means, with respect to the Issuer for any period,
the aggregate net income (or loss) of the Issuer and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP. The
following will, however, be excluded from such calculation:

     (1) after-tax gains from Asset Sales or abandonments or reserves relating
thereto,

     (2) after-tax items classified in accordance with GAAP as extraordinary or
nonrecurring gains,

     (3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Subsidiary or is merged or
consolidated with the Issuer or any Subsidiary,

     (4) the net income of any Subsidiary to the extent that the declaration of
dividends or similar distributions by that Subsidiary of that income is
restricted by charter, contract, operation of law or otherwise,

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     (5) the net income of any Person in which the Issuer or any Subsidiary has
an interest, other than a Subsidiary, except to the extent of cash dividends or
distributions actually paid to the Issuer or any Subsidiary by such Person,

     (6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued), and

     (7) in the case of a successor to the Issuer by consolidation or merger or
as a transferee of the Issuer's assets, any net income of the successor
corporation prior to such consolidation, merger or transfer of assets.

     "CONSOLIDATED NET WORTH" of any Person as of any date means

     (1) the consolidated stockholders' equity of such Person, determined on a
consolidated basis in accordance with GAAP, less (without duplication)

     (2) amounts attributable to Disqualified Capital Stock of such Person.

     "CONSOLIDATED NON-CASH CHARGES" means, for any period, total depreciation,
depletion, amortization and other non-cash expenses reducing Consolidated Net
Income for such period, determined on a consolidated basis in accordance with
GAAP, but excluding any such charges constituting an extraordinary item or loss
or any such charge which requires an accrual of or a reserve for cash charges
for any future period.

     "CONSOLIDATION" means, with respect to any Person, the consolidation of the
accounts of the Subsidiaries of such Person with those of such Person, all in
accordance with GAAP.

     "CRUDE OIL AND NATURAL GAS BUSINESS" means:

     (1) the acquisition, exploration, development, operation and disposition of
interests in oil, gas and other hydrocarbon properties located in North America,
and

     (2) the gathering, marketing, treating, processing, storage, selling and
transporting of any production from such interests or properties of the Issuer
or those of others.

     "CRUDE OIL AND NATURAL GAS HEDGE AGREEMENTS" means any oil and gas
agreements and other agreements or arrangements entered into by a Person in the
ordinary course of business and that is designed to provide protection against
oil and natural gas price fluctuations.

     "CRUDE OIL AND NATURAL GAS PROPERTIES" means all Properties, including
equity or other ownership interests in those Properties, owned by any Person
which have been assigned "proved oil and gas reserves" as defined in Rule 4-10
of Regulation S-X of the Securities Act as in effect on the Issue Date.

     "CRUDE OIL AND NATURAL GAS RELATED ASSETS" means any Investment or capital
expenditure (but not including additions to working capital or repayments of any
revolving credit or working capital borrowings) by the Issuer or any Subsidiary
which is related to the business of the Issuer and its Subsidiaries as it is
conducted on the date of the Asset Sale giving rise to the Net Cash Proceeds to
be reinvested.

     "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect against
fluctuations in currency values.

     "DEFAULT" means an event or condition that is, or with the lapse of time or
the giving of notice or both would be, an Event of Default.

     "DISQUALIFIED CAPITAL STOCK" means any Capital Stock which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily

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redeemable, pursuant to a sinking fund obligation or otherwise, or is
mandatorily redeemable at the sole option of the holder thereof, in whole or in
part, in either case, on or prior to the final maturity of the notes.

     "DRILLING EXPENDITURES" means any direct or indirect expenditure, in each
case, whether expensed or capitalized, in respect of drilling.

     "EASTSIDE COAL" means Eastside Coal Company, Inc., a Colorado corporation.

     "EXCESS CASH FLOW" means, for any period, Consolidated EBITDA of the Issuer
and its Subsidiaries for such period, minus any increase in the Net Working
Capital of the Issuer and its Subsidiaries from the beginning of such period to
the end of a such period or plus any decrease in the Net Working Capital of the
Issuer and its Subsidiaries from the beginning of such period to the end of a
such period (as the case may be), minus Capital Expenditures made by the Issuer
and its Subsidiaries during that period to the extent such Capital Expenditures
did not reduce Consolidated EBITDA, minus any cash interest paid by the Issuer
and its Subsidiaries during that period, minus any cash taxes paid by the Issuer
and its Subsidiaries during that period, minus any amount applied by the Issuer
and its Subsidiaries to Pay Down Debt during that period, minus (to the extent
included in Consolidated EBITDA) any proceeds received during that period from
any equity offering by the Issuer or from any Subordinated Indebtedness of the
Issuer or any of its Subsidiaries.

     "EQUITY OFFERING" means an offering of the Issuer's Qualified Capital
Stock.

     "FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Issuer acting reasonably and in good faith; PROVIDED, HOWEVER, that if the
aggregate non-cash consideration to be received by the Issuer or any Subsidiary
from any Asset Sale shall reasonably be expected to exceed $5,000,000, then fair
market value shall be determined by an Independent Advisor.

     "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.

     "HYDROCARBONS" means oil, gas, casing head gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all constituents, elements or compounds thereof and products processed
therefrom.

     "INDEBTEDNESS" means with respect to any Person, without duplication:

     (1) all Obligations for borrowed money,

     (2) all Obligations evidenced by bonds, debentures, notes or other similar
instruments,

     (3) all Capitalized Lease Obligations,

     (4) all Obligations for the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement but excluding trade accounts payable,

     (5) all Obligations for the reimbursement of any obligor on a letter of
credit, banker's acceptance or similar credit transaction,

     (6) guarantees and other contingent obligations in respect of Indebtedness
referred to in clauses (1) through (5) above and clause (8) below,

     (7) all Obligations of any other Person of the type referred to in clauses
(1) through (6) above which are secured by any Lien on any property or asset of
such Person, the amount of such

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Obligation being deemed to be the lesser of the fair market value of such
property or asset or the amount of the Obligation so secured,

     (8) all Obligations under Currency Agreements and Interest Swap
Obligations,

     (9) all Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed redemption price or repurchase price; and

     (10) all Obligations in respect of production payments and forward sales.

     For purposes of this definition:

     (1) the "maximum fixed repurchase price" of any Disqualified Capital Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if it were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
indenture, and if such price is based upon, or measured by, the fair market
value of the Disqualified Capital Stock, the fair market value shall be
determined reasonably and in good faith by the Board of Directors of the Issuer.

     (2) The "amount" or "principal amount" of Indebtedness at any time will be:

               (a) for any Indebtedness issued at a price that is less than its
     principal amount at maturity, the face amount of the liability,

               (b) for any Capitalized Lease Obligation, the amount determined
     in accordance with its definition above,

               (c) for any Interest Swap Obligations included in the definition
     of Permitted Indebtedness, zero,

               (d) for all other unconditional obligations, the amount
     determined in accordance with GAAP, and

               (e) for all other contingent obligations, the maximum liability
     at such date of such Person.

     "INDEPENDENT ADVISOR" means a reputable accounting, appraisal or nationally
recognized investment banking, engineering or consulting firm which:

     (1) does not, and whose directors, officers and employees or Affiliates do
not, have a direct or indirect material financial interest in the Issuer, and

     (2) in the judgment of the Board of Directors of the Issuer, is otherwise
disinterested, independent and qualified to perform the task for which it is to
be engaged.

     "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement to be dated on
or about the Issue Date entered into by the Senior Credit Facility
Representative and the Trustee and also acknowledged by the Issuer and certain
Subsidiaries of the Issuer, or any successor or replacement agreement, as such
agreement has been or may be amended (including any amendment and restatement
thereof), supplemented, replaced, restated or otherwise modified from time to
time.

     "INTEREST SWAP OBLIGATION" means obligations under interest rate swaps,
caps, floors, collars and similar agreements, whereby, directly or indirectly, a
Person is entitled to receive payments calculated by applying either a floating
or a fixed rate of interest on a stated notional amount in exchange for payments
made by another Person calculated by applying a fixed or a floating rate of
interest on the same notional amount.

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     "INVESTMENT" by a Person means any direct or indirect:

     (1) loan, advance or other extension of credit (including a guarantee) or
capital contribution to others,

     (2) purchase or acquisition of any Capital Stock, bonds, notes, debentures
or other securities or evidences of Indebtedness issued by another Person ,

     (3) guarantee or assumption of the Indebtedness of another Person (other
than the guarantee or assumption of Indebtedness of the Person or a Subsidiary
of the Person which is made in compliance with the provisions of "Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness" above), and

     (4) other items that would be classified as investments on a balance sheet
of such Person prepared in accordance with GAAP.

     Notwithstanding the foregoing, "Investment" excludes extensions of trade
credit on commercially reasonable terms in accordance with the normal trade
practices of the Issuer and its Subsidiaries. The amount of any Investment will
not be adjusted for increases or decreases in value, or write-ups, write-downs
or write-offs with respect to that Investment. If the Issuer or its Subsidiaries
sell or otherwise dispose of any Capital Stock of any Subsidiary such that,
after giving effect to any such sale or disposition, it ceases to be a
Subsidiary of the Issuer, the Issuer will be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Capital Stock of such Subsidiary not sold or disposed of.

     "ISSUE DATE" means the date of original issuance of the notes. "ISSUER"
means Abraxas Petroleum Corporation, a Nevada corporation.

     "ISSUER PROPERTIES" means all Properties, and equity, partnership or other
ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Issuer or any of its Subsidiaries, which business activities are not
prohibited by the terms of the indenture.

     "LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
floating or other charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).

     "MATERIAL CHANGE" means an increase or decrease of more than 10% during a
fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and gas reserves of the
Issuer and its Subsidiaries (before any state or federal income tax); PROVIDED,
HOWEVER, that the following will be excluded from the calculation of Material
Change:

     (1) any acquisitions during the quarter of oil and gas reserves that have
been estimated by independent petroleum engineers and on which a report or
reports exist,

     (2) any disposition of properties existing at the beginning of such quarter
that have been disposed of as provided in "Limitation on Asset Sales," and

     (3) any reserves added during the quarter attributable to the drilling or
recompletion of wells not included in previous reserve estimates, but which will
be included in future quarters.

     "MORTGAGE" means a mortgage or deed of trust dated as of the Issue Date
granted by the Issuer or any Subsidiary for the benefit of the Trustee and the
holders, as the same may be amended, supplemented or modified from time to time
in accordance with the terms thereof and of the indenture.

     "NET CASH PROCEEDS" means the proceeds in the form of cash or Cash
Equivalents including payments in respect of deferred payment obligations when
received in the form of cash or Cash Equivalents received by the Issuer or any
Subsidiary from any Asset Sale, sale, transfer or other disposition net of:

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     (1) reasonable out-of-pocket expenses and fees relating to such Asset Sale,
sale, transfer or other disposition (including, without limitation, legal,
accounting and investment banking fees and sales commissions),

     (2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements,

     (3) appropriate amounts (determined by the Chief Financial Officer of the
Issuer) to be provided by the Issuer or any Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any post closing adjustments or
liabilities associated with such Asset Sale, sale, transfer or other disposition
and retained by the Issuer or any Subsidiary, as the case may be, after such
Asset Sale, sale, transfer or other disposition, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, sale, transfer or other disposition (but excluding any payments
which, by the terms of the indemnities will not, be made during the term of the
notes), and

     (4) the aggregate amount of cash and Cash Equivalents so received which is
used to retire any then existing Indebtedness (other than Indebtedness under the
Senior Credit Agreement, Qualified Senior Affiliate Indebtedness or the notes)
which is secured by a Lien on the property subject of the Asset Sale, sale,
transfer or other disposition.

     "NET WORKING CAPITAL" means:

     (1) all current assets of the Issuer and its Subsidiaries, MINUS

     (2) all current liabilities of the Issuer and its Subsidiaries, except
current liabilities included in Indebtedness, MINUS

     (3) all cash of the Issuer and its Subsidiaries,

     in each case as set forth in the Issuer's financial statements prepared in
accordance with GAAP.

     "OBLIGATIONS" means any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.

     "OIL AND GAS ASSETS" means the Crude Oil and Natural Gas Properties and
natural gas processing facilities of the Issuer and/or any of its Subsidiaries.

     "PAY DOWN DEBT" means:

     -    first, making a payment under the Senior Credit Agreement with a
          permanent reduction of the indebtedness outstanding under the Senior
          Credit Agreement to the extent making a payment on the Senior Credit
          Agreement with a permanent reduction of the indebtedness outstanding
          under the Senior Credit Agreement is required under the terms of the
          Senior Credit Agreement and/or the Intercreditor Agreement,

     -    second, making a payment of principal and/or accrued interest on, or
          redeeming, exchanging, discharging, defeasing, or purchasing and
          retiring, notes in whole or in part, to the extent permitted by the
          Senior Credit Agreement and the Intercreditor Agreement,

     -    third, (i) first, making scheduled or mandatory paydowns on
          Indebtedness under the Senior Credit Agreement and paying down any
          term loans under the Senior Credit Agreement to the extent permitted
          by the Senior Credit Agreement, whether or not then due and payable
          ("Term Loan Paydowns"), and if all Term Loan Paydowns are made (the
          "Term Loan Amounts") so that such outstanding amounts under the Senior
          Credit Agreement have been paid down completely, then (ii) second, any
          amount remaining after payment of the Term Loan Amounts will be
          applied to outstanding amounts under any revolving credit tranche
          under the Senior

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          Credit Agreement for permanent reduction of the commitment under the
          revolving credit tranche, and if no amounts are outstanding under any
          such revolving credit tranche, then at that time the Issuer will
          terminate that credit facility, and

     -    fourth, making a payment of principal and/or accrued interest on, or
          redeeming, exchanging, discharging, defeasing, or purchasing and
          retiring, notes in whole or in part.

     "PERMITTED INDEBTEDNESS" means, without duplication, each of the following:

     (1) Indebtedness under the notes, the indenture, the Guarantees and the
security documents;

     (2) Obligations under Interest Swap Obligations covering Indebtedness if
these Interest Swap Obligations are entered into to protect against fluctuations
in interest rates on Indebtedness incurred in accordance with the indenture to
the extent the notional principal amount of such Interest Swap Obligations is
not greater than the principal amount of the Indebtedness to which such Interest
Swap Obligation relates;

     (3) Indebtedness of a Subsidiary to the Issuer or to a Wholly Owned
Subsidiary for so long as such Indebtedness is held by the Issuer or a Wholly
Owned Subsidiary, in each case subject to no Lien held by a Person other than
the Issuer or a Wholly Owned Subsidiary; PROVIDED, HOWEVER, that if as of any
date any Person other than the Issuer or a Wholly Owned Subsidiary owns or holds
any such Indebtedness or holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;

     (4) Indebtedness of the Issuer to a Wholly Owned Subsidiary for so long as
such Indebtedness is held by a Wholly Owned Subsidiary, in each case subject to
no Lien; PROVIDED, HOWEVER, that

               (a) any Indebtedness of the Issuer to any Wholly Owned Subsidiary
     that is not a Subsidiary Guarantor is unsecured and subordinated, pursuant
     to a written agreement, to the Issuer's Obligations under the indenture and
     the notes, and

               (b) if as of any date any Person other than a Wholly Owned
     Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
     of such Indebtedness, such date shall be deemed the incurrence of
     Indebtedness not constituting Permitted Indebtedness by the Issuer;

     (5) Indebtedness arising from a bank or other financial institution
inadvertently honoring a check, draft or similar instrument (except in the case
of daylight overdrafts) drawn against insufficient funds in the ordinary course
of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within
two Business Days of incurrence;

     (6) Indebtedness of the Issuer or any of its Subsidiaries represented by
letters of credit for the account of the Issuer or any such Subsidiary, as the
case may be, in order to provide security for workers' compensation claims,
payment obligations in connection with self-insurance or similar requirements in
the ordinary course of business;

     (7) Capitalized Lease Obligations and Purchase Money Indebtedness not
exceeding $2,000,000 at any one time outstanding;

     (8) Permitted Operating Obligations in an aggregate amount at any time
outstanding not to exceed $750,000;

     (9) Obligations arising in connection with Crude Oil and Natural Gas Hedge
Agreements with financial institutions (excluding forward sales and production
payments);

     (10) Indebtedness under Currency Agreements with financial institutions;
PROVIDED, HOWEVER, that in the case of Currency Agreements which relate to
Indebtedness, such Currency Agreements do not increase Indebtedness of the
Issuer and its Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;

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     (11) Additional Indebtedness in an aggregate principal amount at any time
outstanding not to exceed $500,000;

     (12) Indebtedness outstanding on the Issue Date except to the extent the
Indebtedness thereunder was taken up by the notes;

     (13) Indebtedness under the Senior Credit Agreement (including (i) any fees
and expenses incurred by the Issuer or any of its Subsidiaries incurred in
connection with the Senior Credit Agreement (including, but not limited to,
those owed to any Person not affiliated to the Issuer or any of its
Subsidiaries) in connection with any amendment (including any amendment and
restatement thereof), supplement, replacement, restatement or other modification
from time to time, including any agreements (and related instruments and
documents) extending the maturity of, refinancing, replacement or other
restructuring of all or any portion of the Indebtedness under such Senior Credit
Agreement (and related instruments and documents) or any successor or
replacement agreements (and related instruments and documents) and (ii) any
capitalized interest, fees, or other expenses incurred by the Issuer or any of
its Subsidiaries whether or not charged to a loan account or any similar account
created under the Senior Credit Agreement (clauses (i) and (ii), the "Related
Indebtedness")); provided, that the principal amount of the Indebtedness under
the Senior Credit Agreement (excluding the Related Indebtedness and excluding
any Qualified Senior Affiliate Indebtedness) shall not at any time exceed the
sum of (a) $50 million less the aggregate amount applied from time to time by
the Issuer or any of its Subsidiaries to repay the Senior Credit Agreement
Indebtedness which is accompanied by a corresponding permanent reduction of the
Revolver Commitment under the Senior Credit Agreement plus (b) (x) $15 million,
if the then applicable Revolver Commitment under the Senior Credit Agreement is
$25 million or greater, (y) $10 million, if the then applicable Revolver
Commitment under the Senior Credit Agreement is less than $25 million and
greater than or equal to $15 million or (z) $5 million, if the then applicable
Revolver Commitment under the Senior Credit Agreement is less than $15 million
("Indebtedness under the Senior Credit Agreement"); provided further that, the
aggregate amount that has been applied by the Issuer or any of its Subsidiaries
to repay the Indebtedness under the Senior Credit Agreement which was
accompanied by a corresponding permanent commitment reduction can be established
by the Issuer at any time by providing the Trustee with an officer's certificate
of the Issuer stating such amount;

     (14) Qualified Senior Affiliate Indebtedness; and

     (15) Permitted Subordinated Indebtedness.

     "PERMITTED INDUSTRY INVESTMENTS" means:

     (1) capital expenditures, including acquisitions of Issuer Properties and
interests therein;

     (2) (a) operating agreements, joint ventures, working interests, royalty
interests, mineral leases, unitization agreements, pooling arrangements or other
similar or customary agreements, transactions, properties, interests or
arrangements, and Investments and expenditures in connection with such
agreements, interests or arrangements, in each case made or entered into in the
ordinary course of the oil and gas business,

     and

               (b) exchanges of Issuer Properties for other Issuer Properties of
     at least equivalent value as determined in good faith by the Board of
     Directors of the Issuer; and

     (3) Investments of operating funds on behalf of co-owners of Crude Oil and
Natural Gas Properties pursuant to joint operating agreements.

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     "PERMITTED INVESTMENTS" means:

     (1) Investments by the Issuer or any Subsidiary in any Person that (i) is
or will become immediately after such Investment a Subsidiary or that will merge
or consolidate into the Issuer or a Subsidiary, and (ii) is not subject to any
Payment Restriction;

     (2) Investments in the Issuer by any Subsidiary; PROVIDED, HOWEVER, that
any Indebtedness evidencing any such Investment held by a Subsidiary that is not
a Subsidiary Guarantor is unsecured and subordinated, pursuant to a written
agreement, to the Issuer's Obligations under the notes and the indenture;

     (3) Investments in cash and Cash Equivalents;

     (4) Investments made by the Issuer or its Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance with
"Certain Covenants -- Limitation on Asset Sales" above;

     (5) Permitted Industry Investments; and

     (6) Investments in any Person so long as such Investments are made on an
arm's-length basis.

     "PERMITTED LIENS" means:

     (1) Liens arising under the indenture or the security documents;

     (2) Liens securing the notes;

     (3) Liens arising under the Senior Credit Agreement or the guarantees and
security documents entered into in connection with the Senior Credit Agreement,
and Liens securing Qualified Senior Affiliate Indebtedness;

     (4) Liens securing the Guarantees;

     (5) Liens for taxes, assessments or governmental charges or claims that are
either

               (a) not delinquent or

               (b) contested in good faith by appropriate proceedings and as to
     which the Issuer has set aside on its books such reserves as may be
     required pursuant to GAAP;

     (6) statutory and contractual Liens of landlords to secure rent arising in
the ordinary course of business to the extent such Liens relate only to the
tangible property of the lessee which is located on such property and Liens of
carriers, warehousemen, mechanics, builders, suppliers, materialmen, repairmen
and other Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made in respect thereof;

     (7) Liens incurred on deposits made in the ordinary course of business:

               (a) in connection with workers' compensation, unemployment
     insurance and other types of social security, including any Lien securing
     letters of credit issued in the ordinary course of business consistent with
     past practice in connection therewith, or

               (b) to secure the performance of tenders, statutory obligations,
     surety and appeal bonds, bids, leases, government contracts, performance
     and return-of-money bonds and other similar obligations (exclusive of
     obligations for the payment of borrowed money);

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     (8) easements, rights-of-way, zoning restrictions, restrictive covenants,
minor imperfections in title and other similar charges or encumbrances in
respect of real property not interfering in any material respect with the
ordinary conduct of the business of the Issuer and its Subsidiaries;

     (9) any interest or title of a lessor under any Capitalized Lease
Obligation not prohibited by the terms of the indenture; provided that such
Liens do not extend to any Property which is not leased Property subject to such
Capitalized Lease Obligation;

     (10) Liens securing reimbursement obligations, not to exceed $100,000 in
the aggregate at any time outstanding, with respect to commercial letters of
credit which encumber documents and other property relating to such letters of
credit and products and proceeds thereof;

     (11) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements, including rights
of offset and set-off;

     (12) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
indenture and Liens securing Crude Oil and Natural Gas Hedge Agreements;

     (13) statutory Liens on pipeline or pipeline facilities, Hydrocarbons or
Properties which arise out of operation of law;

     (14) royalties, overriding royalties, net profit interests, reversionary
interests, operating agreements and other similar interests, properties,
arrangements and agreements, all as ordinarily exist with respect to Properties
of the Issuer and its Subsidiaries or otherwise as are customary in the oil and
gas business, and all as relate to mineral leases and mineral interests of the
Issuer and its Subsidiaries;

     (15) any

               (a) interest or title of a lessor or sublessor under any lease,

               (b) restriction or encumbrance that the interest or title of such
     lessor or sublessor may be subject to (including, without limitation,
     ground leases or other prior leases of the demised premises, mortgages,
     mechanics' liens, builders' liens, tax liens, and easements), or

               (c) subordination of the interest of the lessee or sublessee
     under such lease to any restrictions or encumbrance referred to in the
     preceding clause (b);

     (16) Liens in favor of collecting or payor banks having a right of setoff,
revocation, refund or chargeback with respect to money or instruments on deposit
with or in possession of such bank;

     (17) judgment and attachment Liens not giving rise to an Event of Default;

     (18) Liens securing Acquired Indebtedness incurred in accordance with
"Certain Covenants -- Limitation on Incurrence of Additional Indebtedness"
above; PROVIDED, HOWEVER, that

     (19) such Liens secured such Acquired Indebtedness at the time of and prior
to the incurrence of such Acquired Indebtedness by the Issuer or a Subsidiary
and were not granted in connection with, or in anticipation of, the incurrence
of such Acquired Indebtedness by the Issuer or a Subsidiary, and

     (20) such Liens do not extend to or cover any property or assets of the
Issuer or of any of its Subsidiaries other than the property or assets that
secured the Acquired Indebtedness (and the proceeds of such property and assets)
prior to the time such Indebtedness became Acquired Indebtedness of the Issuer
or a Subsidiary and are no more favorable to the lienholders than those securing
the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness
by the Issuer or a Subsidiary.

     (21) Liens existing on the Issue Date;

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     (22) Liens securing Refinancing Indebtedness which is incurred to Refinance
any Indebtedness permitted under the indenture and which has been secured by a
Lien permitted under the indenture and which has been incurred in accordance
with the provisions of the indenture; PROVIDED, HOWEVER, that such Liens

               (a) are no less favorable to the holders and are not more
     favorable to the lienholders with respect to such Liens than the Liens in
     respect of the Indebtedness being Refinanced and

               (b) do not extend to or cover any Property of the Issuer or any
     of its Subsidiaries that would not have secured the Indebtedness so
     Refinanced under the terms of the documents governing the Liens securing
     the Indebtedness being Refinanced;

     (21) Liens securing Indebtedness of the Issuer or any Subsidiary in an
aggregate principal amount at any time outstanding not to exceed the sum of
$500,000.00; and

     (22) Permitted Farmout Agreements.

     "PERMITTED OPERATING OBLIGATIONS" means Indebtedness of the Issuer or any
Subsidiary in respect of one or more standby letters of credit, bid, performance
or surety bonds, or other reimbursement obligations, issued for the account of,
or entered into by, the Issuer or any Subsidiary in the ordinary course of
business consistent with past practices (excluding obligations related to the
purchase by the Issuer or any Subsidiary of Hydrocarbons for which the Issuer or
any Subsidiary has contracts to sell), or in lieu of any thereof or in addition
to any thereto, guarantees and letters of credit supporting any such obligations
and Indebtedness (in each case, other than for an obligation for borrowed money,
other than borrowed money represented by any such letter of credit, bid,
performance or surety bond, or reimbursement obligation itself, or any guarantee
and letter of credit related thereto).

     "PERSON" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.

     "PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.

     "PROPERTY" OR "PROPERTY" means, with respect to any Person, any interests
of such Person in any kind of property or asset, whether real, personal or
mixed, or tangible or intangible, including, without limitation, Capital Stock,
partnership interests and other equity or ownership interests in any other
Person.

     "PURCHASE MONEY INDEBTEDNESS" means Indebtedness the net proceeds of which
are used to finance the cost (including the cost of construction) of property or
assets acquired in the normal course of business by the Person incurring such
Indebtedness.

     "Q1-2003 BUDGET" equals the Q1-2003 Closing Budget Ratio multiplied by the
Total Assets at March 31, 2003.

     "Q1-2003 CAPEX AMOUNT" equals the lesser of $8 million and the Q1-2003
Budget.

     "Q1-2003 CLOSING BUDGET RATIO" equals (a) $8 million or such lower amount
budgeted prior to the Issue Date by the Issuer for Capital Expenditures for the
first calendar quarter of 2003 divided by (b) Total Assets at the end of the
calendar quarter in which the Issue Date occurs.

     "Q2,3,4-2003 BUDGET" equals, for each of the last three calendar quarters
of 2003, the applicable Q2,3,4-2003 Closing Budget Ratio multiplied by the Total
Assets at the start of the applicable calendar quarter in 2003.

     "Q2,3,4-2003 CAPEX AMOUNT" equals, for each of the last three calendar
quarters of 2003, the lesser of $2.5 million and the Q2,3,4-2003 Budget.

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     "Q2,3,4-2003 CLOSING BUDGET RATIO" equals, for each of the last three
calendar quarters of 2003, (a) $2.5 million or such lower amount budgeted prior
to the Issue Date by the Issuer for Capital Expenditures for such calendar
quarter divided by (b) Total Assets at the end of the calendar quarter in which
the Issue Date occurs.

     "QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.

     "QUALIFIED SENIOR AFFILIATE INDEBTEDNESS" means Indebtedness of the Issuer
to the Senior Credit Facility Representative, any Senior Credit Facility Lender
or any Affiliate of the Senior Credit Facility Representative or any such lender
in connection with (x) hedging activities (i.e., Indebtedness under Hedge
Agreements) or (y) cash management services entered into in the ordinary course
of business with any such Person (i.e., Indebtedness under Bank Products
Agreements).

     "QUALIFIED LEASE OPERATING COSTS" means lease operating costs reasonably
incurred in the ordinary course of business consistent with past practices and
industry standards pursuant to a budget approved by the Board of Directors of
the Issuer and relating to proved developed oil and gas properties.

     "REFINANCE" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part.

     "REFINANCING INDEBTEDNESS" means any Indebtedness that is the result of
Refinancing by the Issuer or any Subsidiary of Indebtedness incurred in
accordance with the covenant described in "Limitation on Incurrence of
Additional Indebtedness" above (other than pursuant to clause (1) (2), (3), (4),
(5), (6), (7), (8), (9), (10), (11), (12), or (15) of the definition of
Permitted Indebtedness), in each case that does not:

     (1) result in an increase in the total principal amount of Indebtedness of
the Issuer or such Subsidiary as of the date of such proposed Refinancing (other
than increases from any premium required to be paid under the terms of the
instrument governing such Indebtedness, capitalized interest, and the amount of
reasonable expenses incurred by the Issuer or such Subsidiary in connection with
such Refinancing, all of which are included in the term "Refinancing
Indebtedness"), or

     (2) create Indebtedness with

               (a) a Weighted Average Life to Maturity that is less than the
     Weighted Average Life to Maturity of the Indebtedness being Refinanced or

               (b) a final maturity earlier than the final maturity of the
     Indebtedness being Refinanced;

     PROVIDED, HOWEVER, that

                    (i) if such Indebtedness being Refinanced is Indebtedness
               solely of the Issuer or a Subsidiary Guarantor or is Indebtedness
               of the Issuer and any Subsidiary Guarantor or Subsidiary
               Guarantors, then such Refinancing Indebtedness shall be
               Indebtedness solely of the Issuer or such Subsidiary Guarantor or
               of the Issuer and such Subsidiary Guarantor or Subsidiary
               Guarantors, as the case may be, and

                    (ii) if such Indebtedness being Refinanced is subordinate or
               junior to the notes or a Guarantee, then such Refinancing
               Indebtedness shall be subordinate to the notes or such Guarantee,
               as the case may be, at least to the same extent and in the same
               manner as the Indebtedness being Refinanced.

     "RELATED PERSON" of any Person means any other Person directly or
indirectly owning 10% or more of the outstanding voting common stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the equity interest in such Person).

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     "RESTRICTED CASH" means, at any time, the lesser of (i) $5 million and (ii)
the minimum amount of cash required to be maintained at that time by the Issuer
pursuant to the terms of the Senior Credit Agreement.

     "ROLLOVER DECREASE" means, for a particular calendar quarter, the amount of
reduced availability of SG&A or Capital Expenditures, as the case may be, due to
any a prior quarter's SG&A Excess Amount or CapEx Excess Amount.

     "ROLLOVER INCREASE" means, for a particular calendar quarter, the amount of
increased availability of SG&A or Capital Expenditures, as the case may be, due
to any a prior quarter's SG&A Deficit Amount or CapEx Deficit Amount.

     "SANDIA" means Sandia Oil and Gas Company, a Texas corporation.

     "SANDIA OPERATING" means Sandia Operating Corp., a Texas corporation, and
Wholly-Owned Subsidiary of Sandia.

     "SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Issuer or any Subsidiary of any property, whether owned by the
Issuer or such Subsidiary at the Issue Date or later acquired which has been or
is to be sold or transferred by the Issuer or any Subsidiary to such Person or
to any other Person from whom funds have been or are to be advanced by such
Person on the security of such property.

     "SECURITY DOCUMENTS" means, collectively, the Mortgages and all security
agreements, mortgages, deeds of trust, collateral assignments or other
instruments evidencing or creating any security interests in favor of the
Trustee in all or any portion of the Collateral, in each case as amended,
supplemented or modified from time to time in accordance with their terms and
the terms of the indenture.

     "SENIOR CREDIT AGREEMENT" means the Loan and Security Agreement, dated as
of January 22, 2003, entered into by the Issuer and certain Subsidiaries of the
Issuer, and the lenders named therein, or any successor or replacement
agreements, whether with the same or any other lender, group of lenders,
trustee, agent, note holder or group of note holders, together with the related
documents thereto (including, without limitation, any promissory notes,
guarantee agreements, security documents), in each case as such agreements,
instruments and documents have been or may be amended (including any amendment
and restatement thereof), supplemented, replaced, restated or otherwise modified
from time to time, including any agreements (and related instruments and
documents) extending the maturity of, refinancing, replacing or otherwise
restructuring all or any portion of the Indebtedness under such agreements (and
related instruments and documents) or any successor or replacement agreements
(and related instruments and documents).

     "SENIOR CREDIT FACILITY LENDERS" means any holders of any Indebtedness
under the Senior Credit Agreement.

     "SENIOR CREDIT FACILITY REPRESENTATIVE" means the Person designated in the
Intercreditor Agreement as the Senior Credit Facility Representative with
respect to the Senior Credit Agreement.

     "SG&A" means, for any period, amounts expended by the Issuer and its
Subsidiaries on selling, general and administrative expenses (as determined in
accordance with GAAP consistent with past practices), but excluding (without
duplication with respect to such exclusions):

       -  costs and expenses of the Issuer incurred in connection with (i)
          issuing the notes and shares of common stock contemporaneously issued
          by the Issuer, (ii) obtaining the loan evidenced by the Senior Credit
          Agreement, and (iii) the sale of stock described under the discussion
          above entitled "Business--Recent Developments--Financial
          Restructuring--Sale of Stock of Canadian Abraxas and Old Grey Wolf,"

       -  legal and accounting fees not to exceed $40,000 in any calendar year
          incurred by the Issuer in connection with preparing and filing the
          reports, information and documents

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          required to be delivered to the Trustee as described above in the
          discussion entitled "Reports to Holders,"

       -  bonuses paid to officers and employees of the Issuer to the extent not
          in violation of the covenant described below in the discussion
          entitled "Transactions with Affiliates";

       -  expenditures with respect to any non-cash compensation to officers and
          employees of the Issuer and its Subsidiaries;

       -  amounts expended by the Issuer and its Subsidiaries on selling,
          general and administrative expenses for Canadian Abraxas and Old Grey
          Wolf; and

       -  the Stark Fees.

     "SG&A ANNUAL AMOUNT" equals, for any annual calendar period, the lesser of
$5 million and the SG&A Budget.

     "SG&A BUDGET" means, for any annual or quarter calendar period, as the case
may be, Closing SG&A Ratio multiplied by the Total Assets at the start of such
calendar period.

     "SG&A DEFICIT AMOUNT" means, for any calendar quarter, the amount by which
the SG&A in any such quarter (excluding the amount of SG&A due to any Rollover
Decrease because of a prior quarter's SG&A Excess Amount) is less than the
applicable SG&A Quarterly Amount.

     "SG&A EXCESS AMOUNT" means, for any calendar quarter, the amount by which
SG&A in any such quarter (excluding the amount of SG&A due to any Rollover
Increase because of a prior quarter's SG&A Deficit Amount) exceeds the
applicable SG&A Quarterly Amount.

     "SG&A QUARTERLY AMOUNT" means, for any calendar quarter, the lesser of (a)
$1.5 million and (b) one quarter of the SG&A Budget.

     "SUBORDINATED INDEBTEDNESS" means Indebtedness of the Issuer or a
Subsidiary Guarantor that is subordinated or junior in right of payment to the
notes, the relevant Guarantee and the security documents, as applicable, under a
written agreement to that effect.

     "SUBSIDIARY" means, with respect to any Person:

     (1) any corporation of which the outstanding Capital Stock having at least
a majority of the votes entitled to be cast in the election of directors under
ordinary circumstances shall at the time be owned, directly or indirectly, by
such Person, or

     (2) any other Person of which at least a majority of the voting interests
under ordinary circumstances is at the time, directly or indirectly, owned by
such Person, or

     (3) any other Person required to be consolidated with such Person for
financial reporting purposes under GAAP.

     "SUBSIDIARY GUARANTOR" means Sandia, Wamsutter, Sandia Operating, Western
Associated, Eastside Coal and New Grey Wolf and each of the Issuer's
Subsidiaries that in the future executes a supplemental indenture in which such
Subsidiary agrees to be bound by the terms of the indenture as a Subsidiary
Guarantor; PROVIDED, HOWEVER, that any Person constituting a Subsidiary
Guarantor as described above shall cease to constitute a Subsidiary Guarantor
when its Guarantee is released in accordance with the terms of the indenture.

     "TOTAL ASSETS" means, as of any date, total assets of the Issuer and its
Subsidiaries as reflected on the Issuer's consolidated balance sheet as of such
date prepared in accordance with GAAP.

     "TRUST MONEYS" means all cash or Cash Equivalents received by the Trustee:

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     (1) upon the release of Collateral from the Lien of the indenture and the
security documents, including investment earnings thereon; or

     (2) pursuant to the provisions of any Mortgage; or

     (3) as proceeds of any other sale or other disposition of all or any part
of the Collateral by or on behalf of the Trustee or any collection, recovery,
receipt, appropriation or other realization of or from all or any part of the
Collateral pursuant to the indenture or any of the security documents or
otherwise; or

     (4) for application under the indenture as provided for in the indenture or
the security documents, or whose disposition is not elsewhere specifically
provided for in the indenture or in the security documents;

PROVIDED, HOWEVER, that Trust Moneys shall not include any property deposited
with the Trustee pursuant to any Change of Control Offer, a payment to Pay Down
Debt or redemption or defeasance of any notes.

     "WESTERN ASSOCIATED" means Western Associated Energy Corporation, a Texas
corporation.

     "WAMSUTTER" means Wamsutter Holdings, Inc., a Wyoming corporation.

     "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:

     (1) the then outstanding aggregate principal amount of such Indebtedness
into

     (2) the sum of the total of the products obtained by multiplying:

               (a) the amount of each then remaining installment, sinking fund,
     serial maturity or other required payment of principal, including payment
     at final maturity, in respect thereof, by

               (b) the number of years (calculated to the nearest one-twelfth)
     which will elapse between such date and the making of such payment.

     "WHOLLY OWNED SUBSIDIARY" means any Subsidiary of which all the outstanding
voting securities normally entitled to vote in the election of directors are
owned by the Issuer or another Wholly Owned Subsidiary.

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                          DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

     Abraxas is currently authorized to issue up to 200,000,000 shares of common
stock, par value $.01 per share.

     As of February 6, 2003 there were 35,612,688 shares of Abraxas common stock
issued and outstanding. Holders of the common stock are entitled to cast one
vote for each share held of record on all matters submitted to a vote of
stockholders and are not entitled to cumulate votes for the election of
directors. Holders of common stock do not have preemptive rights to subscribe
for additional shares of common stock issued by Abraxas.

     Holders of the common stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally available therefore.
Under the terms of the first lien notes indenture and the second lien notes
indenture, Abraxas may not pay dividends on shares of its common stock. In the
event of liquidation, holders of the common stock are entitled to share pro rata
in any distribution of Abraxas' assets remaining after payment of liabilities,
subject to the preferences and rights of the holders of any outstanding shares
of preferred stock. All of the outstanding shares of the common stock are fully
paid and nonassessable.

     References herein to Abraxas' common stock include the common share
purchase rights distributed by Abraxas to its stockholders on November 17, 1994,
as long as they trade with the common stock. See "-- Stockholder Rights Plan"
beginning on page 130.

PREFERRED STOCK

     Abraxas' Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock, par value $.01 per share, in one or more
series. The Board of Directors is authorized, without any further action by the
stockholders, to determine the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences,
sinking fund terms and other rights, preferences, privileges and restrictions of
any series of preferred stock, the number of shares constituting any such
series, and the designation thereof. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of holders of
any preferred stock that may be issued in the future.

WARRANTS

     Abraxas has warrants outstanding to purchase an aggregate of 950,000 shares
of Abraxas common stock. Basil Street Company has warrants to purchase 750,000
shares at an exercise price of $3.50 per share and Jesup & Lamont Holdings, TNC,
Inc. and Charles K. Butler (collectively "Jesup, et al") have warrants to
purchase 200,000 shares at $3.50 per share. Basil Street and Jesup, et al have
certain registration rights with respect to shares of the Abraxas common stock
issued pursuant to the exercise of such warrants. See " -- Registration Rights"
beginning on page 133.

     All outstanding warrants contain provisions that protect Basil Street and
Jesup, et al against dilution by adjusting the price at which the warrants are
exercisable and the number of shares of the Abraxas common stock issuable upon
exercise thereof upon the occurrence of certain events, including payment of
stock dividends and distributions, stock splits, recapitalizations,
reclassifications, mergers or consolidations. A holder of warrants has no rights
as a stockholder of Abraxas until the warrants are exercised. All warrants are
currently exercisable, although none have been exercised as of the date hereof.

OPTION PLANS

     Pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock Option
Plan (the "ISO Plan"), the Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan (the "1993 Plan"), the Abraxas Petroleum Corporation 1994 Long
Term Incentive Plan (the "LTIP") Abraxas grants to Abraxas'

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employees and officers (including Abraxas' directors who are also employees)
incentive stock options and non-qualified stock options. The ISO Plan, the 1993
Plan, and the LTIP are administered by the compensation committee which, based
upon the recommendation of the Chief Executive Officer, determines the number of
shares subject to each option. As of January 31, 2003, there were options to
purchase 3,305,340 shares of Abraxas common stock outstanding, of which
2,136,149 were fully vested at an average exercise price of $1.91 per share.

     Effective as of the closing date of the exchange offer and subject to any
requirements under applicable law, the Abraxas Board of Directors has approved a
reduction in the exercise price of one-half of the options to purchase Abraxas
common stock held by Mr. Watson (320,282 options), and a reduction in the
exercise price of all of stock options previously issued to Abraxas employees
(approximately 1.8 million options). The exercise price on such options will be
reduced to the price at which a share of Abraxas common stock is trading on the
American Stock Exchange at 11:00 a.m. New York time on that date.

REGISTRATION RIGHTS

     Under the terms of their warrants, Basil Street and Jesup, et al have the
right to unlimited piggyback registrations. Abraxas has agreed to pay all
expenses in connection with piggyback registrations by Basil Street and Jesup,
et al, provided, however, all underwriting discounts and selling commissions
shall be borne by Basil Street and Jesup, et al.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND
BYLAWS

     Abraxas' Articles of Incorporation and Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. The Articles of Incorporation and Bylaws provide that
the Board of Directors will consist of not less than three nor more than twelve
members, with the exact number to be determined from time to time by the
affirmative vote of a majority of directors then in office. The Board of
Directors, and not the stockholders, has the authority to determine the number
of directors. This provision could prevent any stockholder from obtaining
majority representation on Abraxas' Board of Directors by enlarging the Board of
Directors and by filling the new directorships with the stockholder's own
nominees. In addition, directors may be removed by the stockholders only for
cause.

     The Articles of Incorporation and Bylaws provide that special meetings of
stockholders of Abraxas may be called only by the Chairman of the Board, the
President or a majority of the members of the Board of Directors. This provision
may make it more difficult for stockholders to take actions opposed by the Board
of Directors.

     The Articles of Incorporation and Bylaws provide that any action required
to be taken or which may be taken by holders of Abraxas common stock must be
effected at a duly called annual or special meeting of such holders, and may not
be taken by any written consent of such stockholders. These provisions may have
the effect of delaying consideration of a stockholder proposal until the next
annual meeting unless a special meeting is called by the persons set forth
above. The provisions of the Articles of Incorporation and Bylaws prohibiting
stockholder action by written consent could prevent the holders of a majority of
the voting power of Abraxas from using the written consent procedure to take
stockholder action and taking action by consent without giving all the
stockholders of Abraxas entitled to vote on a proposed action the opportunity to
participate in determining such proposed action.

STOCKHOLDER RIGHTS PLAN

     On November 17, 1994, the Board of Directors of Abraxas adopted a
stockholder rights plan (the "Stockholder Rights Plan"). Under the terms of the
Stockholder Rights Plan, the Board of Directors of Abraxas declared a dividend
of one common share purchase right ("Stockholder Right") on each share of the
Abraxas common stock outstanding on November 17, 1994. Each Stockholder Right
entitles the holder thereof to buy one share of Abraxas common stock at an
exercise price of $40 per share, subject to adjustment.

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     The Stockholder Rights are not exercisable until the occurrence of
specified events. Upon the occurrence of such an event (which events are
generally those which would signify the commencement of a hostile bid to acquire
Abraxas), the Stockholder Rights then become exercisable (unless redeemed by the
Board of Directors) for a number of shares of Abraxas common stock having a
market value of four times the exercise price of the Stockholder Right. If the
acquirer were to conclude the acquisition of Abraxas, the Stockholder Rights
would then become exercisable for shares of the controlling/surviving
corporation having a value of four times the exercise price of the Stockholder
Rights. If the Stockholder Rights were exercised at any time, significant
dilution would result, thus making the acquisition prohibitively expensive for
the acquirer. In order to encourage a bidder to negotiate with the Board of
Directors, the Stockholder Rights Plan provides that the Stockholder Rights may
be redeemed under prescribed circumstances by the Board of Directors.

     The Stockholder Rights are not intended to prevent a takeover of Abraxas
and will not interfere with any tender offer or business combination approved by
the Board of Directors. The Stockholder Rights Plan is intended to protect the
stockholders in the event of (a) an unsolicited offer to acquire Abraxas,
including offers that do not treat all stockholders equally, (b) the acquisition
in the open market of shares constituting control of Abraxas without offering
fair value to all stockholders and (c) other coercive takeover tactics which
could impair the Board's ability to fully represent the interests of the
stockholders.

ANTI-TAKEOVER STATUTES

     The Nevada General Corporation Law (the "Nevada GCL") contains two
provisions, described below as "Combination Provisions" and the "Control Share
Act," that may make more difficult the accomplishment of unsolicited or hostile
attempts to acquire control of a corporation through certain types of
transactions.

     Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Stockholders. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),
except those combinations which are approved by the board of directors before
the interested stockholder first obtained a 10% interest in the corporation's
stock. There are additional exceptions to the prohibition, which apply to
combinations if they occur more than three years after the interested
stockholder's date of acquiring shares. The Combination Provisions apply unless
the corporation elects against their application in its original articles of
incorporation or an amendment thereto, or in its bylaws. Abraxas' Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Combination Provisions inapplicable.

     Nevada Control Share Act. Nevada's Control Share Acquisition Act (the
"Control Share Act") imposes procedural hurdles on and curtails greenmail
practices of corporate raiders. The Control Share Act temporarily
disenfranchises the voting power of "control shares" of a person or group
("Acquiring Person") purchasing a "controlling interest" in an "issuing
corporation" (as defined in the Nevada GCL) not opting out of the Control Share
Act. In this regard, the Control Share Act will apply to an "issuing
corporation" unless, before an acquisition is made, the articles of
incorporation or bylaws in effect on the tenth day following the acquisition of
a controlling interest provide that it is inapplicable. Abraxas' Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.

     Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of Abraxas at the time of
the occurrence of a transaction governed by the Control Share Act (assuming that
Abraxas' Articles of Incorporation or Bylaws have not theretofore been amended
to include an opting out provision) would determine whether the Control Share
Act is applicable.

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     The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
interest," and (2) acquired within 90 days immediately preceding that date. A
"controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with
one-fifth) of all voting power of the corporation. The Acquiring Person may not
vote any control shares without first obtaining approval from the stockholders
not characterized as "interested stockholders" (as defined below).

     To obtain voting Rights in control shares, the Acquiring Person must file a
statement at the principal office of the issuer ("Offeror's Statement") setting
forth certain information about the acquisition or intended acquisition of
stock. The Offeror's Statement may also request a special meeting of
stockholders to determine the voting Rights to be accorded to the Acquiring
Person. A special stockholders' meeting must then be held at the Acquiring
Person's expense within 30 to 50 days after the Offeror's Statement is filed. If
a special meeting is not requested by the Acquiring Person, the matter will be
addressed at the next regular or special meeting of stockholders.

     At the special or annual meeting at which the issue of voting rights of
control shares will be addressed, "interested stockholders" may not vote on the
question of granting voting rights to control the corporation or its parent
unless the articles of incorporation of the issuing corporation provide
otherwise. Abraxas' Articles of Incorporation do not currently contain a
provision allowing for such voting power.

     If full voting power is granted to the Acquiring Person by the
disinterested stockholders, and the Acquiring Person has acquired control shares
with a majority or more of the voting power, then (unless otherwise provided in
the articles of incorporation or bylaws in effect on the tenth day following the
acquisition of a controlling interest) all stockholders of record, other than
the Acquiring Person, who have not voted in favor of authorizing voting rights
for the control shares, must be sent a notice advising them of the fact and of
their right to receive "fair value" for their shares. Abraxas' Articles of
Incorporation and Bylaws do not provide otherwise. Within 20 days of the mailing
of the notice, any such stockholder may demand to receive from the corporation
the "fair value" for all or part of his shares. "Fair value" is defined in the
Control Share Act as "not less than the highest price per share paid by the
Acquiring Person in an acquisition."

     The Control Share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the tenth day following the acquisition
of a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. Abraxas' Articles of Incorporation and Bylaws do not address this
matter.

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                     REGISTRATION RIGHTS; LIQUIDATED DAMAGES

SHELF REGISTRATION

     Pursuant to the registration rights agreement that we entered into with
Jefferies & Company, Inc., acting on behalf of the holders of the notes and
shares of common stock covered by this prospectus, we have filed a shelf
registration statement of which this prospectus is a part, covering resales of
the notes, any additional notes issued in lieu of cash interest payments and the
shares of Abraxas common stock issued in the financial restructuring exchange
offer. We will be permitted to withdraw the registration statement upon the
soonest of (1) the passage of two years following the date of closing of this
exchange offer, (2) the date on which all tendering noteholders have disposed of
all of the securities covered by such shelf registration statement, or (3) the
date that Jefferies & Company receives an opinion of counsel to Abraxas and the
guarantors that all of the securities covered by such shelf registration
statement may be sold under the provisions of Rule 144 without limitation as to
volume or manner of sale.

     If the registration statement of which this prospectus is a part ceases to
be effective or usable in connection with exchange or resales of the notes, any
additional notes issued in lieu of cash interest payments, and the common stock
during the periods specified in the registration rights agreement (and as
qualified by the exceptions described in such agreement), or if we fail to meet
other obligations under the registration rights agreement, then, as liquidated
damages for such default under the registration rights agreement, the interest
rate on the notes and any additional notes issued in lieu of cash interest
payments, with respect to the first 90 day period immediately following the
occurrence of such default under the registration rights agreement will
increase, by 3.5% per annum and will increase by an additional 0.5% per annum
with respect to each subsequent 30 day period until all such defaults have been
cured, up to a maximum per annum interest rate on such notes of 18% with respect
to all defaults under the registration rights agreement. All accrued liquidated
damages will be paid by Abraxas in the same manner and at the same time as
payments of interest on the notes and any additional notes issued in lieu of
cash interest payments. Following the cure of all defaults under the
registration rights agreement, the accrual of liquidated damages will cease. No
liquidated damages will be payable to holders of the common stock who do not
otherwise hold notes.

     With respect to the shelf registration statement of which this prospectus
is a part, holders of any securities to be covered by such registration
statement are required to deliver information to be used in connection with the
registration statement in order to have their securities included in the
registration statement and to benefit from the provisions regarding liquidated
damages set forth above, to the extent applicable. We are not responsible for
the failure of a selling security holder to provide accurate information in
connection with this prospectus.

EXCHANGE OFFER REGISTRATION

     Pursuant to the registration rights agreement, we have also filed with the
SEC a registration statement with respect to an offer to exchange the notes
covered by this prospectus and any additional notes issued in lieu of cash
interest payments for a new issue of notes registered under the Securities Act,
with terms identical in all material respects to those of the outstanding notes.
We have agreed that if we are not permitted to consummate the exchange offer or
if fewer than all of the outstanding notes are successfully exchanged in the
exchange offer, that we will use our reasonable best efforts to maintain the
effectiveness of the shelf registration statement of which this prospectus is a
part to cover the resales of such notes remaining outstanding. To the extent
that outstanding notes are exchanged in the exchange offer for registered notes,
such outstanding notes will be removed from this prospectus.

     This summary of the registration rights agreement is subject to, and is
qualified in its entirety by reference to, all the provisions of the
registration rights agreement, a copy of which is filed as an exhibit to the
shelf registration statement of which this prospectus is a part.

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                 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

SCOPE AND LIMITATIONS

     The following general discussion summarizes certain United States federal
income tax aspects of the ownership of the notes and Abraxas common stock. This
discussion is a summary for general information purposes only, and does not
purport to describe all of the United States federal income tax consequences
resulting from the acquisition, ownership and disposition of notes and Abraxas
common stock nor does it describe United States federal income tax consequences
resulting to Non-U.S. Holders, except as expressly indicated. This summary deals
only with notes and Abraxas common stock that are held as capital assets by a
purchaser and does not deal with special situations, such as those of brokers,
dealers in securities or currencies, financial institutions, tax-exempt
entities, insurance companies, persons liable for alternative minimum tax,
United States persons whose "functional currency" is not the U.S. dollar,
persons holding the notes as part of a hedging, integrated, conversion or
constructive sale transaction or a straddle, and traders in securities that
elect to use a mark-to-market method of accounting for their securities
holdings. The following summary does not address any state, local or non-United
States tax consequences or United States federal tax consequences (e.g., estate
or gift tax) other than those pertaining to the income tax.

     Furthermore, this discussion is based on provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations of the foregoing,
all as in effect as of the date hereof and all of which are subject to change,
possibly with retroactive effect. This discussion will not be binding in any
manner on the Internal Revenue Service (the "IRS") or the courts. No ruling has
been or will be requested from the IRS on any of the matters relating to holding
the notes and Abraxas common stock, and no assurance can be given that the IRS
will not successfully challenge certain of the conclusions set forth below. If a
partnership holds the notes and/or Abraxas common stock, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. Partners of partnerships that hold notes and/or Abraxas
common stock, should consult their own tax advisors.

     As used herein, the term "U.S. Holder" means a holder of notes or Abraxas
common stock that is, for United States federal income tax purposes:

     (1)  an individual who is a citizen or resident of the United States;

     (2)  a corporation or partnership created or organized in or under the law
          of the United States or of any political subdivision thereof;

     (3)  an estate, the income of which is includible in gross income for
          United States federal income tax purposes regardless of its source; or

     (4)  a trust if (a) a United States court is able to exercise primary
          supervision over the administration of the trust and one or more
          United States persons have the authority to control all substantial
          decisions of the trust, or (b) the trust was in existence on August
          20, 1996, was treated as a United States person prior to that date,
          and elected to continue to be treated as a United States person.

     For purposes of this discussion, the term "non-U.S. Holder" means any
person other than a U.S. Holder.

EACH U. S. HOLDER, NON-U.S. HOLDER, PROSPECTIVE U.S. HOLDERS AND PROSPECTIVE
NON-U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S.
FEDERAL INCOME TAX CONSEQUENCES TO SUCH HOLDER OR PROSPECTIVE HOLDER OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND/OR ABRAXAS COMMON STOCK, AS
WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY OTHER RELEVANT
FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.

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TAX CONSEQUENCES TO U.S. HOLDERS

     ORIGINAL ISSUE DISCOUNT ON THE NOTES. In general, subject to a de minimis
rule, a debt obligation will be treated as being issued with original issue
discount ("OID") if the "stated redemption price at maturity" of the instrument
exceeds that instrument's "issue price"(as described below in "Issue Price").

     The stated redemption price at maturity of a debt obligation is the
aggregate of all payments due to the U.S. Holder under that debt obligation at
or prior to its maturity date, other than interest that is actually and
unconditionally payable in cash or property (other than debt instruments of the
issuer) at a single fixed (or a qualified floating) rate (or a permitted
combination of the two) at least annually ("QSIPs"). Interest on the notes will
be payable in cash, except that Abraxas may, subject to certain conditions, pay
the interest due on any interest payment date through and including the maturity
date of the notes by the issuance of additional notes ("PIK notes"). Because the
interest on the notes due on any payment date may be paid through the issuance
of additional PIK notes, none of the interest payments on the notes will qualify
as QSIPs. Thus, the stated redemption price at maturity of the notes will
include all payments of principal and all of the interest required under the
notes. Furthermore, under the regulations issued pursuant to the OID provisions
of the Code (the "OID Regulations"), a note and any PIK notes issued with
respect thereto are treated as part of the same debt instrument. Accordingly,
the adjusted issue price of the combined note and PIK note will not be reduced
upon the issuance of the PIK note, and the stated redemption price at maturity
of the combined note and PIK note will not change upon the issuance of the PIK
note and will include the interest payable under the PIK note.

     Since the stated redemption price at maturity of the notes exceeds their
issue price, the notes were issued with OID. A U.S. Holder of notes, subject to
the adjustments discussed below, will be required to include in gross income for
federal income tax purposes the sum of the daily portions of OID for each day
during the taxable year or portion thereof during which the U.S. Holder holds
the notes, whether or not the U.S. Holder actually receives a payment relating
to OID in such year. The daily portion is determined by allocating to each day
of the relevant "accrual period" a pro rata portion of an amount equal to (a)
the product of (1) the "adjusted issue price" of the notes at the beginning of
each accrual period, multiplied by (2) the yield to maturity of the notes
(determined by semi-annual compounding) less (b) the sum of any QSIPs during the
accrual period. The "adjusted issue price" of a note at any given time is its
issue price increased by all accrued OID for prior accrual periods (without
regard to the acquisition premium rules) and decreased by the amount of any
payment previously made on the notes other than a QSIP. As discussed above, only
a portion of the interest payments on the notes will qualify as QSIPs.

     A U.S. Holder of a note will be required to include OID in income as such
OID accrues, regardless of the U.S. Holder's method of accounting and regardless
of when such U.S. Holder receives cash payments relating to the OID. A U.S.
Holder's tax basis in a note will be increased by the amount of OID included in
the U.S. Holder's income and reduced by the portion of all interest payments not
qualifying as QSIPs (other than payments in the form of PIK notes) received on
the notes.

     The computation of OID and adjusted issue price with respect to the
combined notes and PIK notes will take into account accruals and payments with
respect to both instruments, with the result that the U.S. Holder of a note
generally will be required to include in income as OID the portion of interest
that accrues under the note that does not give rise to QSIPs and the interest
that accrues under any PIK note issued in respect thereof, regardless of whether
any cash payments are received. Each U.S. Holder of a note will be required to
include in income cash payments of stated interest qualifying as QSIPs in
accordance with their regular method of accounting.

     Upon a disposition of a note or a PIK note issued in respect thereof, the
U.S. Holder will be required (unless it disposes of a note together with all PIK
notes issued in respect thereof) to allocate adjusted issue price, stated
redemption price at maturity and acquisition premium (discussed below), if any,
of the combined note and PIK note among the instruments retained and the
instruments disposed of in order to determine OID with respect to the retained
instruments. Although it is not clear, it is likely that the adjusted tax basis
and adjusted issue price of a note would be allocated between such note and any
PIK notes issued with respect thereto at the time of such issuance, based on
their respective principal amounts. OID on the PIK notes will accrue in the same
manner as described above in respect of the notes.

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     A purchaser of a note who purchases the note at a cost less than the
remaining stated redemption price at maturity but greater than its adjusted
issue price (a purchase at an "acquisition premium") also will be required to
include in gross income the sum of the daily portions of OID on that note . (For
purposes of these rules, a "purchase" is any acquisition of a debt instrument.)
In computing the daily portions of OID for such a purchaser, however, the daily
portion is reduced by the amount that would be the daily portion for such day
(computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the purchaser's
basis in the note on the date of purchase exceeds the adjusted issue price of
the note at that time, and the denominator of which is the sum of the daily
portions for that notes for all days beginning on the day after the purchase
date and ending on the maturity date.

     Abraxas will furnish annually to the IRS, and to each U.S. Holder of notes
to whom Abraxas is required to report, information relating to the OID accruing
during the calendar year. U.S. Holders will be required to determine for
themselves whether, by reason of the rules described above, they are eligible to
report a reduced amount of OID for federal income tax purposes.

     Pursuant to the OID Regulations, U.S. Holders of debt instruments are
permitted to elect to include all interest, discount (including de minimis
market discount) and premium on a debt instrument in income currently on a
constant yield to maturity basis. Such election would constitute an election to
include market discount currently in income on all market discount bonds held by
such U.S. Holders. U.S. Holders of notes are urged to consult their own tax
advisors regarding the availability and advisability of making such an election.

     ISSUE PRICE. The "issue price" of the notes was determined by reference to
the fair market value of the second lien notes and old notes for which they were
exchanged pursuant to the exchange offer. The fair market value of the second
lien notes and old notes was allocated based upon the relative fair market value
of the consideration received by Holders pursuant to the exchange offer.
Information regarding the issue price of the notes may be obtained by sending a
request in writing addressed to the Chief Financial Officer of Abraxas Petroleum
Corporation at 500 North Loop 1604, Suite 100, San Antonio, Texas 78232.

     SALE, EXCHANGE OR REDEMPTION OF NOTES. As noted above, the OID Regulations
treat a note and any PIK notes issued with respect thereto as a part of the same
debt instrument. If, however, a U.S. Holder disposes of a note or a PIK note
separately, in order to determine the amount of its gain or loss recognized, the
U.S. Holder will be required to allocate adjusted issue price and acquisition
premium of the combined note and the PIK notes issued with respect thereto among
the debt instruments retained and disposed of, as described above. See "Original
Issue Discount on the Notes" above.

     Under the OID Regulations, an unscheduled payment made on a debt instrument
such as a note prior to maturity that results in a substantially pro rata
reduction of each payment of principal and interest remaining on the instrument
is treated as a payment in retirement of a portion of the instrument, which may
result in gain or loss to the U.S. Holder. The gain or loss is calculated by
treating the debt obligation as consisting of two instruments, one that is
retired and one that remains outstanding, and by allocating the adjusted issue
price and the U.S. Holder's adjusted basis between the two instruments based
upon the relative principal amount of the portion of the obligation that is
treated as retired by the pro rata prepayment. The stated redemption price at
maturity of and the OID on the remaining instrument will be determined according
to the same principles discussed above. See "Original Issue Discount on the
Notes" above.

     Except as discussed above, upon the sale, exchange or retirement of a note,
a U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement of
the note (other than amounts representing accrued and unpaid interest) and such
U.S. Holder's adjusted tax basis in the note . A U.S. Holder's adjusted tax
basis in a note generally will equal such U.S. Holder's initial investment in
the note increased by any original issue discount included in income and any
accrued market discount included in income, decreased by the amount of any
payments that are not deemed qualified stated interest payments and amortizable
bond premium applied to reduce interest with respect to such note . Such gain or
loss generally will be long term capital gain or loss if the note has been held
for more than one year at the time of such sale, exchange or retirement.

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     ACCRUED MARKET DISCOUNT. A debt instrument has "market discount" if its
stated redemption price at maturity exceeds its tax basis in the hands of the
U.S. Holder immediately after its acquisition, unless a statutorily defined de
minimis exception applies. Any gain recognized on the maturity or disposition of
a note will be treated as ordinary income to the extent that such gain does not
exceed the accrued market discount on such note . Alternatively, a U.S. Holder
of a note may elect to include market discount in income currently over the life
of the note . Such election shall apply to all debt instruments with market
discount acquired by the electing U.S. Holder on or after the first day of the
first year to which the election applies and may not be revoked without the
consent of the IRS.

     AMORTIZABLE BOND PREMIUM. Generally, a U.S. Holder of a note has
"amortizable bond premium" to the extent that the purchase price of a note
exceeds the note 's stated redemption price at maturity. Such a note will not be
treated as issued with OID. If the U.S. Holder makes (or has made) a timely
election under Section 171 of the Code, such U.S. Holder may amortize the bond
premium, on a constant yield basis, by offsetting the interest income from the
notes.

     If the U.S. Holder of a note makes an election to amortize bond premium,
the tax basis of the debt instrument must be reduced by the amount of the
aggregate amortization deductions allowable for the bond premium. Any such
election to amortize bond premium would apply to all debt instruments held or
subsequently acquired by the electing U.S. Holder and cannot be revoked without
permission from the IRS.

     BACKUP WITHHOLDING. A U.S. Holder of a note may be subject to backup
withholding at the rate of 31% with respect to "reportable payments," which
include payments in respect of interest or accrued OID, and the proceeds of a
sale, exchange or redemption of a note . Abraxas will be required to deduct and
withhold the prescribed amount if (a) the U.S. Holder fails to furnish a
taxpayer identification number ("TIN") to Abraxas in the manner required, (b)
the IRS notifies Abraxas that the TIN furnished by the U.S. Holder is incorrect,
(c) there has been a failure of the U.S. Holder to certify under penalty of
perjury that the U.S. Holder is not subject to withholding under Section
3406(a)(1)(C) of the Tax Code, or (d) the U.S. Holder is notified by the IRS
that he or she failed to report properly payments of interest and dividends and
the IRS has notified Abraxas that he or she is subject to backup withholding.

     Amounts paid as backup withholding do not constitute an additional tax and
will be credited against the U.S. Holder's U.S. federal income tax liabilities,
so long as the required information is provided to the IRS. Abraxas will report
to the U.S. Holders of notes and to the IRS the amount of any "reportable
payments" for each calendar year and the amount of tax withheld, if any, with
respect to payments on such notes to any noncorporate U.S. Holder other than an
"exempt recipient."

THE TAX RULES GOVERNING INSTRUMENTS ISSUED WITH OID AND THE DISCUSSION ABOVE
UNDER "ORIGINAL ISSUE DISCOUNT ON THE NOTES," "SALE, EXCHANGE AND RETIREMENT OF
NOTES," "ACCRUED MARKET DISCOUNT" AND "AMORTIZABLE BOND PREMIUM" ARE COMPLEX AND
THEIR APPLICATION TO A U.S. HOLDER WILL DEPEND UPON SUCH U.S. HOLDER'S
INDIVIDUAL SITUATION. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISOR ABOUT
THE APPLICATION OF THESE RULES TO THE THEM.

     TAX CONSEQUENCES OF HOLDING COMMON STOCK

     RULES GENERALLY RELATING TO DISTRIBUTIONS WITH RESPECT TO STOCK. When a
corporation makes a distribution with respect to its capital stock, the amount
of the distribution received by the stockholder will be treated as a dividend
which will be taxable to the stockholder as ordinary income, to the extent it is
paid from the current or accumulated earnings and profits of the corporation.
The amount of a distribution made in property other than cash is the fair market
value of that property at the time of the distribution. U.S. Holders that are
corporations are entitled to a dividends-received deduction subject to certain
limitations. Earnings and profits for this purpose consists of an amount based
on the taxable income of the corporation as adjusted by the application of
detailed rules set forth in Treasury Regulations. A distribution will be treated
as a dividend even though we have an overall deficit in our earnings and profits
to the extent we have positive earnings and profits in the year in which we make
the distribution (i.e., current earnings and profits). If the amount of a
distribution exceeds the current and accumulated earnings and profits of the

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corporation, the excess will be treated first as a tax-free return of investment
up to the basis of the stock, and this amount will reduce the stockholder's tax
basis in the stock. If the distribution exceeds the current and accumulated
earnings and profits, and the stockholder's tax basis in the stock, this excess
amount will be treated as capital gain to the stockholder. If the stockholder is
a U.S. corporation, the stockholder would generally be able to claim a deduction
equal to a portion of the amount of the distribution treated as a dividend ,
subject to certain requirements under the Code, in accordance with the foregoing
rules.

     REDEMPTION OF COMMON STOCK. Upon redemption of the common stock by Abraxas
for cash or property other than capital stock, the redemption should be treated
as a sale or exchange under Section 302 of the Code and the tendering holder
should recognize capital gain or loss to the extent the redemption proceeds are
greater or less than the holder's adjusted tax basis in the common stock if the
redemption proceeds received in exchange for the common stock:

       -  are not essentially equivalent to a dividend distribution;

       -  are substantially disproportionate with respect to the tendering
          holder;

       -  completely terminate the holder's equity interest in Abraxas; or

       -  are distributed to an individual U.S. Holder as part of a partial
          liquidation of shares (as defined in Section 302 of the Code).

In determining whether a cash redemption qualifies for sale or exchange
treatment under Section 302 of the Code, a tendering U.S. Holder must take into
account shares of Abraxas stock that are actually owned by the tendering holder
and, in certain situations, shares that such U.S. Holder is deemed to own
through a related person or entity.

     If the redemption does not qualify for sale or exchange treatment under
Section 302 of the Code, the redemption proceeds will be treated as a
distribution with respect to the common stock. The distribution will be taxable
as a dividend to the extent of current or accumulated earnings and profits. The
amount of the distribution in excess of current or accumulated earnings and
profits will be treated as a tax-free return of basis to the extent of the
tendering U.S. Holder's basis in its common stock and as capital gain to the
extent the distribution exceeds its basis in the common stock.

     SALE OF COMMON STOCK. U.S. Holders will generally recognize capital gain or
loss on a sale or exchange of common stock. The gain or loss will equal the
difference between the proceeds received and the adjusted tax basis in the
stock. The gain or loss recognized by a U.S. Holder on a sale or exchange of
stock will be long-term capital gain or loss if the holding period for the stock
is more than one year.

NON-U.S. HOLDERS

     Subject to the discussion of backup withholding below, the interest income
and gains that a non-U.S. Holder derives in respect of holding notes and Abraxas
common stock generally will be exempt from United States federal income taxes,
including withholding tax.

     Payments of interest or principal in respect of the notes by Abraxas or the
paying agent to a holder that is a non-U.S. Holder will not be subject to
withholding of United States federal income tax, provided that, in the case of
payments of interest (including OID):

     (1)  the income is effectively connected with the conduct by such non-U.S.
          Holder of a trade or business carried on in the United States and the
          non-U.S. Holder complies with applicable identification requirements
          (described below under "Backup Withholding and Information
          Reporting"); or

     (2)  the non-U.S. Holder and/or each securities clearing organization,
          bank, or other financial institution that holds the notes on behalf of
          such non-U.S. Holder in the ordinary course of its trade or business,
          in the chain between the non-U.S. Holder and the paying agent,
          complies with applicable identification requirements (described below
          under "Backup Withholding and Information Reporting") to establish
          that the holder is a non-U.S. Holder

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          and in addition, that the following requirements of the "portfolio
          interest" exemption under the Code are satisfied:

          -    the non-U.S. Holder does not actually or constructively own 10%
               or more of the voting stock of Abraxas;

          -    the non-U.S. Holder is not a controlled foreign corporation with
               respect to Abraxas; and

          -    the non-U.S. Holder is not a bank whose receipt of interest on
               the notes is described in Section 881(c)(3)(A) of the Code.

     Any gain realized by a non-U.S. Holder on the sale or exchange of the
notes, or Abraxas common stock generally will be exempt from U.S. federal income
tax, including withholding tax, unless:

     (1)  such gain is effectively connected with the conduct of a trade or
          business in the United States (or if a tax treaty applies, such gain
          is attributable to a permanent establishment of the non-U.S. Holder);

     (2)  in the case of a non-U.S. Holder that is an individual, such non-U.S.
          Holder is present in the United States for 183 days or more during the
          taxable year in which such sale, exchange, or other disposition
          occurs; or

     (3)  in the case of gain representing accrued interest, the requirements of
          the portfolio interest exemption are not satisfied.

     If the interest income (including OID) paid on the notes or gain recognized
from a sale or exchange of the notes, or Abraxas common stock, is effectively
connected with the conduct of a trade or business in the United States by a
non-U.S. Holder, such non-U.S. Holder will generally be taxed under the same
rules that govern the taxation of a U.S. Holder. In addition, if such holder is
a foreign corporation, it may be subject to an additional branch profits tax.

BACKUP WITHHOLDING AND INFORMATION REPORTING

     Payment of the proceeds of a sale of a note or payment of interest
(including original issue discount) will be subject to information reporting
requirements and backup withholding tax unless the beneficial owner certifies
its non-United States status under penalties of perjury or otherwise establishes
an exemption provided that the paying agent does not actually know, or has
reason to know, that the holder is actually a U.S. Holder). Recently promulgated
Treasury Regulations provide certain presumptions under which a non-U.S. Holder
will be subject to backup withholding and information reporting unless such
holder certifies as to its non-U.S. status or otherwise establishes an
exemption. In addition, the recent Treasury Regulations change certain
procedural requirements related to establishing a holder's non-United States
status. Non-U.S. Holders should consult with their tax advisors regarding the
above issues.

     Any amounts withheld from a payment to a non-U.S. Holder under the backup
withholding rules will be allowed as a credit against the holder's United States
federal income tax liability and may entitle the holder to a refund, provided
that the required information is furnished to the Internal Revenue Service.

     Applicable identification requirements generally will be satisfied if there
is delivered to a securities clearing organization either directly, or
indirectly, by the appropriate filing of a Form W-8IMY:

     (1)  IRS Form W-8BEN signed under penalties of perjury by the non-U.S.
          Holder, stating that such holder of the notes is not a United States
          person and providing such non-U.S. Holder's name and address;

     (2)  with respect to non-U.S. Holders of the notes residing in a country
          that has a tax treaty with the United States who seek an exemption or
          reduced tax rate (depending on the treaty terms), Form W-8BEN. If the
          treaty provides only for a reduced rate, withholding tax will be
          imposed at that rate unless the non-U.S. Holder qualifies under the
          portfolio interest rules set forth in the Code and files a W-8BEN; or

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     (3)  with respect to interest income "effectively connected" with the
          conduct by such non-U.S. Holder of a trade or business carried on in
          the United States, Form W-8ECI;

     provided that in any such case:

          -    - the applicable form is delivered pursuant to applicable
               procedures and is properly transmitted to the United States
               withholding agent, otherwise required to withhold tax; and

          -    - none of the entities receiving the form has actual knowledge or
               reason to know that the holder is a U.S. Holder.

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                                  LEGAL MATTERS

     The validity of the issuance of the notes and the Abraxas common stock
covered by this prospectus has been passed upon for Abraxas by Cox & Smith
Incorporated, San Antonio, Texas.

                                     EXPERTS

     The consolidated financial statements of Abraxas as of December 31, 2001
and 2000, and for each of the two years in the period ended December 31, 2001,
included in this prospectus and registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to significant subsequent events and an
explanatory paragraph referring to a change in the method of accounting for
derivative financial instruments), and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.

     The consolidated financial statements of Abraxas for the year ended
December 31, 1999, appearing in this prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firms as experts in accounting and
auditing.

     The historical reserve information prepared by DeGolyer and MacNaughton and
McDaniel and Associates Consultants Ltd. included in this prospectus has been
included herein in reliance upon the authority of such firm as experts with
respect to matters contained in such reserve reports.

                       WHERE YOU CAN FIND MORE INFORMATION

     Abraxas and the guarantors of the notes have filed the registration
statement regarding the notes and Abraxas common stock with the SEC. This
prospectus does not contain all of the information included in the registration
statement. Any statement made in this prospectus concerning the contents of any
other document is not necessarily complete. If we have filed any other document
as an exhibit to the registration statement, you should read the exhibit for a
more complete understanding of the document or matter. Each statement regarding
any other document does not necessarily contain all of the information important
to you.

     Abraxas files annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document Abraxas files at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the SEC's public reference room in Washington, D.C. by calling the
SEC at 1-800-SEC-0330.

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                                GLOSSARY OF TERMS

     Unless otherwise indicated in this prospectus, natural gas volumes are
stated at the legal pressure base of the State or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
NGLs.

     The following definitions shall apply to the technical terms used in this
prospectus.

TERMS USED TO DESCRIBE QUANTITIES OF CRUDE OIL AND NATURAL GAS

     "BBL" -- barrel or barrels.

     "BCF" -- billion cubic feet.

     "BCFE" -- billion cubic feet equivalent.

     "BOE" -- barrels of

     "BOPD" -- barrels of crude oil per day.

     "MBBL" -- thousand barrels.

     "MCF" -- thousand cubic feet.

     "MCFE" -- thousand cubic feet equivalent.

     "MMBBLS" -- million barrels.

     "MMBTU" -- million British Thermal Units.

     "MMBTUPD" -- million British Thermal Units per day.

     "MMCF" -- million cubic feet.

     "MMCFE" -- million cubic feet equivalent.

     "MMCFPD" -- million cubic feet per day.

TERMS USED TO DESCRIBE OUR INTERESTS IN WELLS AND ACREAGE

     "DEVELOPED ACREAGE" means acreage which consists of acres spaced or
     assignable to productive wells.

     "GROSS" natural gas and crude oil wells or "gross" wells or acres is the
     number of wells or acres in which we have an interest.

     "NET" natural gas and crude oil wells or "net" acres are determined by
     multiplying "gross" wells or acres by our working interest in such wells or
     acres.

     "UNDEVELOPED ACREAGE" means leased acres on which wells have not been
     drilled or completed to a point that would permit the production of
     commercial quantities of crude oil and natural gas, regardless whether or
     not such acreage contains proved reserves.

TERMS USED TO ASSIGN A PRESENT VALUE TO OR TO CLASSIFY OUR RESERVES

     "PV-10" means estimated future net revenue, discounted at a rate of 10% per
     annum, before income taxes and with no price or cost escalation or
     de-escalation in accordance with guidelines promulgated by the SEC.

     "PROVED RESERVES" or "RESERVES" means natural gas and crude oil, condensate
     and NGLs on a net revenue interest basis, found to be commercially
     recoverable.

     "PROVeD UNDEVELOPED RESERVES" includes those proved reserves expected to be
     recovered from new wells on undrilled acreage or from existing wells where
     a relatively major expenditure is required for recompletion.

TERMS USED TO DESCRIBE COSTS

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     "DD&A" means depletion, depreciation and amortization.

     "LOE" means lease operating expenses and production taxes.

TERMS USED TO DESCRIBE TYPES OF WELLS

     "DEVELOPMENT WELL" means a well drilled within the proved area of a crude
     oil or natural gas reservoir to the depth of stratigraphic horizon (rock
     layer or formation) known to be productive for the purpose of extraction of
     proved crude oil or natural gas reserves.

     "DRY HOLE" means an exploratory or development well found to be incapable
     of producing either crude oil or gas in sufficient quantities to justify
     completion as a crude oil or natural gas well.

     "EXPLORATORY WELL" means a well drilled to find and produce crude oil or
     natural gas in an unproved area, to find a new reservoir in a field
     previously found to be producing crude oil or natural gas in another
     reservoir, or to extend a known reservoir.

     "PRODUCTIVE WELLS" mean producing wells and wells capable of production.

     "SERVICE WELL" is a well used for water injection in secondary recovery
     projects or for the disposal of produced water.

OTHER TERMS

     "CHARGE" means an encumbrance, lien, claim or other interest in property
     securing payment or performance of an obligation.

     "EBITDA" means earnings from continuing operations before income taxes,
     interest expense, DD&A and other non-cash charges.

     "NGL" means natural gas liquid.

     "NYMEX" means the New York Mercantile Exchange.

                                      143
<Page>

                          INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                                                    Page
                                                                                                    ----

<S>                                                                                                 <C>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

Independent Auditors' Reports for the years ended December 31, 2001 and 2000........................F-2
Independent Auditors' Report for the year ended December 31, 1999 ..................................F-3
Consolidated Balance Sheets at December 31, 2000 and 2001 ..........................................F-4
Consolidated Statements of Operations for the years ended December 31, 1999,
   2000 and 2001 ...................................................................................F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
   December 31, 1999, 2000 and 2001 ................................................................F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
   2000 and 2001 ...................................................................................F-9
Notes to Consolidated Financial Statements .........................................................F-11

Unaudited Consolidated Balance Sheet at September 30, 2002 and December 31, 2001 ...................F-50
Unaudited Consolidated Statement of Operations for the three and nine months ended
   September 30, 2002 and 2001......................................................................F-52
Unaudited Consolidated Statement of Stockholders Equity (Deficit)
   at September 30, 2002 and December 31, 2001......................................................F-53
Unaudited Consolidated Statement of Cash Flows for the nine months
   ended September 30, 2002 and December 31, 2001...................................................F-54
Notes to Unaudited Consolidated Financial Statements ...............................................F-55

GREY WOLF EXPLORATION INC.

Auditors' Report for the years ended December 31, 2001 and 2000.....................................F-75
Comments by Auditors' for US readers on Canada - US reporting differences...........................F-76
Auditors' Report for the year ended December 31, 1999...............................................F-77
Balance Sheets at December 31, 2000 and 2001........................................................F-78
Statements of Earnings and Retained Earnings for the years ended December 31, 1999, 2000
   and 2001.........................................................................................F-79
Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001.......................F-80
Notes to Financial Statements.......................................................................F-81
</Table>

                                       F-1
<Page>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation

We have audited the accompanying consolidated balance sheets of Abraxas
Petroleum Corporation and Subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2000, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 16 to the financial statements, in 2001 the Company changed
its method of accounting for derivative financial instruments to conform to
Statement of Financial Accounting Standards No. 133.

We have not audited any financial statements of the Company for any period
subsequent to December 31, 2001. However, as discussed in Note 19 to the
financial statements, the Company sold various assets and repurchased a
production payment obligation during 2002; and on January 23, 2003, sold all of
the outstanding common stock of two wholly owned subsidiaries, Canadian Abraxas
Petroleum Limited and Grey Wolf Exploration Inc., repaid certain debt, and also
entered into an agreement to exchange cash, new debt and common stock of the
Company for certain other debt.


/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
March 26, 2002
(January 23, 2003 as to Note 19)

                                       F-2
<Page>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Abraxas Petroleum Corporation

     We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Abraxas Petroleum
Corporation and Subsidiaries for the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Abraxas Petroleum Corporation and Subsidiaries for the year ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.

                                                               ERNST & YOUNG LLP

San Antonio, Texas
March 17, 2000

                                       F-3
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<Table>
<Caption>
                                                                      DECEMBER 31
                                                               ---------------------------
                                                                   2000           2001
                                                               ------------   ------------
                                                                  (Dollars in thousands)
<S>                                                            <C>            <C>
Current assets:
   Cash ....................................................   $      2,004   $      7,605
   Accounts receivable, less allowance for doubtful
     accounts:
       Joint owners ........................................          3,771          2,785
       Oil and gas production sales ........................         16,106          4,758
       Other ...............................................            841            504
                                                               ------------   ------------
                                                                     20,718          8,047
   Equipment inventory .....................................          1,411          1,251
   Other current assets ....................................            179            443
                                                               ------------   ------------
     Total current assets ..................................         24,312         17,346

Property and equipment:
     Oil and gas properties, full cost method of accounting:
       Proved ..............................................        481,802        486,098
       Unproved, not subject to amortization ...............         12,831         10,626
     Other property and equipment ..........................         63,720         67,632
                                                               ------------   ------------
           Total ...........................................        558,353        564,356
         Less accumulated depreciation, depletion, and
          amortization .....................................        253,569        282,462
                                                               ------------   ------------
       Total property and equipment - net ..................        304,784        281,894

Deferred financing fees, net of accumulated amortization
   of $6,917 and $8,668 at December 31, 2000 and 2001,
   respectively ............................................          5,556          3,928

Other assets ...............................................            908            545
                                                               ------------   ------------
   Total assets ............................................   $    335,560   $    303,713
                                                               ============   ============
</Table>

          See accompanying Notes to Consolidated Financial Statements.

                                       F-4
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<Table>
<Caption>
                                                                                            DECEMBER 31
                                                                                   ---------------------------
                                                                                       2000           2001
                                                                                   ------------   ------------
                                                                                      (Dollars in thousands)
<S>                                                                                <C>            <C>
Current liabilities:
   Accounts payable ............................................................   $     22,721   $     10,542
   Joint interest oil and gas production payable ...............................          6,281          3,596
   Accrued interest ............................................................          6,079          6,013
   Other accrued expenses ......................................................          1,932          1,116
   Hedge liability .............................................................              -            658
   Current maturities of long-term debt ........................................          1,128            415
                                                                                   ------------   ------------
     Total current liabilities .................................................         38,141         22,340

Long-term debt .................................................................        266,441        285,184

Deferred income taxes ..........................................................         21,079         20,621

Future site restoration ........................................................          4,305          4,056

Minority interest in foreign subsidiary ........................................         12,097              -

Commitments and contingencies

Stockholders' equity (deficit):
   Common stock, par value $.01 per share - authorized 200,000,000 shares;
     issued 22,759,852 and 30,145,280
     shares at December 31, 2000 and 2001, respectively ........................            227            301
   Additional paid-in capital ..................................................        130,409        136,830
   Accumulated deficit .........................................................       (131,376)      (151,094)
   Treasury stock, at cost, 165,883 shares at December 31, 2000
     and 2001 ..................................................................           (964)          (964)
   Accumulated other comprehensive income (loss) ...............................         (4,799)       (13,561)
                                                                                   ------------   ------------
Total stockholders' equity  (deficit) ..........................................         (6,503)       (28,488)
                                                                                   ------------   ------------
   Total liabilities and stockholders' equity  (deficit) .......................   $    335,560   $    303,713
                                                                                   ============   ============
</Table>

          See accompanying Notes to Consolidated Financial Statements.

                                       F-5
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                        YEAR ENDED DECEMBER 31
                                                               ------------------------------------------
                                                                   1999           2000          2001
                                                               ------------   ------------   ------------
                                                                  (In thousands except per share data)
<S>                                                            <C>            <C>            <C>
Revenues:
   Oil and gas production revenues .........................   $     59,025   $     72,973   $     73,201
   Gas processing revenues .................................          4,244          2,717          2,438
   Rig revenues ............................................            444            505            756
   Other ...................................................          3,057            405            848
                                                               ------------   ------------   ------------
                                                                     66,770         76,600         77,243
Operating costs and expenses:
   Lease operating and production taxes ....................         17,938         18,783         18,616
   Depreciation, depletion, and amortization ...............         34,811         35,857         32,484
   Proved property impairment ..............................         19,100              -          2,638
   Rig operations ..........................................            624            717            702
   General and administrative ..............................          5,269          6,533          6,445
   General and administrative (Stock-based compensation) ...              -          2,767         (2,767)
                                                               ------------   ------------   ------------
                                                                     77,742         64,657         58,118
                                                               ------------   ------------   ------------
Operating income (loss) ....................................        (10,972)        11,943         19,125

Other (income) expense:
   Interest income .........................................           (666)          (530)           (78)
   Amortization of deferred financing fees .................          1,915          2,091          2,268
   Interest expense ........................................         36,815         31,140         31,523
   (Gain) loss on sale of equity investment ................              -        (33,983)           845
   Other ...................................................              -          1,563            207
                                                               ------------   ------------   ------------
                                                                     38,064            281         34,765
                                                               ------------   ------------   ------------
Income (loss) from operations before income tax and
   extraordinary item ......................................        (49,036)        11,662        (15,640)
Income tax expense (benefit):
   Current .................................................            491         (1,233)           505
   Deferred ................................................        (13,116)         4,938          1,897
Minority interest in income of consolidated foreign
   subsidiary (2001 prior to purchase) .....................            269          1,281          1,676
                                                               ------------   ------------   ------------
Income (loss) before extraordinary item ....................        (36,680)         6,676        (19,718)
Extraordinary item:
   Gain on debt extinguishment .............................              -          1,773              -
                                                               ------------   ------------   ------------
Net income (loss) ..........................................   $    (36,680)  $      8,449   $    (19,718)
                                                               ============   ============   ============

Basic earnings (loss) per common share:
   Net income (loss) before extraordinary item .............   $      (5.41)  $       0.29   $      (0.76)
   Extraordinary item ......................................              -           0.08              -
                                                               ------------   ------------   ------------
Net income (loss) per common share - basic .................   $      (5.41)  $       0.37   $      (0.76)
                                                               ============   ============   ============

Diluted earnings (loss) per common share:
   Net income (loss) before extraordinary item .............   $      (5.41)  $       0.21   $      (0.76)
   Extraordinary item ......................................              -           0.05              -
                                                               ------------   ------------   ------------
Net income (loss) per common share - diluted ...............   $      (5.41)  $       0.26   $      (0.76)
                                                               ============   ============   ============
</Table>

          See accompanying Notes to Consolidated Financial Statements.

                                       F-6
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                       (In thousands except share amounts)

<Table>
<Caption>
                                                    COMMON STOCK                  TREASURY STOCK
                                           ----------------------------    ---------------------------
                                              SHARES         AMOUNT           SHARES         AMOUNT
                                           ------------    ------------    -----------    ------------
<S>                                           <C>          <C>                 <C>        <C>
Balance at January 1, 1999 .............      6,501,441    $         65        171,015    $     (1,167)

   Comprehensive income
     (loss):
     Net loss ..........................              -               -              -               -

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -              -               -

   Comprehensive income (loss)

   Issuance of common stock
     for compensation ..................          3,314               -        (18,932)             96

   Issuance of common stock
     in connection with
     Exchange Offer (Note 2,
     5 and 6) ..........................     16,242,344             162              -               -
                                           ------------    ------------    -----------    ------------
Balance at December 31, 1999 ...........     22,747,099    $        227        152,083    $     (1,071)

   Comprehensive income
     (loss):
   Net income ..........................              -               -              -               -

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -              -               -

   Comprehensive income (loss) .........
   Stock-based compensation
     expense ...........................              -               -              -               -

   Issuance of common stock
     and warrants for
     compensation ......................         12,753               -        (25,000)            185
   Purchase of treasury stock ..........              -               -         38,800             (78)
                                           ------------    ------------    -----------    ------------
Balance at December 31, 2000 ...........     22,759,852    $        227        165,883    $       (964)
                                           ------------    ------------    -----------    ------------

<Caption>
                                                                           ACCUMULATED
                                            ADDITIONAL                        OTHER
                                             PAID-IN        ACCUMULATED   COMPREHENSIVE
                                             CAPITAL          DEFICIT     INCOME (LOSS)       TOTAL
                                           ------------    ------------   -------------   ------------
<S>                                        <C>             <C>            <C>             <C>
Balance at January 1, 1999 .............   $     51,695    $   (103,145)  $     (10,970)  $    (63,522)

   Comprehensive income
     (loss):
     Net loss ..........................              -         (36,680)              -        (36,680)

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -          14,572         14,572
                                                                                          ------------
   Comprehensive income (loss)

                                                                                               (22,108)
   Issuance of common stock
     for compensation ..................            (43)              -               -             53

   Issuance of common stock
     in connection with
     Exchange Offer (Note 2,
     5 and 6) ..........................         75,910               -               -         76,072
                                           ------------    ------------   -------------   ------------
Balance at December 31, 1999 ...........   $    127,562    $   (139,825)   $      3,602   $     (9,505)

   Comprehensive income
     (loss):
   Net income ..........................              -           8,449               -          8,449

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -          (8,401)        (8,401)
                                                                                          ------------
   Comprehensive income (loss) .........                                                            48
   Stock-based compensation
     expense ...........................          2,767               -               -          2,767

   Issuance of common stock
     and warrants for
     compensation ......................             80               -               -            265
   Purchase of treasury stock ..........              -               -               -            (78)
                                           ------------    ------------   -------------   ------------
Balance at December 31, 2000 ...........   $    130,409    $   (131,376)   $     (4,799)  $     (6,503)
                                           ------------    ------------   -------------   ------------
</Table>

                                       F-7
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
                       (In thousands except share amounts)

<Table>
<Caption>
                                                    COMMON STOCK                  TREASURY STOCK
                                           ----------------------------    --------------------------
                                              SHARES          AMOUNT          SHARES        AMOUNT
                                           ------------    ------------    -----------   ------------
<S>                                          <C>           <C>                 <C>       <C>
Balance at December 31, 2000 ...........     22,759,852    $        227        165,883   $       (964)

   Comprehensive income
     (loss):
     Net loss ..........................              -               -              -              -

     Other comprehensive
       income:
       Hedge loss ......................              -               -              -              -

       Foreign currency
         translation
         adjustment ....................              -               -              -              -

   Comprehensive income ................
     (loss)
   Stock-based compensation
     expense ...........................              -               -              -              -

   Issuance of common stock
     for contingent value
     rights ............................      3,386,488              34              -              -
   Issuance of common stock
     and stock options for
     acquisition of
     minority interest in
     Grey Wolf Exploration,
     Inc ...............................      3,990,565              40              -              -
   Stock options exercised .............          8,375               -              -              -
                                           ------------    ------------    -----------   ------------
Balance at December 31, 2001 ...........     30,145,280    $        301        165,883   $       (964)
                                           ============    ============    ===========   ============

<Caption>
                                             PAID-IN       ACCUMULATED    COMPREHENSIVE
                                             CAPITAL         DEFICIT      INCOME (LOSS)        TOTAL
                                           ------------   -------------   -------------    ------------
<S>                                        <C>             <C>             <C>             <C>
Balance at December 31, 2000 ...........   $    130,409    $   (131,376)   $     (4,799)   $     (6,503)

   Comprehensive income
     (loss):
     Net loss ..........................              -         (19,718)              -         (19,718)

     Other comprehensive
       income:
       Hedge loss ......................              -               -            (566)           (566)


       Foreign currency
         translation
         adjustment ....................              -               -          (8,196)         (8,196)
                                                                                           ------------
   Comprehensive income ................                                                        (28,480)
     (loss)
   Stock-based compensation
     expense ...........................         (2,767)              -               -          (2,767)

   Issuance of common stock
     for contingent value
     rights ............................            (34)              -               -               -
   Issuance of common stock
     and stock options for
     acquisition of
     minority interest in
     Grey Wolf Exploration,
     Inc ...............................          9,206               -               -           9,246
   Stock options exercised .............             16               -               -              16
                                           ------------   -------------   -------------    ------------
Balance at December 31, 2001 ...........   $    136,830    $   (151,094)   $    (13,561)   $    (28,488)
                                           ============    ============    ============    ============
</Table>

          See accompanying Notes to Consolidated Financial Statements.

                                       F-8
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                           YEAR ENDED DECEMBER 31
                                                               ------------------------------------------
                                                                  1999            2000           2001
                                                               ------------   ------------   ------------
                                                                             (In thousands)
<S>                                                            <C>            <C>            <C>
OPERATING ACTIVITIES
Net income (loss) ..........................................   $    (36,680)  $      8,449   $    (19,718)
Adjustments to reconcile net income
   (loss) to net cash provided by operating activities:
     Minority interest in income of
       foreign subsidiary ..................................            269          1,281          1,676
        Extraordinary gain on
       extinguishment of debt ..............................              -         (1,773)             -
     (Gain) loss on sale of equity .........................              -        (33,983)           845
       investment
     Depreciation, depletion, and
       amortization ........................................         34,811         35,857         32,484
     Proved property impairment ............................         19,100              -          2,638
     Deferred income tax (benefit) expense
                                                                    (13,116)         4,938          1,897
     Amortization of deferred financing ....................          1,915          2,091          2,268
       fees
     Amortization of premium on long term
       debt ................................................           (579)             -              -
     Stock-based compensation ..............................              -          2,767         (2,767)
     Issuance of common stock and
       warrants for compensation ...........................             53            265              -
     Changes in operating assets and
       liabilities:
         Accounts receivable ...............................         (2,698)        (7,036)        12,693
         Equipment inventory ...............................             57           (538)           (76)
         Other .............................................            396         (1,839)          (106)
         Accounts payable ..................................           (744)        11,318        (14,848)
         Accrued expenses ..................................          1,098           (425)          (723)
                                                               ------------   ------------   ------------
Net cash provided by operating activities ..................          3,882         21,372         16,263

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ...........................       (128,708)       (74,412)       (57,056)
Proceeds from sale of oil and gas
   properties ..............................................         17,494         21,157         28,938
Acquisition of minority interest ...........................              -              -         (2,679)
Proceeds from sale of equity investment ....................              -         34,482              -
                                                               ------------   ------------   ------------
Net cash used in investing activities ......................       (111,214)       (18,773)       (30,797)
</Table>

                                       F-9
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<Table>
<Caption>
                                                                        YEAR ENDED DECEMBER 31
                                                               ------------------------------------------
                                                                  1999            2000           2001
                                                               ------------   ------------   ------------
                                                                             (In thousands)
<S>                                                            <C>            <C>            <C>
FINANCING ACTIVITIES
Purchase of treasury stock, net ............................   $          -   $        (78)  $          -
Proceeds from issuance of common stock .....................              -              -             16
Proceeds from long-term borrowings .........................         88,457          6,400         29,995
Payments on long-term borrowings ...........................        (35,747)       (10,163)        (9,326)
Deferred financing fees ....................................         (3,586)            23              -
                                                               ------------   ------------   ------------
Net cash provided by (used in) financing
   activities ..............................................         49,124         (3,818)        20,685
                                                               ------------   ------------   ------------
Increase (decrease) in cash ................................        (58,208)        (1,219)         6,151
                                                               ------------   ------------   ------------
Effect of exchange rate changes on cash ....................            617           (576)          (550)
                                                               ------------   ------------   ------------
Increase (decrease) in cash ................................        (57,591)        (1,795)         5,601
Cash at beginning of year ..................................         61,390          3,799          2,004
                                                               ------------   ------------   ------------
Cash at end of year ........................................   $      3,799   $      2,004   $      7,605
                                                               ============   ============   ============

SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow
   information:
     Interest paid .........................................   $     35,979   $     33,004   $     31,752
                                                               ============   ============   ============
     Taxes paid ............................................   $          -   $          -   $        505
                                                               ============   ============   ============

Supplemental schedule of noncash investing and financing
   activities:
         In December 1999 the Company completed the exchange of $269,699,000 of
         its 11.5% Old Notes for $188,778,000 of new Second Lien Notes, issuance
         of up to 16,078,990 shares of common stock and contingent value rights.
         An additional $5,000,000 of the Second Lien Notes were issued for
         payment of fees and expenses. See Note 2, 5 and 6.
         Decrease in long-term debt.........                   $     75,921
                                                               ------------
         Increase in stockholder's equity...                   $     75,921
                                                               ------------

         In May 2001 the Company issued 3,386,488 shares of common stock upon
         the expiration of the CVRs issued in connection with the December 1999
         exchange. See Note 6.

         In September  2001 the Company  issued  3,990,565  shares of common stock and
         options  and  paid  $2,679,000   million  in  cash  in  connection  with  the
         acquisition of the minority interest in Grey Wolf. See Note 3.
         Decrease in oil and gas properties and other assets......................           $     (2,925)
                                                                                             ------------

         Decrease in deferred income tax liability................................           $      1,091
                                                                                             ------------
         Increase in stockholders equity..........................................           $     (9,246)
                                                                                             ------------
         Decrease in minority interest in foreign subsidiary......................           $     13,759
                                                                                             ------------
</Table>

          See accompanying Notes to Consolidated Financial Statements.

                                      F-10
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1999, 2000, and 2001

1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

     Abraxas Petroleum Corporation (the "Company" or "Abraxas") is an
independent energy company engaged in the exploration for and the acquisition,
development, and production of crude oil and natural gas primarily along the
Texas Gulf Coast, in the Permian Basin of western Texas and in Canada and the
processing of natural gas primarily in Canada. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

     The consolidated financial statements include the accounts of the Company,
its wholly-owned foreign subsidiaries Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and Grey Wolf Exploration Inc. ("Grey Wolf"). Minority
interest represents the minority shareholders' proportionate share of the equity
and income of Grey Wolf prior to the Company's acquisition of the remaining
interest in September 2001.

USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Management believes that it is reasonably possible that estimates of
proved crude oil and natural gas revenues could significantly change in the
future.

CONCENTRATION OF CREDIT RISK

     Financial instruments which potentially expose the Company to credit risk
consist principally of trade receivables, interest rate and crude oil and
natural gas price swap agreements. Accounts receivable are generally from
companies with significant oil and gas marketing activities. The Company
performs ongoing credit evaluations and, generally, requires no collateral from
its customers.

EQUIPMENT INVENTORY

     Equipment inventory principally consists of casing, tubing, and compression
equipment and is carried at the lower of cost or market.

OIL AND GAS PROPERTIES

     The Company follows the full cost method of accounting for crude oil and
natural gas properties. Under this method, all direct costs and certain indirect
costs associated with acquisition of properties and successful as well as
unsuccessful exploration and development activities are capitalized.
Depreciation, depletion, and amortization ("DD&A") of capitalized crude oil and
natural gas properties and estimated future development costs, excluding
unproved properties, are based on the unit-of-production method based on proved
reserves. Net capitalized costs of crude oil and natural gas properties, less
related deferred taxes, are limited, by country, to the lower of unamortized
cost or the cost ceiling, defined as the sum of the present value of estimated
future net revenues from proved reserves based on unescalated prices discounted
at 10 percent, plus the cost of properties not being amortized, if any, plus the
lower of cost or estimated fair

                                      F-11
<Page>

value of unproved properties included in the costs being amortized, if any, less
related income taxes. Excess costs are charged to proved property impairment
expense. No gain or loss is recognized upon sale or disposition of crude oil and
natural gas properties, except in unusual circumstances - see Note 3.

     Unproved properties represent costs associated with properties on which the
Company is performing exploration activities or intends to commence such
activities. These costs are reviewed periodically for possible impairments or
reduction in value based on geological and geophysical data. If a reduction in
value has occurred, costs being amortized are increased. The Company believes
that the unproved properties will be substantially evaluated in six to
thirty-six months and it will begin to amortize these costs at such time. During
1999, 2000 and 2001, the Company capitalized $193,000, $589,000 and $164,000 of
interest expense, respectively, based on the cost of major development projects
in progress.

OTHER PROPERTY AND EQUIPMENT

     Other property and equipment are recorded on the basis of cost.
Depreciation of gas gathering and processing facilities and other property and
equipment is provided over the estimated useful lives using the straight-line
method. Major renewals and betterments are recorded as additions to the property
and equipment accounts. Repairs that do not improve or extend the useful lives
of assets are expensed.

TURNAROUND COSTS

     Turnaround costs represent major maintenance performed on the Company's gas
processing plants and are expensed as incurred.

HEDGING

     The Company periodically enters into agreements to hedge the risk of future
crude oil and natural gas price fluctuations. Such agreements, primarily in the
form of price swaps, may either fix or support crude oil and natural gas prices
or limit the impact of price fluctuations with respect to the Company's sale of
crude oil and natural gas. Gains and losses on such hedging activities are
recognized in oil and gas production revenues when hedged production is sold.
The net cash flows related to any recognized gains or losses associated with
these hedges are reported as cash flows from operations. If the hedge is
terminated prior to expected maturity, gains or losses are deferred and included
in income in the same period as the physical production required by the contract
is delivered.

     Statement of Financial Accounting Standards, ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", is effective for the Company
on January 1, 2001. SFAS 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated a fair-value hedge, the changes in the fair value of the derivative
and the hedged item will be recognized in earnings. If the derivative is
designated a cash-flow hedge, changes in the fair value of the derivative will
be recorded in other comprehensive income (OCI) and will be recognized in the
income statement when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized in earnings.

STOCK-BASED COMPENSATION

     The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.

                                      F-12
<Page>

     Effective July 1, 2000, the Financial Accounting Standards Board ("FASB")
issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In March 1999, the Company amended the exercise price to $2.06 on all
options with an existing exercise price greater than $2.06. See Note 7. The
Company recognized approximately $2.8 million in expense during 2000 and a
credit of $2.8 million during 2001 as General and Administrative (Stock-based
compensation). The credit for the year ended December 31, 2001 was due to a
decline in the Company's common stock price.

FOREIGN CURRENCY TRANSLATION

     The functional currency for Canadian Abraxas and Grey Wolf is the Canadian
dollar ($CDN). The Company translates the functional currency into U.S. dollars
($US) based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity (Deficit).

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
materially different from the book value. The Company assumes the book value of
those financial instruments that are classified as current approximates fair
value because of the short maturity of these instruments. For noncurrent
financial instruments, the Company uses quoted market prices or, to the extent
that there are no available quoted market prices, market prices for similar
instruments.

RESTORATION, REMOVAL AND ENVIRONMENTAL LIABILITIES

     The estimated costs of restoration and removal of major processing
facilities are accrued on a straight-line basis over the life of the property.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and the amount of
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.

REVENUE RECOGNITION

     The Company recognizes crude oil and natural gas revenue from its interest
in producing wells as crude oil and natural gas is sold from those wells, net of
royalties. Revenue from the processing of natural gas is recognized in the
period the service is performed. The Company utilizes the sales method to
account for gas production volume imbalances. Under this method, income is
recorded based on the Company's net revenue interest in production taken for
delivery. Management does not believe that the Company had material gas
imbalances at December 31, 2000 or 2001.

DEFERRED FINANCING FEES

     Deferred financing fees are being amortized on a level yield basis over the
term of the related debt arrangements.

INCOME TAXES

     The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

                                      F-13
<Page>

NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, which requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142,
Goodwill and Other Intangible Assets, which discontinues the practice of
amortizing goodwill and indefinite lived intangible assets and initiates an
annual review for impairment. Intangible assets with a determinable useful life
will continue to be amortized over that period. The amortization provisions
apply to goodwill and intangible assets acquired after June 30, 2001. The
Company has applied these standards to its purchase of the minority interest in
Grey Wolf.

     In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 requires an asset retirement obligation to be recorded
at fair value during the period incurred and an equal amount recorded as an
increase in the value of the related long-lived asset. The capitalized cost is
depreciated over the useful life of the asset and the obligation is accreted to
its present value each period. SFAS No. 143 is effective for the Company
beginning January 1, 2003 with earlier adoption encouraged. The Company is
currently evaluating the impact the standard will have on its future results of
operations and financial condition.

     In August 2001, the FASB issued SFAS No. 144 ACCOUNTING FOR THE IMPAIRMENT
OF DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 retains the requirement to
recognize an impairment loss only where the carrying value of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure such loss as
the difference between the carrying amount and fair value of the asset. SFAS No.
144, among other things, changes the criteria that have to be met to classify an
asset as held-for-sale and requires that operating losses from the discontinued
operations be recognized in the period that the losses are incurred rather than
as of the measurement date. The Company adopted the accounting standard
effective January 1, 2002, which did not have a significant impact on the
Company's financial condition or results of operations.

RECLASSIFICATIONS

     Certain prior years balances have been reclassified for comparative
purposes.

2.   LIQUIDITY

     At December 31, 2001 the Company's current liabilities of approximately
$22.3 million exceeded its current assets of $17.3 million. Included in current
liabilities are trade payables of $10.5 million, revenues due third parties of
$3.6 million and accrued interest of $6.0 million. The Company's results of
operations in 2001 generated $16.3 million in cash flows from operations. The
Company will need additional funds in the future for both the development of its
assets and the service of its debt, including the repayment of the $63.5 million
in principal amount of the First Lien Notes maturing in March 2003 and the $191
million of the Second Lien Notes and Old Notes maturing in November 2004. In
order to meet the goals of developing its assets and servicing its debt
obligations, the Company will be required to obtain additional sources of
capital and/or reduce or reschedule its existing cash requirements. In order to
do so, the Company may pursue one or more of the following alternatives:

   - refinancing existing debt;
   - repaying debt with proceeds from the sale of assets;
   - exchanging debt for equity;
   - managing the timing and reducing the scope of its capital expenditures;
   - issuing debt or equity securities or otherwise raising additional funds;
     or
   - selling all or a portion of its existing assets, including interests in its
     assets.

                                      F-14
<Page>

     The Company has implemented a number of measures to conserve its cash
resources, including postponement of certain exploration and development
projects. However, while these measures will help conserve the Company's cash
resources in the near term, they will also limit the Company's ability to
replenish its depleting reserves, which could negatively impact the Company's
operating cash flow and results of operations in the future.

     There can be no assurance that any of the above alternatives, or some
combination thereof, will be available or, if available, will be on terms
acceptable to the Company.

     The Company will have four principal sources of liquidity going forward:
(i) cash on hand, (ii) cash flow from operations, (iii) a production payment
related to certain U.S. properties, and (iv) sale of assets and property. Grey
Wolf also has availability under its new financing agreement entered into in
December 2001, see discussion below. The First Lien Notes indenture, the Second
Lien Notes indenture and the Old Notes indenture substantially limit its use of
proceeds from asset sales. Should commodity prices not increase from levels at
December 31, 2001, most of the Company's capital expenditures are discretionary
and can be delayed to maintain current liquidity. While the availability of
capital resources cannot be predicted with certainty and is dependent upon a
number of factors including factors outside of management's control, management
believes that the net cash flow from operations plus cash on hand, cash
available under the production payment and the proceeds from the sale of
additional properties will be adequate to fund operations and planned capital
expenditures.

     The Company's wholly owned Canadian subsidiaries, Canadian Abraxas and Grey
Wolf, have entered into a definitive Purchase and Sale Agreement related to the
sale of their interest in a natural gas plant and the associated reserves. The
sale, effective March 1, 2002, is scheduled to close in the second quarter of
2002 with estimated net proceeds of US $21.5 million. See Note 19.

     In December 2001, the Company's wholly owned subsidiary, Grey Wolf, entered
into a financing agreement ("Grey Wolf Facility") with Mirant Canada Energy
Capital, Ltd. ("Mirant Canada") for US $96 million (CDN $150 million) senior
secured facility, which is non-recourse to Abraxas. Initial proceeds from this
facility of approximately US $25 million were used to retire Grey Wolf's
existing bank debt and for general corporate purposes. Up to US $71 million is
available to finance the drilling of wells and related activities in the Grey
Wolf development plan, as anticipated over the next two years.

3.   ACQUISITIONS AND DIVESTITURES

NEW CACHE PETROLEUMS LTD ACQUISITION

     In January 1999, Canadian Abraxas completed the acquisition of New Cache
Petroleums, LTD ("New Cache"), for approximately $78 million in cash and the
assumption of approximately $10 million in debt. The debt was paid off with a
portion of the proceeds from the sale of the First Lien Notes.

     The acquisition was accounted for as a purchase, and the purchase price was
allocated to the crude oil and natural gas properties based on the fair values
of the properties acquired. Results of operations for New Cache have been
included in the consolidated financial statements since January 1999.

ABRAXAS WAMSUTTER L.P. DIVESTITURE

     In November 1998, the Company sold its interest in certain Wyoming
properties to Abraxas Wamsutter L.P., a Texas limited partnership (the
"Partnership"), for approximately $58.6 million and a minority equity ownership
in the Partnership. Wamsutter Holdings, Inc. ("Wamsutter") initially owned a one
percent interest and acted as general partner of the Partnership. The investment
in the Partnership was accounted for by the equity method. After certain payback
requirements were satisfied, the Company's interest would increase to 35%
initially and could increase to as high as 65%. The Company also received a
management fee and reimbursement of certain overhead costs from the Partnership
which amounted to $594,700 and $112,700 for the years ended December 31, 1999
and 2000 respectively.

                                      F-15
<Page>

     In March 2000, the Partnership sold all of its interest in its crude oil
and natural gas properties to a third party. Prior to the sale of these
properties, effective January 1, 2000, the Company's equity investee share of
oil and gas property cost, results of operations and amortization were not
material to consolidated operations or financial position. As a result of the
sale, the Company received approximately $34 million, which represented a
proportional interest in the Partnership's proved properties. See Note 10
regarding a litigation provision in 2001 of $845,000 related to ad valorem
taxes.

     The condensed pro forma financial information presented below summarizes on
an unaudited pro forma basis, approximate results of the Company's consolidated
results of operations for the year ended December 31, 1999, assuming the
divestiture had occurred on January 1, 1999.

<Table>
<Caption>
                                                       (In thousands except
                                                         per share data)
                                                      -----------------------
     <S>                                                 <C>
     Revenue ........................................    $            66,770
                                                      =======================
     Net loss .......................................    $            (3,294)
                                                      =======================
     Loss per common share ..........................    $             (0.49)
                                                      =======================
</Table>

ACQUISITION OF MINORITY INTEREST IN GREY WOLF

     In September 2001, the Company completed a tender offer for the minority
interest in Grey Wolf, acquiring the approximately 52% of capital stock that was
not previously owned by the Company. The Company issued 3,990,565 common shares
and 588,916 stock options, valued together at approximately $9.2 million.
Additionally, the Company incurred direct costs of approximately $2.7 million
related to the acquisition. The elimination of the minority interest through an
acquisition at a purchase price less than Grey Wolf's book value in the
Company's consolidated financial statements had the effect of reducing the
property and other assets balances by $2.9 million and deferred income taxes by
$1.1 million.

     The condensed pro forma financial information presented below summarizes,
on an unaudited pro forma basis, approximate results of the Company's
consolidated results of operations for the years ended December 31, 1999, 2000
and 2001, assuming the acquisition of the minority interest in Grey Wolf had
occurred at the beginning of each period presented.

<Table>
<Caption>
                                                                             Years ended December 31,
                                                                       1999            2000           2001
                                                                    -------------------------------------------
                                                                      (In thousands except per share items)
                                                                    ------------   ------------   ------------
     <S>                                                            <C>            <C>            <C>
     Revenue ....................................................   $     66,770   $     76,600   $     77,243
                                                                    ============   ============   ============
     Income (loss) before extraordinary item ....................        (36,411)         7,957        (18,042)
                                                                    ============   ============   ============
     Net income (loss) ..........................................        (36,411)         9,730        (18,042)
                                                                    ============   ============   ============
     Income (loss) before extraordinary item, per
      common share - basic ......................................          (3.38)          0.30          (0.63)
                                                                    ============   ============   ============
     Net income (loss) per common share - basic .................          (3.38)         0.37          (0.63)
                                                                    ============   ============   ============
     Income (loss) before extraordinary item, per
      common share - diluted ....................................          (3.38)          0.22          (0.63)
                                                                    ============   ============   ============
     Net income (loss) per common share - diluted                          (3.38)          0.27          (0.63)
                                                                    ============   ============   ============
</Table>

                                      F-16
<Page>

4.   PROPERTY AND EQUIPMENT

          The major components of property and equipment, at cost, are as
          follows:

<Table>
<Caption>
                                                                                          DECEMBER 31
                                                                ESTIMATED        -----------------------------
                                                               USEFUL LIFE           2000             2001
                                                            -----------------    --------------   ------------
                                                                  Years                 (In thousands)
          <S>                                                      <C>           <C>              <C>
          Land, buildings, and improvements ..............         15            $          318   $        318
          Crude oil and natural gas properties ...........          -                   494,633        496,724
          Natural gas processing plants ..................         18                    60,299         63,964
          Equipment and other ............................          7                     3,103          3,350
                                                                                 --------------   ------------
                                                                                 $      558,353   $    564,356
                                                                                 ==============   ============
</Table>

5.   LONG-TERM DEBT

          Long-term debt consists of the following:

<Table>
<Caption>
                                                                                                DECEMBER 31
                                                                                     --------------------------------
                                                                                          2000              2001
                                                                                     --------------     -------------
                                                                                              (In thousands)
          <S>                                                                        <C>                <C>
          11.5% Senior Notes due 2004 ("Old Notes") .............................    $          801     $         801
          12.875% Senior Secured Notes due 2003 ("First Lien Notes") ............            63,500            63,500
          11.5% Second Lien Notes due 2004 ("Second Lien Notes").................           190,178           190,178
          Grey Wolf Credit facility repaid in 2001...............................             7,859                 -
          9.5% Senior Credit Facility ("Grey Wolf Facility"), providing for
           borrowings up to approximately US $96 million (CDN $150 million).
           Secured by the assets of Grey Wolf and non-recourse to Abraxas, net
           of US $2.3 million discount...........................................                 -            22,944

          Production Payment  ...................................................             5,231             8,176
                                                                                     --------------     -------------
                                                                                            267,569           285,599
          Less current maturities ...............................................             1,128               415
                                                                                     --------------     -------------
                                                                                     $      266,441       $   285,184
                                                                                     ===============    =============
</Table>

LONG-TERM INDEBTEDNESS

     OLD NOTES. On November 14, 1996, the Company consummated the offering of
$215.0 million of it's 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of its 11.5% Senior Notes due 2004,
Series C. The Series B Notes and the Series C Notes were subsequently combined
into $275.0 million in principal amount of the Old Notes in June 1998.

     Interest on the Old Notes is payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of the Company at the redemption
prices set forth below, plus accrued and unpaid interest to the date of
redemption, if redeemed during the 12-month period commencing on November 1 of
the years set forth below:

<Table>
<Caption>
          YEAR                                        PERCENTAGE
          ----                                        ----------
          <S>                                            <C>
          2001....................................       102.875%
          2002 and thereafter.....................       100.000%
</Table>

     The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank PARI PASSU in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and to the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by Sandia Oil and Gas Company ("Sandia"), a wholly
owned subsidiary of the Company. The guarantee is a general unsecured obligation
of Sandia and ranks PARI PASSU in right of payment to all unsubordinated
indebtedness of Sandia and senior in right of payment to all subordinated

                                      F-17
<Page>

indebtedness of Sandia. The guarantee is effectively subordinated to the First
Lien Notes and the Second Lien Notes to the extent of the value of the
collateral securing the First Lien Notes and the Second Lien Notes.

     Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to repurchase
all or a portion of such holder's Old Notes at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the Old Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales.

     FIRST LIEN NOTES. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. Beginning March 15, 2002, the First Lien Notes are redeemable, in whole or
in part, at the option of Abraxas at the par value price, plus accrued and
unpaid interest to the date of redemption.

     The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter, wholly-owned subsidiaries of the Company (the
"Restricted Subsidiaries"). The guarantees are secured by substantially all of
the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas.

     Upon a Change of Control, as defined in the First Lien Notes Indenture,
each holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.

     The First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas.

     The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except in certain situations as described in the First Lien Notes
indenture.

     SECOND LIEN NOTES. In December 1999, Abraxas and Canadian Abraxas
consummated an exchange offer whereby $269,699,000 of the Old Notes were
exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of
Abraxas common stock and contingent value rights. An additional $5,000,000 of
the Second Lien Notes were issued in payment of fees and expenses.

     Interest on the Second Lien Notes is payable semi-annually in arrears on
May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas
at the redemption prices set forth below, plus accrued and unpaid interest to

                                      F-18
<Page>

the date of redemption, if redeemed during the 12=month period commencing on
December 1 of the years set forth below:

<Table>
<Caption>
          YEAR                                               PERCENTAGE
          -----                                              ----------
          <S>                                                   <C>
          2001............................................      102.875%
          2002 and thereafter.............................      100.000%
</Table>

     The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.

     Upon a Change of Control, as defined in the Second Lien Notes Indenture,
each holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.


     The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.

     The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture

     The fair value of the Old Notes, First Lien Notes and Second Lien Notes was
approximately $235.2 million as of December 31, 2001. The Company has
approximately $325,000 of standby letters of credit and a $10,000 performance
bond open at December 31, 2001. Approximately $336,000 of cash is restricted and
in escrow related to certain of the letters of credit and the bond.

GREY WOLF FACILITY

     On December 20, 2001, Grey Wolf entered into a credit facility with Mirant
Canada. The Grey Wolf Facility established a revolving credit facility with a
commitment amount of CDN $150 million, (approximately US $96 million). Subject
to certain restrictions, the borrowing base may be reduced at the discretion of
Mirant Canada upon 30 days written notice. Subject to earlier termination on the
occurrence of events of default or other events, the stated maturity date is
December 20, 2007. The applicable interest rate charged on the outstanding
balance under the Grey Wolf Facility is 9.5%. Any amounts in default will

                                      F-19
<Page>

accrue interest at 15%. The Grey Wolf Facility is non-recourse to Abraxas and
its properties, other than Grey Wolf properties, and Abraxas has no additional
direct obligations to Mirant Canada under the facility.

     Prior to maturity, Grey Wolf is required to make principal payments under
the Grey Wolf Facility as follows: (i) on the date of the sale of any producing
properties, Grey Wolf is required to make a payment equal to the amount of the
net sales proceeds; (ii) on a monthly basis, Grey Wolf is required to make a
payment equal to its net cash flow for the month prior to the date of the
payment; and (iii) on the date that any reduction in the commitment amount
becomes effective, Grey Wolf must repay all amounts over the commitment amount
so reduced.

     Under the Grey Wolf Facility, "net cash flow" generally means the amount of
proceeds received by Grey Wolf from the sale of hydrocarbons less taxes, royalty
and similar payments (including overriding royalty interest payments made to
Mirant Canada), interest payments made to Mirant Canada and operating and other
expenses including approved capital and G&A expenses.

     Grey Wolf may also make pre-payments at any time after December 20, 2002.

     The Company treats the Grey Wolf Facility as a revolving line of credit
since, under ordinary circumstances, the lender is paid on a net cash flow
basis. It is anticipated that the Company will be a net borrower for the next
several years due to a large number of exploration and exploitation projects and
the associated capital needs to complete the projects.

     Obligations under the Grey Wolf Facility are secured by a security interest
in substantially all of Grey Wolf's assets, including, without limitation,
working interests in producing properties and related assets owned by Grey Wolf.
None of Abraxas' assets are subject to a security interest under the Grey Wolf
Facility.

     The Grey Wolf Facility contains a number of covenants that, among other
things, restrict the ability of Grey Wolf to (i) enter into new business areas,
(ii) incur additional indebtedness, (iii) create or permit to be created any
liens on any of its properties, (iv) make certain payments, dividends and
distributions, (v) make any unapproved capital expenditures, (vi) sell any of
its accounts receivable, (vii) enter into any unapproved leasing arrangements,
(viii) enter into any take-or-pay contracts, (ix) liquidate, dissolve,
consolidate with or merge into any other entity, (x) dispose of its assets, (xi)
abandon any property subject to Mirant Canada's security interest, (xii) modify
any of its operating agreements, (xiii) enter into any unapproved hedging
agreements, and (xiv) enter into any new agreements affecting existing
agreements relating to or affecting properties subject to Mirant Canada's
security interests. In addition, Grey Wolf is required to submit a quarterly
development plan for Mirant Canada's approval and Grey Wolf must comply with
specified financial ratios and tests, including a minimum collateral coverage
ratio.

     Upon receipt by the Company of a written request from the Miranat Canada,
the Company shall promptly, and in any event within 10 days of receipt of such
request, have entered into one or more swap, hedge, floor, collar or similar
agreements which are satisfactory to the lender at a price and for a term which
is mutually acceptable to the Company and the Mirant Canada.

     The Grey Wolf Facility contains customary events of default, including
nonpayment of principal or interest, violations of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities, change of control and any material adverse change in the financial
condition of Grey Wolf.

     As a condition to the Grey Wolf Facility, Grey Wolf has granted two
overriding royalty interests to Mirant Canada, each in the amount of 2.5% of the
revenues received by Grey Wolf from oil and gas sales from all of its
properties. These overriding royalty interest result in the recording of a $2.3
million discount on the Grey Wolf Facility borrowings at December 31, 2001.

                                      F-20
<Page>

PRODUCTION PAYMENT

     In October 1999 the Company entered into a non-recourse Dollar Denominated
Production Payment agreement (the "Production Payment") with a third party. The
Production Payment has an aggregate total availability of up to $50 million at
15% interest. The Production Payment relates to a portion of the production from
several natural gas wells in South Texas. As of December 31, 2001, the Company
had received $22.1 million under this agreement. The outstanding balance as of
December 31, 2001 is $8.2 million.

EXTRAORDINARY ITEM

     In June 2000, the Company retired $3.5 million of the Old Notes and $3.6
million of the Second Lien Notes at a discount of $1.8 million.

6.   STOCKHOLDERS' EQUITY

COMMON STOCK

     In 1994, the Board of Directors adopted a Stockholders' Rights Plan and
declared a dividend of one Common Stock Purchase Right ("Rights") for each share
of common stock. The Rights are not initially exercisable. Subject to the Board
of Directors' option to extend the period, the Rights will become exercisable
and will detach from the common stock ten days after any person has become a
beneficial owner of 20% or more of the common stock of the Company or has made a
tender offer or Exchange Offer (other than certain qualifying offers) for 20% or
more of the common stock of the Company.

     Once the Rights become exercisable, each Right entitles the holder, other
than the acquiring person, to purchase for $40 a number of shares of the
Company's common stock having a market value of two times the purchase price.
The Company may redeem the Rights at any time for $.01 per Right prior to a
specified period of time after a tender or Exchange Offer. The Rights will
expire in November 2004, unless earlier exchanged or redeemed

CONTINGENT VALUE RIGHTS ("CVRs")

     As part of the exchange offer consummated by the Company in December 1999,
Abraxas issued contingent value rights or CVRs, which entitled the holders to
receive up to a total of 105,408,978 of Abraxas common stock under certain
circumstances as defined. In May 2001, Abraxas issued 3,386,488 shares upon the
expiration of the CVRs.

TREASURY STOCK

     In March 1996, the Board of Directors authorized the purchase in the open
market of up to 500,000 shares of the Company's outstanding common stock, the
aggregate purchase price not to exceed $3,500,000. During the year ended
December 31, 2000, 38,800 shares with an aggregate cost of $78,000 were
purchased. During the years ended December 31, 1999 and 2001, the Company did
not purchase any shares of its common stock for treasury stock.

7.  STOCK OPTION PLANS AND WARRANTS

STOCK OPTIONS

     The Company grants options to its officers, directors, and key employees
under various stock option and incentive plans.

     During 2001, the Company's stockholders approved an amendment to the
Abraxas Petroleum Corporation 1994 Long Term Incentive Plan to increase the
number of shares of Abraxas common stock reserved for issuance under the plan to
5,000,000. The additional shares were necessary to accommodate

                                      F-21
<Page>

the grant of Abraxas options to Grey Wolf option holders in connection with the
acquisition of the minority interest in Grey Wolf in September 2001 (see Note
3), and for the re-issuance of outstanding options granted under the Abraxas
Petroleum Corporation 2000 Long Term Incentive Plan, which was terminated in
2001. The options were re-issued at the same exercise price and term as the
original issuances.

     The Company's various stock option plans have authorized the grant of
options to management, employees and directors for up to approximately 5.6
million shares of the Company's common stock. All options granted have ten year
terms and vest and become fully exercisable over three to four years of
continued service at 25% to 33% on each anniversary date. At December 31, 2001
approximately 695,000 options remain available for grant.

     Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, "Accounting for Stock-Based Compensation", which
also requires that the information be determined as if the Company has accounted
for its employee stock options granted subsequent to December 31, 1995 under the
fair value method prescribed by that SFAS. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 2000, and 2001, risk-free
interest rates of 6.25%, 6.25% and 3.50%, respectively; dividend yields of -0-%;
volatility factors of the expected market price of the Company's common stock of
..928, .916 and .35, respectively; and a weighted-average expected life of the
option of ten years.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<Table>
<Caption>
                                                                  1999              2000              2001
                                                              -------------     -------------     ------------
                                                                   (In thousands except per share data)
   <S>                                                        <C>               <C>               <C>
   Pro forma net income (loss) ............................   $     (37,240)    $      10,089     $    (21,002)
   Pro forma net income (loss) per common share ...........   $       (5.49)    $        0.45     $      (0.81)
   Pro forma net income (loss) per common share -  diluted    $       (5.49)    $        0.31     $      (0.81)
</Table>

                                      F-22
<Page>

A summary of the Company's stock option activity, and related information for
the years ended December 31, follows:

<Table>
<Caption>
                                         1999                          2000                           2001
                              ---------------------------   ---------------------------   -----------------------------
                                            WEIGHTED-                                                  WEIGHTED-AVERAGE
                              OPTIONS   AVERAGE EXERCISE    OPTIONS    WEIGHTED-AVERAGE    OPTIONS      EXERCISE PRICE
                              (000s)        PRICE(1)         (000s)     EXERCISE PRICE      (000s)           (2)
                              -------   -----------------   --------   ----------------   ---------   ------------------
<S>                             <C>     <C>                    <C>     <C>                    <C>     <C>
Outstanding-beginning of
 year ......................    1,572   $            7.33      1,890   $           1.82       4,042   $             3.37
Granted ....................      534                1.19      2,240               4.62         918                 2.81
Exercised ..................        -                   -          -                 -           (8)                1.95
Forfeited/Expired ..........     (216)               2.06        (88)              1.89         (10)                1.79
                              -------                       --------                      ---------

Outstanding-end of year ....    1,890   $            1.82      4,042   $           3.37       4,942   $             3.28
                              =======                       ========                      =========

Exercisable at end of year..      685   $            2.06      1,067   $           1.99       2,259   $             2.65
                              =======                       ========                      =========

Weighted-average fair value
 of options granted during
 the year ..................            $            1.07              $           1.21               $             1.19
</Table>

     Exercise prices for options outstanding as of December 31, 2001 ranged from
$0.97 to $5.03. The weighted-average remaining contractual life of those options
is approximately 7 years.

     (1)  In March 1999, the Company amended the exercise price to $2.06 per
          share on all options with an existing exercise price greater than
          $2.06. See Note 1 Stock-based compensation.
     (2)  In September 2001, the Abraxas Petroleum Corporation 2000 Long Term
          Incentive Plan was terminated, and options granted under the plan were
          reissued under the Abraxas Petroleum Corporation 1994 Long Term
          Incentive Plan at the same option price and term.

                                      F-23
<Page>

STOCK AWARDS

     In addition to stock options granted under the plans described above, the
1994 Long-Term Incentive Plan also provides for the right to receive
compensation in cash, awards of common stock, or a combination thereof. In 1999,
the Company made direct awards of common stock of 18,932 shares at weighted
average fair values of $5.09 per share. The Company recorded compensation
expense of $37,900 for the year ended December 31, 1999. There were no awards in
2000 or 2001.

     The Company also has adopted the Restricted Share Plan for Directors which
provides for awards of common stock to nonemployee directors of the Company who
did not, within the year immediately preceding the determination of the
director's eligibility, receive any award under any other plan of the Company.
In 1999 and 2000, the Company made direct awards of common stock of 3,314 shares
and 12,753 shares, respectively, at weighted average fair values of $4.38 and
$0.94 per share, respectively. The Company recorded compensation expense of
$13,700 and $11,900 for the years ended December 31, 1999 and 2000,
respectively. There were no direct awards of common stock in 2001.

     During 1996, the Company's stockholders approved the Abraxas Petroleum
Corporation Director Stock Option Plan (Plan), which authorizes the grant of
nonstatutory options to acquire an aggregate of 104,000 common shares to those
persons who are directors and not officers of the Company. In March 1999 each of
the seven eligible directors were granted an option to purchase 2,000 common
shares at $2.06, in November 1999 five of the eligible directors were granted
options to purchase 15,000 common shares at $1.41. In December 1999 a new board
was appointed in connection with the Company's Exchange Offer, each of the four
new eligible directors were granted options for 75,000 common shares at $0.97.

STOCK WARRANTS AND OTHER

     In 2000, the Company issued 950,000 warrants in conjunction with a
consulting agreement. Each is exercisable for one share of common stock at an
exercise price of $3.50 per share. These warrants have a four-year term
beginning July 1, 2000. The Company recorded approximately $219,000 of
compensation expense which is included in Other expense in 2000. In addition,
the Company paid cash compensation of $360,000 and $191,000 in 2000 and 2001,
respectively, under the agreement.

     At December 31, 2001, the Company has approximately 6.6 million shares
reserved for future issuance for conversion of its stock options, warrants, and
incentive plans for the Company's directors, employees and consultants.

8.   INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:

<Table>
<Caption>
                                                                           DECEMBER 31
                                                                   ---------------------------
                                                                       2000          2001
                                                                   -------------  ------------
                                                                         (In thousands)
     <S>                                                           <C>            <C>
     Deferred tax liabilities:
       U.S. full cost pool ......................................  $       2,359  $      2,714
       Canadian full cost pool ..................................         21,079        24,809
                                                                   -------------  ------------
     Total deferred tax liabilities .............................         23,438        27,523
     Deferred tax assets:
      Depletion .................................................          1,439         2,035
       Net operating losses  ("NOL").............................         34,624        42,264
       Other ....................................................          1,059         2,273
                                                                   -------------  ------------
     Total deferred tax assets ..................................         37,122        46,572
     Valuation allowance for deferred tax assets ................        (34,763)      (39,670)
                                                                   -------------  ------------
     Net deferred tax assets ....................................          2,359         6,902
                                                                   -------------  ------------
     Net deferred tax liabilities ...............................  $      21,079  $     20,621
                                                                   =============  =============
</Table>

                                      F-24
<Page>

          Significant components of the provision (benefit) for income taxes are
          as follows:

<Table>
<Caption>
                                                                           1999         2000       2001
                                                                        ----------   ---------   ---------
     <S>                                                                <C>          <C>         <C>
     Current:
       Federal........................................................  $        -   $       -   $     505
       Foreign .......................................................         491      (1,233)          -
                                                                        ----------   ---------   ---------
                                                                        $      491   $  (1,233)  $     505
                                                                        ==========   =========   =========
     Deferred:
       Federal .......................................................  $        -   $   3,433   $       -
       Foreign .......................................................     (13,116)      1,505       1,897
                                                                        ----------   ---------   ---------
                                                                        $  (13,116)  $   4,938   $   1,897
                                                                        ==========   =========   =========
</Table>

     As a result of the acquisition described in Note 3, deferred tax
liabilities decreased by $1,091,000.

     At December 31, 2001 the Company had, subject to the limitation discussed
below, $115,900,000 of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire from 2002 through 2021 if not utilized. At
December 31, 2001, the Company had approximately US $6,700,000 of net operating
loss carryforwards for Canadian tax purposes. These carryforwards will expire
from 2002 through 2008 if not utilized.

     As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the use
of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $3,203,000 will be limited to approximately $235,000 per year.

     During 1992, the Company acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of the acquired
corporation of $257,000 acquired in the acquisition are limited to approximately
$115,000 per year.

     As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $6,590,000 will be limited as described above and in the following paragraph.

     An ownership change under Section 382 occurred in December 1999, following
the issuance of additional shares, as described in Note 5. It is expected that
the annual use of U.S. net operating loss carryforwards subject to this Section
382 limitation will be limited to approximately $363,000, subject to the lower
limitations described above. Future changes in ownership may further limit the
use of the Company's carryforwards. In 2000 assets with built in gains were
sold, increasing the Section 382 limitation for 2001 by approximately
$31,000,000.

     The annual Section 382 limitation may be increased during any year, within
5 years of a change in ownership, in which built-in gains that existed on the
date of the change in ownership are recognized.

     In addition to the Section 382 limitations, uncertainties exist as to the
future utilization of the operating loss carryforwards under the criteria set
forth under FASB Statement No. 109. Therefore, the Company has

                                      F-25
<Page>

established a valuation allowance of $34,763,000 and $39,670,000 for deferred
tax assets at December 31, 2000 and 2001, respectively.

     The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:

<Table>
<Caption>
                                                                         DECEMBER 31
                                                   -------------------------------------------------------
                                                        1999                2000                  2001
                                                   -------------        -------------        -------------
                                                                        (In thousands)
     <S>                                           <C>                  <C>                  <C>
     Tax (expense) benefit at U.S.
       statutory rates (34%) ...............       $      16,672        $      (3,965)       $       5,318
     (Increase) decrease in deferred tax
       asset valuation allowance ...........              (3,312)               1,371               (4,907)
      NOL utilization - extraordinary gain                     -                 (603)                   -
     Write-down of non-tax basis assets.....                   -                    -                (2,194)
     Higher effective rate of foreign                       (491)              (1,098)                (136)
       operations...........................
     Percentage depletion ..................                   -                  363                  596
     Other .................................                (244)                 227               (1,079)
                                                   -------------        -------------        -------------
                                                   $      12,625        $      (3,705)       $      (2,402)
                                                   =============        =============        =============
</Table>

9.   RELATED PARTY TRANSACTIONS

     Accounts receivable - Other and Other assets includes approximately
$268,000 and $195,000 as of December 31, 2000 and 2001, respectively,
representing amounts due from officers and stockholders relating primarily to
joint interest billings on properties which the Company operates and advances
made to employees.

     Grey Wolf owns a 10% interest in the Canadian Abraxas oil and gas
properties and the Canadian Abraxas gas processing plants acquired by Canadian
Abraxas in November 1996 and manages the operations of Canadian Abraxas,
pursuant to a management agreement between Canadian Abraxas and Grey Wolf. Under
the management agreement, Canadian Abraxas reimburses Grey Wolf for reasonable
costs or expenses attributable to Canadian Abraxas and for administrative
expenses based upon the percentage that Canadian Abraxas' gross revenue bears to
the total gross revenue of Canadian Abraxas and Grey Wolf. Amounts paid under
this agreement were $2.3 million, $2.5 million and $1.7 million for the years
ended December 31, 1999, 2000 and 2001, respectively.

     Wind River Resources Corporation ("Wind River"), all of the capital stock
of which is owned by the Company's President, owns a twin-engine airplane. The
airplane is available for business use by the employees of Abraxas from time to
time at Wind River's cost. Abraxas paid Wind River a total of $336,000, $336,000
and $314,000 in 1999, 2000 and 2001 respectively.

10.  COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

     During the years ended December 31, 1999, 2000 and 2001, the Company
incurred rent expense related to leasing office facilities of approximately
$396,000, $465,000 and $519,000, respectively. Future minimum rental payments
are as follows at December 31, 2001.

<Table>
     <S>                                                                                     <C>
     2002................................................................................    $   528,000
     2003 ...............................................................................        336,000
     2004 ...............................................................................        236,000
     2005 ...............................................................................        236,000
     2006 ...............................................................................        177,000
     Thereafter .........................................................................              -
</Table>

                                      F-26
<Page>

LITIGATION AND CONTINGENCIES

     In 2001 the Company and the Partnership (see Note 3) were named in a
lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by the Company
related to the responsibility for year 2000 ad valorem taxes on crude oil and
natural gas properties sold by the Company and the Partnership. In February
2002, a summary judgment was granted to the plaintiff in this matter and a final
judgment in the amount of $1.3 million was entered. The Company has filed an
appeal. The Company believes these charges are without merit. The Company has
established a reserve in the amount of $845,000, which represents the Company's
interest in the judgment.

     In late 2000, the Company received a Final De Minimis Settlement Offer from
the United States Environmental Protection Agency concerning the Casmalia
Disposal Site, Santa Barbara County, California. The Company's liability for the
cleanup at the Superfund site is based on its acquisition of Bennett Petroleum
Corporation, which is alleged to have transported or arranged for the
transportation of oil field waste and drilling muds to the Superfund site. The
Company has engaged California counsel to evaluate the notice of proposed de
minimis settlement and its notice of potential strict liability under the
Comprehensive Environmental Response, Compensation and Liability Act. Defense of
the action is handled through a joint group of oil companies, all of which are
claiming a petroleum exclusion that limits the Company's liability. The
potential financial exposure and any settlement posture has yet not been
developed, but is considered by the Company to be immaterial.

     Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At December 31, 2001, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.

11.  EARNINGS PER SHARE

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

<Table>
<Caption>
                                                             1999               2000               2001
                                                         -------------      -------------      -------------
<S>                                                      <C>                <C>                <C>
Numerator:
   Numerator for basic and diluted earnings per share
    - net income (loss) before extraordinary item        $ (36,680,000)     $   6,676,000      $ (19,718,000)

  Extraordinary item                                                 -          1,773,000                  -
                                                         -------------      -------------      -------------

   Numerator for basis and diluted earnings per share
    - net income (loss) available to common
    stockholders                                           (36,680,000)         8,449,000        (19,718,000)
                                                         -------------      -------------      -------------

Denominator:
   Denominator for basic earnings per share -
    weighted-average shares                                  6,783,633         22,615,777         25,788,571
   Effect of dilutive securities:
    Stock options, warrants and CVRs                                 -         10,011,987                  -
                                                         -------------      -------------      -------------

   Dilutive potential common shares
                                                         =============      =============      =============
Denominator for diluted earnings per share -
 adjusted weighted-average shares and assumed
 conversions                                                 6,783,633         32,627,764         25,788,571
                                                         =============      =============      =============

   Basic earnings (loss) per share:
      Net income (loss) before extraordinary item        $       (5.41)     $        0.29      $       (0.76)
      Extraordinary item                                             -               0.08                  -
                                                         -------------      -------------      -------------
        Net income (loss) per common share               $       (5.41)     $        0.37      $       (0.76)
                                                         =============      =============      =============
   Diluted earnings (loss) per share:
      Net income (loss) before extraordinary item        $       (5.41)     $        0.21      $       (0.76)
      Extraordinary item                                             -               0.05                  -
                                                         -------------      -------------      -------------
        Net income (loss) per common share - diluted      $      (5.41)     $        0.26      $       (0.76)
                                                         =============      =============      =============
</Table>

                                      F-27
<Page>

     For the year ended December 31, 1999 and 2001 none of the shares issuable
in connection with stock options, warrants or CVRs are included in diluted
shares. Inclusion of these shares would be antidilutive due to losses incurred
in that year. Had a loss not been incurred, 68.2 million shares and 1.2 million
shares would have been included for the year ended December 31, 1999 and 2001,
respectively.

12.   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     Selected results of operations for each of the fiscal quarters during the
years ended December 31, 2000 and 2001 are as follows:

<Table>
<Caption>
                                            1ST              2ND               3RD               4TH
                                          QUARTER          QUARTER           QUARTER           QUARTER
                                         ----------      -----------      ------------      ------------
                                                     (In thousands, except per share data)
<S>                                      <C>             <C>              <C>               <C>
Year Ended December 31, 2000
   Net revenue ....................      $   16,717      $    16,287      $     16,377      $     27,219
   Operating income (loss) ........           1,513            1,629              (963)            9,404
   Net income (loss) before
    extraordinary item ............          27,156           (7,186)          (13,586)              292
   Net income (loss) ..............          27,156           (5,413)          (13,586)              292
   Net income (loss) before
    extraordinary item  per
    common share-basic ............      $     1.20      $     (0.32)     $      (0.60)     $       0.01
   Net income (loss) before
    extraordinary item per common
    share-diluted .................      $     0.52      $     (0.32)     $      (0.60)     $       0.01
   Net income (loss) per common
    share-basic ...................      $     1.20      $     (0.24)     $      (0.60)     $       0.01

   Net income (loss) per common
    share-diluted .................      $     0.52      $     (0.24)     $      (0.60)     $       0.01

Year Ended December 31, 2001
   Net revenue ....................      $   29,086      $    21,116      $     14,901      $     12,140
   Operating income (loss) ........          12,112            9,002             2,113            (4,102)
   Net income (loss) ..............             255           (1,274)           (5,849)          (12,850)
   Net income (loss) per common
    share-basic ...................      $     0.01      $     (0.05)     $      (0.22)     $      (0.43)

   Net income (loss) per common
    share-diluted .................      $     0.01      $     (0.05)     $      (0.22)     $      (0.43)
</Table>

                                      F-28
<Page>

     During the first quarter of 2000, the Company recognized a gain of $34
million on the sale of its equity investment in the Partnership. In the second
quarter of 2000, the Company recognized an extraordinary gain on debt
extinguishment of $1.8 million.

     During the fourth quarter of 2001, the Company incurred a ceiling
limitation write-down of $2.6 million, which was determined using realized
prices at March 22, 2002. Had year-end 2001 realized prices been used, the
write-down would have been $71.3 million.

13.  BENEFIT PLANS

     The Company has a defined contribution plan (401(k)) covering all eligible
employees of the Company. The Company did not contribute to the plan in 2000 or
2001. The employee contribution limitations are determined by formulas, which
limit the upper one-third of the plan members from contributing amounts that
would cause the plan to be top-heavy. The employee contribution is limited to
the lesser of 20% of the employee's annual compensation or $11,000.

14.  GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS.

     The following table presents condensed consolidating balance sheets of
Abraxas, as a parent company, and its significant subsidiaries, Canadian Abraxas
and Grey Wolf, as of December 31, 2000 and 2001 and the related consolidating
statements of operations for the years ended December 31, 1999, 2000 and 2001.
Canadian Abraxas (one of the Restricted Subsidiaries, see Note 5) is a guarantor
of the First Lien Notes ($63.5 million) and jointly and severally liable with
Abraxas for the Second Lien Notes ($190.2 million) and the Old Notes ($801,000).
Grey Wolf is a non-guarantor with respect to the First Lien Notes and the Old
Notes.

                                      F-29
<Page>


        CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                           NON-GUARANTOR BALANCE SHEET
                               DECEMBER 31, 2001
                                (IN THOUSANDS)

<Table>
<Caption>
                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
<S>                                                <C>             <C>           <C>             <C>            <C>
ASSETS:
Current assets:
   Cash ........................................   $       3,593   $     1,245   $       2,767   $          -   $      7,605
   Accounts receivable, less allowance for
    doubtful accounts...........................          17,281           792           6,782        (16,808)         8,047
   Equipment inventory .........................           1,061           178              12              -          1,251
   Other current assets ........................             250            99              94              -            443
                                                   -------------   -----------   -------------   ------------   ------------
     Total current assets ......................          22,185         2,314           9,655        (16,808)        17,346
Property and equipment - net....................         116,462       122,486          42,946              -        281,894
Deferred financing fees, net  ..................           2,779         1,042             107              -          3,928
Other assets ...................................         108,801           784           6,281       (115,321)           545
                                                   -------------   -----------   -------------   ------------   ------------
   Total assets ................................      $  250,227   $   126,626   $      58,989   $   (132,129)  $    303,713
                                                   =============   ===========   =============   ============   ============
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Current liabilities:
   Accounts payable ............................      $   10,642   $    17,009   $       9,472   $    (22,985)  $     14,138
   Accrued interest ............................           5,000         1,009               4              -          6,013
   Other accrued expenses ......................           1,052             -              64              -          1,116
   Hedge liability .............................             438           220               -              -            658
   Current maturities of long-term debt ........             415             -               -              -            415
                                                   -------------   -----------   -------------   ------------   ------------
     Total current liabilities .................          17,547        18,238           9,540        (22,985)        22,340
Long-term debt .................................         209,611        52,629          22,944              -        285,184
Deferred income taxes ..........................               -        17,718           2,903              -         20,621
Future site restoration  .......................               -         3,399             657              -          4,056
                                                   -------------   -----------   -------------   ------------   ------------
                                                         227,158        91,984          36,044        (22,985)       332,201
Stockholders' equity (deficit)..................          23,069        34,642          22,945       (109,144)       (28,488)
                                                   -------------   -----------   -------------   ------------   ------------
Total liabilities and stockholders' equity
(deficit).......................................   $     250,227   $   126,626   $      58,989   $   (132,129)  $    303,713
                                                   =============   ===========   =============   ============   ============
</Table>

     (1)  Includes amounts for insignificant U.S. subsidiaries, Sandia and
          Wamsutter, which are guarantors of the First and Second Lien Notes.
          Sandia is also a guarantor of the Old Notes. Additionally, these
          subsidiaries are designated as Restricted Subsidiaries along with
          Canadian Abraxas (see Note 5).

                                      F-30
<Page>

          CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND
                          NON-GUARANTOR BALANCE SHEET
                               DECEMBER 31, 2000
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
<S>                                                <C>             <C>           <C>             <C>            <C>
ASSETS:
Current assets:
   Cash ........................................   $         326   $     1,678   $           -   $          -   $      2,004
   Accounts receivable, less allowance for
    doubtful accounts...........................          46,085         2,890           6,434        (34,691)        20,718
   Equipment inventory .........................             985           319             107              -          1,411
   Other current assets ........................             179             -               -              -            179
                                                   -------------   -----------   -------------   ------------   ------------
     Total current assets ......................          47,575         4,887           6,541        (34,691)        24,312
Property and equipment - net....................         119,349       148,585          36,850              -        304,784
Deferred financing fees, net  ..................           4,116         1,440               -              -          5,556
Other assets ...................................          96,666           832               -        (96,590)           908
                                                   -------------   -----------   -------------   ------------   ------------
   Total assets ................................   $     267,706   $   155,744   $      43,391   $   (131,281)  $    335,560
                                                   =============   ===========   =============   ============   ============
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Current liabilities:
   Accounts payable ............................   $      23,028   $    31,437   $       8,891   $    (34,354)  $     29,002
   Accrued interest ............................           5,057         1,009              13              -          6,079
   Other accrued expenses ......................             679          (349)          1,602              -          1,932
   Current maturities of long-term debt ........           1,128             -               -              -          1,128
                                                   -------------   -----------   -------------   ------------   ------------
     Total current liabilities .................          29,892        32,097          10,506        (34,354)        38,141
Long-term debt .................................         205,953        52,629           7,859              -        266,441
Deferred income taxes ..........................               -        18,881           2,198              -         21,079
Future site restoration  .......................               -         3,706             599              -          4,305
Minority interest in foreign subsidiary ........               -             -               -         12,097         12,097
                                                   -------------   -----------   -------------   ------------   ------------
                                                         235,845       107,313          21,162        (22,257)       342,063
Stockholders' equity (deficit)..................          31,861        48,431          22,229       (109,024)        (6,503)
                                                   -------------   -----------   -------------   ------------   ------------
Total liabilities and stockholders' equity
(deficit).......................................   $     267,706   $   155,744   $      43,391   $   (131,281)  $    335,560
                                                   =============   ===========   =============   ============   ============
</Table>

                                      F-31
<Page>

         CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND
                      NON-GUARANTOR STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2001
                                 (IN THOUSANDS)

<Table>
<Caption>

                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
<S>                                                <C>             <C>           <C>             <C>            <C>
Revenues:
   Oil and gas production revenues .............   $      34,934   $    24,308   $      13,959   $          -   $     73,201
   Gas processing revenues .....................               -         2,008             430              -          2,438
   Rig revenues ................................             756             -               -              -            756
   Other  ......................................              85           471             292              -            848
                                                   -------------   -----------   -------------   ------------   ------------
                                                          35,775        26,787          14,681              -         77,243
Operating costs and expenses:
   Lease operating and production taxes ........           9,302         6,836           2,478              -         18,616
   Depreciation, depletion, and amortization ...          12,336        14,707           5,441              -         32,484
   Proved property impairment ..................               -         2,638               -              -          2,638
   Rig operations ..............................             702             -               -              -            702
   General and administrative ..................           3,742         1,720             983              -          6,445
   General and administrative (Stock-based
     Compensation)..............................          (2,767)            -               -              -         (2,767)
                                                   -------------   -----------   -------------   ------------   ------------
                                                          23,315        25,901           8,902              -         58,118
                                                   -------------   -----------   -------------   ------------   ------------
Operating income (loss).........................          12,460           886           5,779              -         19,125

Other (income) expense:
   Interest income .............................          (1,242)            -               -          1,164            (78)
   Amortization of deferred financing fees......           1,907           361               -              -          2,268
   Interest expense.............................          25,086         7,117             484         (1,164)        31,523
   Other .......................................           1,052             -               -              -          1,052
                                                   -------------   -----------   -------------   ------------   ------------
                                                          26,803         7,478             484              -         34,765
                                                   -------------   -----------   -------------   ------------   ------------

Income (loss) from operations before income tax
   and extraordinary item.......................         (14,343)       (6,592)          5,295              -        (15,640)
Income tax expense (benefit)....................             505           (80)          1,977              -          2,402
Minority interest in income of consolidated
   foreign subsidiary ..........................               -             -               -         (1,676)        (1,676)
                                                   -------------   -----------   -------------   ------------   ------------
Net  income (loss)..............................   $     (14,848)  $    (6,512)  $       3,318   $     (1,676)  $    (19,718)
                                                   =============   ===========   =============   ============   ============
</Table>

                                      F-32
<Page>

        CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND
                     NON-GUARANTOR STATEMENT OF OPERATIONS
                     FOR THE YEAR ENDED DECEMBER 31, 2000
                                 (IN THOUSANDS)

<Table>
<Caption>

                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
<S>                                                <C>             <C>           <C>             <C>            <C>
Revenues:
   Oil and gas production revenues .............   $      32,165   $    27,425   $      13,383   $          -   $     72,973
   Gas processing revenues .....................               -         2,271             446              -          2,717
   Rig revenues ................................             505             -               -              -            505
   Other  ......................................             216           170              19              -            405
                                                   -------------   -----------   -------------   ------------   ------------
                                                          32,886        29,866          13,848              -         76,600
Operating costs and expenses:
   Lease operating and production taxes ........           7,755         8,695           2,333              -         18,783
   Depreciation, depletion, and amortization ...          12,328        18,126           5,403              -         35,857
   Rig operations ..............................             717             -               -              -            717
   General and administrative ..................           4,115         1,484             934              -          6,533
   General and administrative (Stock-based
     Compensation)..............................           2,767             -               -              -          2,767
                                                   -------------   -----------   -------------   ------------   ------------
                                                          27,682        28,305           8,670              -         64,657
                                                   -------------   -----------   -------------   ------------   ------------
Operating income (loss).........................           5,204         1,561           5,178              -         11,943

Other (income) expense:
   Interest income .............................          (2,277)            -               -          1,747           (530)
   Amortization of deferred financing fees......           1,660           431               -              -          2,091
   Interest expense ............................          24,594         7,582             711        (1,747)         31,140
   Gain on sale of equity investment ...........         (33,983)            -               -              -        (33,983)
   Other .......................................           1,116           447               -              -          1,563
                                                   -------------   -----------   -------------   ------------   ------------
                                                          (8,890)        8,460             711              -            281
                                                   -------------   -----------   -------------   ------------   ------------
Income (loss) from operations before income tax
   and extraordinary item.......................          14,094        (6,899)          4,467              -         11,662
Income tax expense (benefit)....................           3,433        (1,658)          1,930                         3,705
Minority interest in income of consolidated
   foreign subsidiary ..........................               -             -               -         (1,281)        (1,281)
                                                   -------------   -----------   -------------   ------------   ------------
Income (loss) before extraordinary item.........          10,661        (5,241)          2,537         (1,281)         6,676
Extraordinary item:
   Gain on debt extinguishment..................           1,773             -               -              -          1,773
                                                   -------------   -----------   -------------   ------------   ------------
Net income (loss)...............................   $      12,434   $    (5,241)  $       2,537   $     (1,281)  $      8,449
                                                   =============   ===========   =============   ============   ============
</Table>

                                      F-33
<Page>

        CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                      NON-GUARANTOR STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)

<Table>
<Caption>

                                                      ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
<S>                                                  <C>              <C>           <C>            <C>            <C>
Revenues:
   Oil and gas production revenues ...............   $    21,331      $  29,314     $   8,380      $        -     $    59,025
   Gas processing revenues .......................             -          3,827           417               -           4,244
   Rig revenues ..................................           444              -             -               -             444
   Other  ........................................         2,811            222            24               -           3,057
                                                     -----------      ---------     ---------      ---------      -----------
                                                          24,586         33,363         8,821                          66,770
Operating costs and expenses:
   Lease operating and production taxes ..........         6,627          9,115         2,196               -          17,938
   Depreciation, depletion, and amortization .....         9,931         20,329         4,551               -          34,811
   Proved property impairment ....................             -         19,100             -               -          19,100
   Rig operations ................................           624              -             -               -             624
   General and administrative ....................         2,933          1,728           608               -           5,269
                                                     -----------      ---------     ---------      ---------      -----------
                                                          20,115         50,272         7,355               -          77,742
                                                     -----------      ---------     ---------      ---------      -----------
Operating income (loss)...........................         4,471        (16,909)        1,466               -         (10,972)

Other (income) expense:
   Interest income ...............................        (1,590)          (347)          (28)          1,299            (666)
   Amortization of deferred financing fees........         1,484            431             -               -           1,915
   Interest expense...............................        28,036          9,662           416          (1,299)         36,815
                                                     -----------      ---------     ---------      ---------      -----------
                                                          27,930          9,746           388               -          38,064
                                                     -----------      ---------     ---------      ---------      -----------
Income (loss) from operations before income tax...       (23,459)       (26,655)        1,078               -         (49,036)
Income tax expense (benefit)......................             -        (13,177)          552               -         (12,625)
Minority interest in income of consolidated
   foreign subsidiary ............................             -              -             -            (269)           (269)
                                                     -----------      ---------     ---------      ---------      -----------
Net income (loss) ...............................    $   (23,459)     $ (13,478)    $     526      $     (269)    $   (36,680)
                                                     ===========      =========     =========      ==========     ===========
</Table>

                                      F-34
<Page>

              CONDENSED CONSOLIDATING PARTENT, RESTRICTED SUBSIDIARY AND
                       NON-GUARANTOR STATEMENT OF CASH FLOW
                       FOR THE YEAR ENDED DECEMBER 31, 2001
                                 (IN THOUSANDS)

<Table>
<Caption>

                                                      ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
<S>                                                  <C>              <C>           <C>            <C>            <C>
OPERATING ACTIVITIES
Net income (loss) ...........................        $   (14,848)     $  (6,512)    $   3,318      $   (1,676)    $   (19,718)
Adjustments to reconcile net income (loss)
   to net cash provided by operating
   activities:
     Minority interest in income of foreign
       subsidiary ...........................                  -              -             -           1,676           1,676
     Loss on sale of equity investment.......                845              -             -               -             845
     Depreciation, depletion, and
       amortization .........................             12,336         14,707         5,441               -          32,484
     Proved property impairment .............                  -          2,638             -               -           2,638
     Deferred income tax (benefit) expense...                  -            (80)        1,977               -           1,897
     Amortization of deferred financing fees.              1,907            361             -               -           2,268

     Stock-based compensation ...............             (2,767)             -             -               -          (2,767)
     Changes in operating assets and
       liabilities:
         Accounts receivable ................             28,804         (9,721)       (6,390)              -          12,693
         Equipment inventory ................                (76)             -             -               -             (76)
         Other  .............................               (281)             -           175               -            (106)
         Accounts payables and accrued
           expenses .........................            (12,915)        (2,254)         (402)              -         (15,571)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided (used) by operating
   activities ...............................             13,005           (861)        4,119               -          16,263

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............            (19,126)       (15,313)      (22,617)              -         (57,056)
Proceeds from sale of oil and gas
   properties................................              9,677         15,882         3,379               -          28,938
Acquisition of minority interest ............             (2,679)             -             -               -          (2,679)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided  (used) by investing
   activities ...............................            (12,128)           569       (19,238)              -         (30,797)

FINANCING ACTIVITIES
Proceeds form issuance of common stock.......                 16              -             -               -              16
Proceeds from long-term borrowings ..........             11,700              -        18,295               -          29,995
Payments on long-term borrowings ............             (9,326)             -             -               -          (9,326)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided (used) by financing
 activities..................................              2,390              -        18,295               -          20,685
                                                     -----------      ---------     ---------      ----------     -----------
                                                           3,267           (292)        3,176               -           6,151
Effect of exchange rate changes on cash .....                  -           (141)         (409)              -            (550)
                                                     -----------      ---------     ---------      ----------     -----------
Increase (decrease) in cash .................              3,267           (433)        2,767               -           5,601
Cash at beginning of year ...................                326          1,678             -               -           2,004
                                                     -----------      ---------     ---------      ----------     -----------
Cash at end of year..........................        $     3,593      $   1,245     $   2,767      $        -     $     7,605
                                                     ===========      =========     =========      ==========     ===========
</Table>

                                      F-35
<Page>

             CONDENSED CONSOLIDATING PARTENT, RESTRICTED SUBSIDIARY AND
                       NON-GUARANTOR STATEMENT OF CASH FLOW
                       FOR THE YEAR ENDED DECEMBER 31, 2000
                                (IN THOUSANDS)

<Table>
<Caption>

                                                      ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
<S>                                                  <C>              <C>           <C>            <C>            <C>
OPERATING ACTIVITIES
Net income (loss) ...........................        $    12,434      $  (5,241)    $   2,537      $   (1,281)    $     8,449
Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
     Minority interest in income of foreign
       subsidiary ...........................                  -              -             -           1,281           1,281
        Extraordinary gain on extinguishment
       of debt...............................             (1,773)             -             -               -          (1,773)
     Gain on sale of equity investment.......            (33,983)             -             -               -         (33,983)
     Depreciation, depletion, and
       amortization .........................             12,329         18,126         5,402               -          35,857
     Deferred income tax expense (bebefit)...              3,433           (153)        1,658                           4,938
     Amortization of deferred financing fees.              1,660            431             -               -           2,091
     Stock-based compensation ...............              2,767              -             -               -           2,767
     Issuance of common stock and warrants
       for compensation .....................                265              -             -               -             265
     Changes in operating assets and
       liabilities:
         Accounts receivable ................                  8         (3,461)       (3,583)              -          (7,036)
         Equipment inventory ................               (538)             -             -               -            (538)
         Other  .............................               (184)        (1,618)         (37)               -          (1,839)
         Accounts payables and accrued
           expenses .........................              5,357            378         5,158               -          10,893
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided by operating activities ...              1,775          8,462        11,135               -          21,372

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............            (39,767)       (15,649)      (18,996)              -         (74,412)
Proceeds from sale of oil and gas
   properties ...............................              5,542          7,393         8,222               -          21,157
Proceeds from sale of equity investment .....             34,482              -             -               -          34,482
                                                     -----------      ---------     ---------      ----------     -----------
Net cash  provided (used) by investing
   activities ...............................                257         (8,256)      (10,774)              -          (18,773)

FINANCING ACTIVITIES
Purchase of treasury stock, net .............                (78)             -             -               -             (78)
Proceeds from long-term borrowings ..........              6,400              -             -               -           6,400
Payments on long-term borrowings ............             (9,979)             -          (184)              -         (10,163)
Deferred financing fees .....................                 23              -             -               -              23
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided  (used) by  financing
   activities ...............................             (3,634)             -          (184)              -          (3,818)
                                                     -----------      ---------     ---------      ----------     -----------
                                                         (1,602)            206           177               -          (1,219)
Effect of exchange rate changes on cash .....                 -            (399)         (177)              -            (576)
                                                     -----------      ---------     ---------      ----------     -----------
Increase (decrease) in cash .................             (1,602)          (193)            -               -          (1,795)
Cash at beginning of year ...................              1,928          1,871             -               -           3,799
                                                     -----------      ---------     ---------      ----------     -----------
Cash at end of year..........................        $       326      $   1,678     $       -      $        -     $     2,004
                                                     ===========      =========     =========      ==========     ===========
</Table>

                                      F-36
<Page>

            CONDENSED CONSOLIDATING PARTENT, RESTRICTED SUBSIDIARY AND
                      NON-GUARANTOR STATEMENT OF CASH FLOW
                      FOR THE YEAR ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)

<Table>
<Caption>

                                                      ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
<S>                                                  <C>              <C>           <C>            <C>            <C>
OPERATING ACTIVITIES
Net income (loss) ...........................        $   (23,459)     $ (13,478)    $     526      $     (269)    $   (36,680)

Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
     Minority interest in income of foreign
       subsidiary ...........................                  -              -             -             269             269
     Depreciation, depletion, and
       amortization .........................              9,931         20,329         4,551               -          34,811
     Proved property impairment .............                  -         19,100             -               -          19,100
     Deferred income tax (benefit) expense...                  -        (13,595)          479               -         (13,116)
     Amortization of deferred financing fees.              1,484            431             -               -           1,915
     Amortization of premium on long term
       debt..................................               (579)             -             -               -            (579)
     Issuance of common stock and warrants
       for compensation .....................                 53              -             -               -              53
     Changes in operating assets and
       liabilities:
         Accounts receivable ................              3,724         (5,201)       (1,315)             94          (2,698)
         Equipment inventory ................                 57              -             -               -              57
         Other  .............................                221           (177)          352               -             396
         Accounts payables and accrued
           expenses .........................              7,816         (8,224)          762               -             354
     Other...................................            (83,656)        83,750             -             (94)              -
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided (used) by operating
   activities ...............................            (84,408)        82,935         5,355               -           3,882

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............            (19,132)       (99,600)       (9,976)              -        (128,708)
Proceeds from sale of oil and gas
   properties and equipment inventory .......              1,753         13,920         1,821               -          17,494
                                                     -----------      ---------     ---------      ----------     -----------
Net cash used by investing activities .......            (17,379)       (85,680)       (8,155)              -        (111,214)

FINANCING ACTIVITIES
Proceeds from long-term borrowings ..........             87,006             54         1,397               -          88,457
Payments on long-term borrowings ............            (35,747)             -             -               -         (35,747)
Deferred financing fees .....................             (3,586)             -             -               -          (3,586)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided by financing activities ...             47,673             54         1,397               -          49,124
                                                     -----------      ---------     ---------      ----------     -----------
                                                         (54,114)        (2,691)       (1,403)              -         (58,208)
Effect of exchange rate changes on cash .....                  -            392           225               -             617
                                                     -----------      ---------     ---------      ----------     -----------
Increase (decrease) in cash .................            (54,114)        (2,299)       (1,178)              -         (57,591)
Cash at beginning of year ...................             56,042          4,170         1,178                -         61,390
                                                     -----------      ---------     ---------      ----------     -----------
Cash at end of year..........................        $     1,928      $   1,871     $       -      $        -     $     3,799
                                                     ===========      =========     =========      ==========     ===========
</Table>

                                      F-37
<Page>

15. BUSINESS SEGMENTS

     The Company conducts its operations through two geographic segments, the
United States and Canada, and is engaged in the acquisition, development, and
production of crude oil and natural gas and the processing of natural gas in
each country. The Company's significant operations are located in the Texas Gulf
Coast, the Permian Basin of western Texas, and Canada. Identifiable assets are
those assets used in the operations of the segment. Corporate assets consist
primarily of deferred financing fees and other property and equipment. The
Company's revenues are derived primarily from the sale of crude oil, condensate,
natural gas liquids, and natural gas to marketers and refiners and from
processing fees from the custom processing of natural gas. As a general policy,
collateral is not required for receivables; however, the credit of the Company's
customers is regularly assessed. The Company is not aware of any significant
credit risk relating to its customers and has not experienced significant credit
losses associated with such receivables.

     In 2001, three customers accounted for approximately 41% of consolidated
oil and natural gas production revenue. Three customers accounted for
approximately 76% of United States revenue and five customers accounted for
approximately 78% of revenue in Canada. In 2000, two customers accounted for
approximately 26% of oil and natural gas production revenues. Three customers
accounted for approximately 59% of United States revenue and two customers
accounted for approximately 36% of revenue in Canada. In 1999, three customers
accounted for approximately 58% of oil and natural gas production revenues and
gas processing revenues.

Business segment information about the Company's 1999 operations in different
geographic areas is as follows:

<Table>
<Caption>
                                                  U.S.       CANADA      TOTAL
                                               ---------   ---------   ---------
                                                         (In thousands)
<S>                                            <C>         <C>         <C>
Revenues ...................................   $  24,586   $  42,184   $  66,770
                                               =========   =========   =========

Operating profit (loss).....................   $   7,765   $ (15,444)  $  (7,679)
                                               =========   =========
General corporate ..........................                              (3,293)
Net interest expense and amortization of
   deferred financing fees .................                             (38,064)
                                                                       ---------
   Loss before income taxes ................                           $ (49,036)
                                                                       =========

Identifiable assets at December 31, 1999 ...   $ 107,336   $ 206,474   $ 313,810
                                               =========   =========
Corporate assets ...........................                               8,474
                                                                       ---------
   Total assets ............................                           $ 322,284
                                                                       =========
</Table>

Business segment information about the Company's 2000 operations in different
geographic areas is as follows:

<Table>
<Caption>
                                                  U.S.       CANADA      TOTAL
                                               ---------   ---------   ---------
                                                        (In thousands)
<S>                                            <C>         <C>         <C>
Revenues ...................................   $  32,886   $  43,714   $  76,600
                                               =========   =========   =========

Operating profit............................   $  12,446   $   6,739   $  19,185
                                               =========   =========
General corporate ..........................                              (7,602)
Net interest expense and amortization of
   deferred financing fees .................                             (32,701)
Other income (net)..........................                              32,780
                                                                       ---------
   Income before income taxes and
     extraordinary items ...................                           $  11,662
                                                                       =========
Identifiable assets at December 31, 2000 ...   $ 132,327   $ 197,229   $ 329,556
                                               =========   =========
Corporate assets ...........................                               6,004
                                                                       ---------
   Total assets ............................                           $ 335,560
                                                                       =========
</Table>

                                      F-38
<Page>

Business segment information about the Company's 2001 operations in different
geographic areas is as follows:

<Table>
<Caption>
                                                  U.S.       CANADA      TOTAL
                                               ---------   ---------   ---------
                                                        (In thousands)
<S>                                            <C>         <C>         <C>
Revenues ...................................   $  35,775   $  41,468   $  77,243
                                               =========   =========   =========

Operating profit............................   $  13,795   $   6,665   $  20,460
                                               =========   =========
General corporate ..........................                              (1,335)
Net interest expense and amortization of
   deferred financing fees .................                             (33,713)
Other expense...............................                              (1,052)
                                                                       ---------
   Loss before income taxes.................                           $ (15,640)
                                                                       =========

Identifiable assets at December 31, 2001....   $ 124,993   $ 174,063   $ 299,056
                                               =========   =========
Corporate assets ...........................                               4,657
                                                                       ---------
   Total assets ............................                           $ 303,713
                                                                       =========
</Table>

16.  HEDGING PROGRAM AND DERIVATIVES

     On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended and interpreted. Under SFAS 133,
all derivative instruments are recorded on the balance sheet at fair value. If
the derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss on the derivative is recognized currently in earnings. To qualify
for hedge accounting, the derivative must qualify either as a fair value hedge,
cash flow hedge or foreign currency hedge. Currently, the Company uses only cash
flow hedges and the remaining discussion will relate exclusively to this type of
derivative instrument. If the derivative qualifies for hedge accounting, the
gain or loss on the derivative is deferred in Other Comprehensive Income (Loss),
a component of Stockholders' Equity, to the extent that the hedge is effective.

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

     Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income (Loss) and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in the
period that the related production is delivered.

     The following table sets forth the Company's hedge position as of December
31, 2001.

                                      F-39
<PAGE>

<Table>
<Caption>
             Time Period                     Notional Quantities                   Price                Fair Value
--------------------------------------  -----------------------------  -----------------------------  ----------------
<S>                                     <C>                            <C>                            <C>
January, 2002 - October 31, 2002        20,000   Mcf/day  of  natural  Fixed price swap $2.60-$2.95   $ (658,000)
                                        gas  or  1,000   Bbl/day   of  natural gas or
                                        crude oil                      $18.90 Crude oil
</Table>

     On January 1, 2001, in accordance with the transition provisions of SFAS
133, the Company recorded $31.0 million, net of tax, in Other Comprehensive
Income (Loss) representing the cumulative effect of an accounting change to
recognize the fair value of cash flow derivatives. The Company recorded cash
flow hedge derivative liabilities of $38.2 million on that date and a deferred
tax asset of $7.2 million.

     For the year ended December 31, 2001, losses before tax of $12.1 million
were transferred from Other Comprehensive Income (Loss) to revenue and the fair
value of outstanding liabilities decreased by $25.5 million. The ineffective
portion of the cash flow hedges was not material at December 31, 2001.

     For the year ended December 31, 2001, $566,000 of deferred net loss on
derivative instruments were recorded in Other Comprehensive Income (Loss). All
of the deferred net loss is expected to be reclassified to earnings during the
next twelve-month period.

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

     The fair value of the hedging instrument was determined based on the base
price of the hedged item and NYMEX forward price quotes. As of December 2001, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of $1.2 million, and a commodity price decrease of 10%
would have resulted in a favorable change in fair market value of $0.9 million.

     In November 1996, the Company assumed swap arrangements extending through
October 2001 with a counterparty involving various quantities and fixed prices.
These swap arrangements provided that the Company make payments to the
counterparty to the extent the market prices, determined based on the price for
crude oil on the NYMEX and the Inside FERC, Tennessee Gas Pipeline Co. Texas
(Zone O) price for natural gas, exceed certain fixed prices and for the
counterparty to make payments to the Company to the extent the market prices
were less than such fixed prices. The Company accounted for the related gains or
losses in crude oil and natural gas revenue in the period of the hedged
production. These swap arrangements terminated in January 1999 and the Company
was paid $750,000 by the counterparty for such termination. This amount is
included in Other Revenue in the accompanying financial statements.

     In March 1998, the Company entered into a costless collar hedge agreement
with Enron Capital and Trade Resources Corp. for 2,000 Bbls of crude oil per day
with a floor price of $14.00 per Bbl and a ceiling price of $22.30 per Bbl for
crude oil on the NYMEX. The agreement was effective April 1, 1998 and extended
through March 31, 1999. Under the terms of the agreement the Company was paid
when the average monthly price for crude oil on the NYMEX was below the floor
price, and the Company paid the counterparty when the average monthly price
exceeded the ceiling price. For the year ended December 31, 1999 the Company
realized a loss of $1.8 million on this agreement, which is accounted for in
Crude Oil and Natural Gas Revenue. The Company has also entered into a costless
collar hedge agreement with Barrett Resources Corporation ("Barrett") for the
period November 1999 through October 2000. This agreement consisted of a swap
for 1,000 Bbls per day of crude oil with the Company being paid $20.30 and
paying NYMEX calendar month average, and an additional 1,000 Bbls of crude oil
per day with a floor price of $18.00 per Bbl and a ceiling of $22.00 per Bbl.
The Company realized a loss from hedges of $20.2 million for the year ended
December 31, 2000, which is accounted for in Oil and Gas Production Revenue. At
year end 2001 Barrett has a swap call on either 1,000 Bbls of crude oil or
20,000 MMBtu of

                                      F-40
<Page>

natural gas per day at Barrett's option at fixed prices ($18.90
for crude oil or $2.60 to $2.95 for natural gas) through October 31, 2002. The
Company realized a loss from hedges of $12.1 million for the year ended December
31, 2001, which is accounted for in Oil and Gas Production Revenue.

17. COMPREHENSIVE INCOME

     Comprehensive income includes net income, losses and certain items recorded
directly to Stockholders' Equity and classified as Other Comprehensive Income
(Loss). The following table illustrates the calculation of comprehensive income
for the year ended December 31, 2001:

<Table>
<Caption>
                                                                                             Accumulated Other
                                                                        Comprehensive      Comprehensive Income
                                                                        Income (Loss)             (Loss)
                                                                      -----------------    --------------------
                                                                        For the year
                                                                           Ended
                                                                         December 31,             As of
                                                                            2001             December 31,2001
                                                                      -----------------    --------------------
<S>                                                                   <C>                  <C>
Accumulated other comprehensive loss at December 31, 2000 (a)......                        $             (4,799)
   Net loss........................................................   $         (19,718)
                                                                      -----------------

Other Comprehensive income (loss):
   Hedging derivatives (net of tax) - See Note 16
     Cumulative effect of change in accounting principle January
     1, 2001.......................................................             (30,980)
     Reclassification adjustment for settled hedge contracts.......              12,113
     Change in fair market value of outstanding hedge positions....              18,301
                                                                      -----------------
                                                                                   (566)
   Foreign currency translation adjustment.........................              (8,196)
                                                                      -----------------
Other comprehensive income (loss)..................................              (8,762)                 (8,762)
                                                                      -----------------

Comprehensive income (loss)........................................   $         (28,480)
                                                                      =================    --------------------
Accumulated other comprehensive loss at December 31, 2001..........                        $            (13,561)
                                                                                           ====================
</Table>

(a) Amount at December 31, 2000 due to foreign currency translation adjustment.

18.  PROVED PROPERTY IMPAIRMENT

     In accordance with SEC requirements, the estimated discounted future net
cash flows from proved reserves are generally based on prices and costs as of
the end of the year, or alternatively, if prices subsequent to that date have
increased, a price near the periodic filing date of the Company's financial
statements. As of December 31, 2001, the Company's net capitalized costs of oil
and gas properties exceeded the present value of its estimated proved reserves
by $71.3 million ($38.9 million on the U.S. properties and $32.4 million on the
Canadian properties). These amounts were calculated considering 2001 year-end
prices of $19.84 per barrel for oil and $2.57 per Mcf for gas as adjusted to
reflect the expected realized prices for each of the full cost pools. The
Company did not adjust its capitalized costs for its U.S. properties because
subsequent to December 31, 2001, oil and gas prices increased such that
capitalized costs for its U.S. properties did not exceed the present value of
the estimated proved oil and gas reserves for its U.S. properties as determined
using increased realized prices on March 22, 2002 of $24.16 per Bbl for oil and
$2.89 per Mcf for gas. The Company also used the subsequent prices to evaluate
its Canadian properties, and reduced the 2001 year-end write-down to an amount
of $2.6 million on those properties.

19. SUBSEQUENT EVENT (UNAUDITED)

SALE OF PROPERTIES - 2002

                                      F-41
<Page>

     In May 2002, Grey Wolf and Canadian Abraxas sold their interest in a
natural gas processing plant and associated crude oil and natural gas reserves
in the Quirk Creek and Mahaska fields in Alberta, Canada for approximately $22.9
million.

     In June 2002, Abraxas sold its interest in the East White Point field in
South Texas for approximately $9.8 million. Abraxas reacquired the Production
Payment in June 2002, for approximately $6.8 million.

     There have been other minor asset divestitures during 2002.

CANADIAN STOCK SALES AND EXCHANGE OFFER -  2003

     On January 23, 2003 the Company sold to a third party all of the
outstanding capital stock of it's wholly owned subsidiaries, Canadian Abraxas
and Grey Wolf, for approximately $138 million, subject to closing adjustments
(certain assets were retained); repaid the Grey Wolf Facility indebtedness of
approximately $46.3 million; redeemed the First Lien Notes, at 100% of the
principal amount of the First Lien Notes, plus accrued and unpaid interest, for
approximately $66.4 million; and entered into a new senior credit agreement
providing for a revolving credit facility with an initial borrowing capacity of
$50 million and a new term facility for $4.2 million.

     On January 23, 2003 the Company completed an exchange offer, pursuant to
which it offered to exchange cash and securities for all of the outstanding
Second Lien Notes and Old Notes. In connection with the exchange offer, the
Company made cash payments of approximately $59.2 million, issued new 11.5%
secured notes due 2007 and issued approximately 5.6 million shares of Common
Stock. Such new secured notes are subordinate to the new senior credit agreement
which includes provisions regarding the payment of interest on the new secured
notes.

                                      F-42
<Page>

20.  SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)

     The accompanying table presents information concerning the Company's crude
oil and natural gas producing activities as required by Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Capitalized costs relating to oil and gas producing activities are
as follows:

<Table>
<Caption>
                                                                Years Ended December 31
                                         --------------------------------------------------------------------------
                                                        2000                                  2001
                                         -----------------------------------   ------------------------------------
                                           TOTAL         U.S.        CANADA       TOTAL        U.S.        CANADA
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                                                      (In thousands)
     <S>                                 <C>          <C>          <C>         <C>          <C>          <C>
     Proved crude oil and natural
       gas properties.................   $  481,802   $  274,939   $ 206,863   $  486,098   $  284,182   $  201,916
     Unproved properties..............       12,831            -      12,831       10,626            -       10,626
                                         ----------   ----------   ---------   ----------   ----------   ----------
       Total..........................      494,633      274,939     219,694      496,724      284,182      212,542
     Accumulated depreciation,
       depletion, and amortization,
       and impairment.................     (251,746)    (156,148)    (95,598)    (280,280)    (168,124)    (112,156)
                                         ----------   ----------   ---------   ----------   ----------   ----------
         Net capitalized costs........   $  242,887      118,791   $ 124,096   $  216,444   $  116,058   $  100,386
                                         ==========   ==========   =========   ==========   ==========   ==========
</Table>

     Cost incurred in oil and gas property acquisitions, exploration and
development activities are as follows:

<Table>
<Caption>
                                                                   YEARS ENDED DECEMBER 31
                                         --------------------------------------------------------------------------
                                                        1999                                  2000
                                         -----------------------------------   ------------------------------------
                                           TOTAL         U.S.        CANADA       TOTAL        U.S.        CANADA
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                                                      (In thousands)
   <S>                                   <C>          <C>          <C>         <C>          <C>          <C>
   Property acquisition costs:
     Proved...........................   $   89,743   $        -   $  89,743   $    7,189   $        -   $    7,189
     Unproved.........................            -            -           -            -            -            -
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                         $   89,743   $        -   $  89,743   $    7,189   $        -   $    7,189
                                         ==========   ==========   =========   ==========   ==========   ==========
   Property development and
     exploration costs................   $   37,344   $   18,901   $  18,443   $   64,873   $   39,631   $   25,242
                                         ==========   ==========   =========   ==========   ==========   ==========

<Caption>
                                                YEARS ENDED DECEMBER 31
                                         ------------------------------------
                                                        2001
                                         ------------------------------------
                                            TOTAL        U.S.        CANADA
                                         ----------   ----------   ----------
                                                    (In thousands)
   <S>                                   <C>          <C>          <C>
   Property acquisition costs:
     Proved...........................   $        -   $        -   $        -
     Unproved.........................            -            -            -
                                         ----------   ----------   ----------
                                         $        -   $        -   $        -
                                         ==========   ==========   ==========
   Property development and
     exploration costs................   $   56,694   $   18,867   $   37,827
                                         ==========   ==========   ==========
</Table>

                                      F-43
<Page>

     The results of operations for oil and gas producing activities are as
follows:

<Table>
<Caption>
                                                                   YEARS ENDED DECEMBER 31
                                         --------------------------------------------------------------------------
                                                        1999                                  2000
                                         -----------------------------------   ------------------------------------
                                           TOTAL         U.S.       CANADA       TOTAL        U.S.         CANADA
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                                                      (In thousands)
   <S>                                   <C>          <C>          <C>         <C>          <C>          <C>
   Revenues...........................   $   59,025   $   21,331   $  37,694   $   72,973   $   32,165   $   40,808
   Production costs...................      (17,938)      (6,627)    (11,311)     (18,783)      (7,755)     (11,028)
   Depreciation, depletion, and
     amortization.....................      (34,452)      (9,571)    (24,881)     (35,497)     (11,968)     (23,529)

   Proved property impairment.........      (19,100)           -     (19,100)           -            -            -
   General and administrative.........       (1,317)        (733)       (584)      (1,722)      (1,118)        (604)
   Income taxes (expense) benefit.....        7,455            -       7,455         (339)           -         (339)
                                         ----------   ----------   ---------   ----------   ----------   ----------

   Results of operations from oil
     and gas producing activities
     (excluding corporate overhead
     and interest costs)..............   $   (6,327)  $    4,400   $ (10,727)  $   16,632   $   11,324   $    5,308
                                         ==========   ==========   =========   ==========   ==========   ==========
   Depletion rate per barrel of oil
     equivalent, before impact of
     impairment.......................   $     6.34   $     4.91   $    7.13   $     8.30   $     6.19   $    10.02
                                         ==========   ==========   =========   ==========   ==========   ==========

<Caption>
                                               YEARS ENDED DECEMBER 31
                                         ------------------------------------
                                                        2001
                                         ------------------------------------
                                            TOTAL        U.S.        CANADA
                                         ----------   ----------   ----------
                                                   (In thousands)
   <S>                                   <C>          <C>          <C>
   Revenues...........................   $   73,201   $   34,934   $   38,267
   Production costs...................      (18,616)      (9,302)      (9,314)
   Depreciation, depletion, and
     amortization.....................      (32,124)     (11,976)     (20,148)

   Proved property impairment.........       (2,638)           -       (2,638)
   General and administrative.........       (1,565)      (1,073)        (492)
   Income taxes (expense) benefit.....       (2,419)           -       (2,419)
                                         ----------   ----------   ----------

   Results of operations from oil
     and gas producing activities
     (excluding corporate overhead
     and interest costs)..............   $   15,839   $   12,583   $    3,256
                                         ==========   ==========   ==========
   Depletion rate per barrel of oil
     equivalent, before impact of
     impairment.......................   $     8.81   $     6.96   $    10.45
                                         ==========   ==========   ==========
</Table>

ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

     The following table presents the Company's estimate of its net proved crude
oil and natural gas reserves as of December 31, 1999, 2000, and 2001. The
Company's management emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are expected to change as
future information becomes available. The estimates have been prepared by
independent petroleum reserve engineers.

                                      F-44
<Page>

<Table>
<Caption>
                                                              TOTAL               UNITED STATES                CANADA
                                                     ----------------------   ----------------------   -----------------------
                                                        LIQUID      NATURAL      LIQUID      NATURAL      LIQUID       NATURAL
                                                     HYDROCARBONS     GAS     HYDROCARBONS     GAS     HYDROCARBONS      GAS
                                                     ------------   -------   ------------   -------   ------------    -------
                                                      (BARRELS)      (MCF)     (BARRELS)      (MCF)     (BARRELS)       (MCF)
                                                                     (In Thousands)                        (In Thousands)
     <S>                                                   <C>      <C>              <C>     <C>             <C>       <C>
     PROVED DEVELOPED AND UNDEVELOPED RESERVES:
       Balance at December 31, 1998...............          7,695   197,478          5,751   110,239          1,944(1)  87,239(2)
         Revisions of previous estimates..........           (167)  (80,592)         1,153   (45,697)        (1,320)   (34,895)
         Extensions and discoveries...............            354    30,305            196    24,686            158      5,619
         Purchase of minerals in place............          3,246    58,354              -         -          3,246     58,354
         Production...............................         (1,154)  (25,698)          (584)   (8,190)          (570)   (17,508)
         Sale of minerals in place................           (125)  (15,542)           (95)     (621)           (30)   (14,921)
                                                     ------------   -------   ------------   -------   ------------    -------
       Balance at December 31, 1999 (3)...........          9,849   164,305          6,421    80,417          3,428(1)  83,888(2)
         Revisions of previous estimates..........           (216)  (21,342)            54   (13,441)          (270)    (7,901)
         Extensions and discoveries...............            791    72,498            315    57,371            476     15,127
         Purchase of minerals in place............            254     6,822              -         -            254      6,822
         Production...............................           (952)  (19,963)          (539)   (8,364)          (413)   (11,599)
         Sale of minerals in place................           (882)  (10,993)          (170)   (1,075)          (712)    (9,918)
                                                     ------------   -------   ------------   -------   ------------    -------
       Balance at December 31, 2000...............          8,844   191,327          6,081   114,908          2,763(1)  76,419(2)
         Revisions of previous estimates..........           (627)    2,944           (688)    3,318             60       (374)
         Extensions and discoveries...............          1,063    26,329            354     4,886            710     21,443
         Production...............................           (732)  (17,495)          (416)   (7,823)          (316)    (9,672)
         Sale of minerals in place................         (1,746)  (14,348)          (924)   (6,821)          (822)    (7,527)
                                                     ------------   -------   ------------   -------   ------------    -------
       Balance at December 31, 2001...............          6,802   188,757          4,407   108,468          2,395     80,289
                                                     ============   =======   ============   =======   ============    =======
</Table>

(1) Includes 269,000 and 732,000 barrels of liquid hydrocarbon reserves owned by
Grey Wolf of which approximately 138,000 and 376,000 barrels are applicable to
the minority interest's share of these reserves at December 31, 1999 and 2000,
respectively. As of December 31, 2001 Abraxas owned 100% of Grey Wolf. (2)
Includes 21,710 and 21,389 MMcf of natural gas reserves owned by Grey Wolf of
which 11,140 and 10,975 MMcf are applicable to the minority interest's share of
these reserves at December 31, 1999 and 2000, respectively. As of December 31,
2001 Abraxas owned 100% of Grey Wolf.
(3) At year end 1999 amounts exclude the Company's proportional interest in
Partnership proved reserves, accounted for by the equity method, of 2.8 Mbbls of
liquid hydrocarbons and 25.8 MMcf of natural gas.


                                      F-45
<Page>

<Table>
<Caption>
                                                      TOTAL               UNITED STATES                CANADA
                                             ----------------------   ----------------------   -----------------------
                                                LIQUID      NATURAL      LIQUID      NATURAL      LIQUID       NATURAL
                                             HYDROCARBONS     GAS     HYDROCARBONS     GAS     HYDROCARBONS      GAS
                                             ------------   -------   ------------   -------   ------------    -------
                                              (BARRELS)      (MCF)     (BARRELS)      (MCF)     (BARRELS)       (MCF)
                                                             (In Thousands)                        (In Thousands)
     <S>                                            <C>     <C>              <C>      <C>             <C>       <C>
     PROVED DEVELOPED RESERVES:
       December 31, 1999..................          7,700   128,587          4,492    53,275          3,208     75,312
                                             ============   =======   ============   =======   ============    =======

       December 31, 2000..................          7,001   119,737          4,309    48,177          2,692     71,560
                                             ============   =======   ============   =======   ============    =======

       December 31, 2001..................          5,047   111,243          2,892    40,514          2,155     70,729
                                             ============   =======   ============   =======   ============    =======
</Table>


                                      F-46
<Page>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES

     The following disclosures concerning the standardized measure of future
cash flows from proved crude oil and natural gas reserves are presented in
accordance with SFAS No. 69. The standardized measure does not purport to
represent the fair market value of the Company's proved crude oil and natural
gas reserves. An estimate of fair market value would also take into account,
among other factors, the recovery of reserves not classified as proved,
anticipated future changes in prices and costs, and a discount factor more
representative of the time value of money and the risks inherent in reserve
estimates.

     Under the standardized measure, future cash inflows were estimated by
applying period-end prices at December 31, 2001 adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the tax basis of the properties. Operating
loss carryforwards, tax credits, and permanent differences to the extent
estimated to be available in the future were also considered in the future
income tax calculations, thereby reducing the expected tax expense.

     Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.

                                      F-47
<Page>

     Set forth below is the Standardized  Measure relating to proved oil and gas
reserssves for:

<Table>
<Caption>
                                                           YEARS ENDED DECEMBER 31
                                  ----------------------------------------------------------------------------
                                                  1999                                   2000
                                  -----------------------------------   --------------------------------------
                                    TOTAL         U.S.     CANADA (1)      TOTAL          U.S.      CANADA (1)
                                  ----------   ---------   ----------   -----------   -----------   ----------
                                                               (In thousands)
   <S>                            <C>          <C>         <C>          <C>           <C>           <C>
   Future cash inflows.........   $  577,407   $ 309,609   $  267,798   $ 2,046,039   $ 1,274,871   $  771,168
   Future production and
     development costs.........     (181,109)    (96,302)     (84,807)     (318,130)     (254,667)     (63,463
   Future income tax expense...       (6,319)          -       (6,319)     (230,987)      (65,421)    (165,566
                                  ----------   ---------   ----------   -----------   -----------   ----------
   Future net cash flows.......      389,979     213,307      176,672     1,496,922       954,783      542,139
   Discount....................     (151,528)    (90,024)     (61,504)     (721,388)     (468,663)    (252,725
                                  ----------   ---------   ----------   -----------   -----------   ----------
   Standardized Measure of
     discounted future net
     cash relating to proved
     reserves..................   $  238,451   $ 123,283   $  115,168   $   775,534   $   486,120   $  289,414
                                  ==========   =========   ==========   ===========   ===========   ==========

<Caption>
                                         YEARS ENDED DECEMBER 31
                                  ------------------------------------
                                                  2001
                                  ------------------------------------
                                     TOTAL         U.S.       CANADA
                                  ----------   ----------   ----------
                                             (In thousands)
   <S>                            <C>          <C>          <C>
   Future cash inflows.........   $  607,375   $  313,640   $  293,735
   Future production and
     development costs.........     (220,613)    (138,296)     (82,317)
   Future income tax expense...            -            -            -
                                  ----------   ----------   ----------
   Future net cash flows.......      386,762      175,344      211,418
   Discount....................     (177,096)     (98,157)     (78,939)
                                  ----------   ----------   ----------
   Standardized Measure of
     discounted future net
     cash relating to proved
     reserves..................   $  209,666   $   77,187   $  132,479
                                  ==========   ==========   ==========
</Table>

At year end 1999 amounts exclude the Partnership, accounted for by the equity
method, which was sold in 2000.

     (1)  The Standardized  Measure of discounted future net cash flows relating
          to proved reserves  includes  approximately  $12,400 and $43,700 as of
          December  31,  1999  and  2000,  respectively,  relating  to  minority
          interest. As of December 31, 2001, Abraxas owns 100% of Grey Wolf.

                                      F-48
<Page>

CHANGES IN STANDARDIZED  MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES

     The following is an analysis of the changes in the Standardized Measure:

<Table>
<Caption>
                                                     YEAR ENDED DECEMBER 31
                                                -----------------------------------
                                                   1999        2000        2001
                                                ---------   ----------   ----------
                                                          (In thousands)
<S>                                             <C>         <C>          <C>
  Standardized Measure, beginning
    of year..................................   $ 181,581   $  238,451   $  775,534
  Sales and transfers of oil and gas
    produced, net of production costs........     (41,086)     (54,190)     (54,585)
  Net changes in prices and development
    and production costs from prior year.....      77,060      707,755     (613,325)
  Extensions, discoveries, and improved
    recovery, less related costs.............      34,445      290,283       39,982
  Purchases of minerals in place.............      90,510       33,586            -
  Sales of minerals in place.................     (18,797)     (75,391)     (96,096)
  Revision of previous quantity estimates....     (90,030)     (95,757)      (2,474)
  Change in future income tax expense........      (6,319)    (224,668)     230,987
  Other......................................      (7,071)     (68,380)    (147,910)
  Accretion of discount......................      18,158       23,845       77,553
                                                ---------   ----------   ----------
    Standardized Measure, end of year........   $ 238,451   $  775,534   $  209,666
                                                =========   ==========   ==========
</Table>

                                      F-49
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                 SEPTEMBER 30,   DECEMBER 31,
                                                                     2002           2001
                                                                 -------------   ------------
                                                                        (In Thousands)
<S>                                                              <C>             <C>
ASSETS:
Current assets:
   Cash.......................................................   $      13,358   $      7,605
   Accounts receivable, less allowances for doubtful
     accounts:
          Joint owners........................................           1,700          2,785
          Oil and gas production..............................           4,367          4,758
          Other...............................................           1,424            504
                                                                 -------------   ------------
                                                                         7,491          8,047

  Equipment inventory.........................................           1,061          1,251
  Other current assets........................................             672            443
                                                                 -------------   ------------
    Total current assets......................................          22,582         17,346

Property and equipment:
   Oil and gas properties, full cost method of accounting:
     Proved...................................................         516,084        486,098
     Unproved, not subject to amortization....................           6,704         10,626
   Other property and equipment...............................          42,557         67,632
                                                                 -------------   ------------
          Total...............................................         565,345        564,356
     Less accumulated depreciation, depletion, and
      amortization............................................         415,815        282,462
                                                                 -------------   ------------
      Total property and equipment - net......................         149,530        281,894

Deferred financing fees, net of accumulated
   amortization of $9,951 and $8,668..........................
   at September 30, 2002 and December 31, 2001, respectively..           2,952          3,928

Deferred income taxes.........................................           8,442              -
Other assets..................................................             387            448
                                                                 -------------   ------------
   Total assets...............................................   $     183,893   $    303,616
                                                                 =============   ============
</Table>

   See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-50
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                 SEPTEMBER 30,   DECEMBER 31,
                                                                     2002           2001
                                                                 -------------   ------------
                                                                        (In Thousands)
<S>                                                              <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable............................................   $       8,484   $     10,542
  Oil and gas production payable..............................           2,696          3,596
  Accrued interest............................................           9,422          6,013
  Other accrued expenses......................................           1,993          1,116
  Hedge liability.............................................             644            658
  Current maturities of long-term debt........................          63,500            415
                                                                 -------------   ------------
            Total current liabilities.........................          86,739         22,340

Long-term debt ...............................................          231,199       285,184

Deferred income taxes.........................................               -         20,621

Future site restoration.......................................           3,987          4,056

Stockholders' equity (deficit):
  Common Stock, par value $.01 per share-
  Authorized 200,000,000 shares; issued, 30,145,280 at
   September 30, 2002 and December 31, 2001...................             301            301
   Additional paid-in capital.................................         136,830        136,830
  Accumulated deficit.........................................        (263,921)      (151,094)
  Receivables from stock sales................................             (97)           (97)
  Treasury stock, at cost, 165,883 shares.....................            (964)          (964)
  Accumulated other comprehensive loss........................         (10,181)       (13,561)
                                                                 -------------   ------------
      Total stockholders' deficit.............................        (138,032)       (28,585)
                                                                 -------------   ------------
Total liabilities and stockholders' equity (deficit)..........   $     183,893   $    303,616
                                                                 =============   ============
</Table>

   See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-51
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<Table>
<Caption>
                                                          THREE MONTHS ENDED      NINE MONTHS ENDED
                                                             SEPTEMBER 30,           SEPTEMBER 30,
                                                           2002       2001         2002        2001
                                                         --------   ---------   ----------   ---------
                                                              (In thousands except per share data)
<S>                                                      <C>        <C>         <C>          <C>
Revenue:
   Oil and gas production revenues ...................   $ 10,129   $  13,667   $   34,158   $  62,043
   Gas processing revenues ...........................        522         777        1,933       1,711
   Rig revenues ......................................        169         199          513         607
   Other  ............................................        241         258          499         742
                                                         --------   ---------   ----------   ---------
                                                           11,061      14,901       37,103      65,103
Operating costs and expenses:
   Lease operating and production taxes ..............      3,943       4,488       11,205      13,679
   Depreciation, depletion, and amortization .........      5,086       8,021       21,010      25,150
   Proved property impairment.........................          -           -      115,995           -
   Rig operations ....................................        143         204          439         548
   General and administrative ........................      1,399       1,367        4,578       5,051
   General and administrative (Stock-based
     compensation) ...................................          -      (1,366)           -      (2,767)
                                                         --------   ---------   ----------   ---------
                                                           10,571      12,714      153,227      41,661
                                                         --------   ---------   ----------   ---------
Operating income (loss) ..............................        490       2,187     (116,124)     23,442

Other (income) expense:
   Interest income ...................................        (15)        (46)         (56)        (74)
   Amortization of deferred financing fees............        425         405        1,283       1,315
   Interest expense ..................................      8,616       8,090       25,790      23,700
   Other expense .....................................          -           -            -          16
                                                         --------   ---------   ----------   ---------
                                                            9,026       8,449       27,017      24,957
                                                         --------   ---------   ----------   ---------
Net loss from operations before taxes ................     (8,536)     (6,262)    (143,141)     (1,515)

Income tax expense (benefit)..........................        (98)       (608)     (30,314)      3,677

Minority interest in income of consolidated foreign
   subsidiary ........................................          -         195            -       1,676
                                                         --------   ---------   ----------   ---------
Net loss  ............................................   $ (8,438)     (5,849)    (112,827)     (6,868)
                                                         ========   =========   ==========   =========

Loss per common share:
   Net loss per common share - basic and diluted......   $  (0.28)  $   (0.22)  $    (3.76)      (0.28)
                                                         ========   =========   ==========   =========
</Table>

   See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-52
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)

<Table>
<Caption>

                                                     Common Stock           Treasury Stock       Additional
                                                ------------------------ ----------------------   Paid-In      Accumulated
                                                   Shares       Amount     Shares      Amount     Capital        Deficit
                                                ------------  ----------  --------  ----------  ------------  -------------
<S>                                               <C>         <C>          <C>      <C>         <C>           <C>
Balance at December 31, 2001..................    30,145,280  $      301   165,883  $     (964) $    136,830  $    (151,094)
Comprehensive income (loss) - Note 10
  Net loss....................................             -          -          -           -             -       (112,827)
  Other comprehensive income:
    Hedge loss................................             -          -          -           -             -              -
    Foreign currency translation adjustment...             -          -          -           -             -              -

       Comprehensive income (loss)............             -          -          -           -             -              -
                                                ------------  ----------  --------  ----------  ------------  -------------
Balance at September  30, 2002................    30,145,280  $    301     165,883  $     (964) $    136,830  $    (263,921)
                                                ============  ==========  ========  ==========  ============  =============

<Caption>
                                                 Accumulated
                                                    Other      Receivables
                                                Comprehensive     from
                                                 Income(Loss)  Stock Sale     Total
                                                -------------  -----------  ----------
<S>                                             <C>            <C>          <C>
Balance at December 31, 2001..................  $     (13,561) $       (97) $  (28,585)
Comprehensive income (loss) - Note 10
  Net loss....................................              -            -    (112,827)
  Other comprehensive income:
    Hedge loss................................             54            -          54
    Foreign currency translation adjustment...          3,326            -       3,326
                                                                            ----------
       Comprehensive income (loss)............              -            -    (109,447)
                                                -------------  -----------  ----------
Balance at September  30, 2002................  $     (10,181) $       (97) $ (138,032)
                                                =============  ===========  ==========
</Table>

   See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-53
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                    NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                                 ------------------------
                                                                    2002          2001
                                                                 -----------   ----------
                                                                      (In thousands)
<S>                                                              <C>           <C>
OPERATING ACTIVITIES
Net loss......................................................   $  (112,827)  $   (6,868)

Adjustments to reconcile net loss to net cash provided by
  operating activities:
Minority interest in income of foreign subsidiary.............             -        1,676
Depreciation, depletion, and amortization.....................        21,010       25,150
Proved property impairment....................................       115,995            -
Deferred income tax (benefit) expense.........................       (30,314)       2,957
Amortization of deferred financing fees.......................         1,283        1,315
Amortization of debt discount.................................           287            -
Stock-based compensation                                                   -       (2,767)
Changes in operating assets and liabilities:
  Accounts receivable.........................................           499       13,598
  Equipment inventory.........................................           191         (234)
  Other ......................................................          (249)           -
  Accounts payable and accrued expenses.......................         1,305       (8,738)
                                                                 -----------   ----------
Net cash provided by (used in) operating activities...........        (2,820)      26,089
                                                                 -----------   ----------

INVESTING ACTIVITIES
Capital  expenditures, including purchases and  development
  of properties...............................................       (33,392)     (44,793)
Proceeds from sale of oil and gas producing properties........        33,678       15,361
Acquisition of minority interest..............................             -       (2,248)
                                                                 -----------   ----------
Net cash provided by (used in) investing activities...........   $       286   $  (31,680)
                                                                 -----------   ----------

FINANCING ACTIVITIES
Proceeds from long-term borrowings............................        17,084       12,866
Payments on long-term borrowings..............................        (8,176)      (8,873)
Deferred financing fees                                                 (303)           -
Exercise of stock options.....................................             -           16
Other.........................................................             -          231
                                                                 -----------   ----------
Net cash provided by financing activities.....................         8,605        4,240
                                                                 -----------   ----------
Effect of exchange rate changes on cash.......................          (318)        (161)
                                                                 -----------   ----------
Increase (decrease) in cash...................................         5,753       (1,512)

Cash, at beginning of period..................................         7,605        2,004
                                                                 -----------   ----------

Cash, at end of period........................................   $    13,358   $      492
                                                                 ===========   ==========

Supplemental disclosures of cash flow information:
Interest paid.................................................   $    22,336   $   20,262
                                                                 ===========   ==========
Taxes paid....................................................   $         -   $      505
                                                                 ===========   ==========
</Table>

   See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-54
<Page>

                 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2002

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, 2001. Such policies have been
continued without change. Also, refer to the notes to those financial statements
for additional details of the Company's financial condition, results of
operations, and cash flows. All the material items included in those notes have
not changed except as a result of normal transactions in the interim, or as
disclosed within this report. The accompanying interim consolidated financial
statements have not been audited by independent accountants, but in the opinion
of management, reflect all adjustments necessary for a fair presentation of the
financial position and results of operations. Any and all adjustments are of a
normal and recurring nature. The results of operations for the three and nine
months ended September 30, 2002 are not necessarily indicative of results to be
expected for the full year.

     The consolidated financial statements include the accounts of the Company,
its wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and Grey Wolf Exploration Inc. ("Grey Wolf"). Minority
interest in 2001 represents the minority shareholders' proportionate share of
the equity and income of Grey Wolf prior to the Company's acquiring the
remaining interest in September 2001.

     Canadian Abraxas' and Grey Wolf's assets and liabilities are translated to
U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.

     Certain prior years balances have been reclassified for comparative
purposes.

NOTE 2. BUSINESS CONDITIONS AND LIQUIDITY REQUIREMENTS

     The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
experienced net losses from operations before taxes during the nine months ended
September 30, 2002, of $143.1 million due primarily to proved property
impairments of $116 million resulting primarily from volatile commodity prices -
see Note 11. At September 30, 2002, the Company's current liabilities of
approximately $86.7 million exceeded current assets of $22.6 million resulting
in a working capital deficit of $64.2 million. The Company also had a
stockholders' deficit of $138.0 million. The Company's principal sources of
liquidity are cash on hand, cash flow from operations and proceeds from sales of
assets and properties, in addition to funding remaining available under the Grey
Wolf credit facility with Mirant Canada Energy Capital Ltd.

     The Company's continued existence as a going concern is dependent upon
several current factors including the successful pursuit of financial
restructuring alternatives and improvement in commodity prices. The Company will
need additional funds on a timely basis for both the development of its assets
and the service of its debt, including the repayment of the $63.5 million in
principal amount of 12 7/8% Senior Secured notes or First Lien Notes maturing in
March 2003 and the $191 million of 11 1/2 % Senior Secured Notes or Second Lien
Notes and 11 1/2% Senior Notes or Old Notes maturing in November 2004 - see Note
4. In order to meet the current operating requirements of developing its assets
and servicing its debt obligations, the Company will be required to obtain
additional sources of liquidity and capital and/or reduce or reschedule its
existing cash requirements including repayment of the First Lien Notes. In order
to do so, the Company is actively pursuing one or more of the following
alternatives:

     -    selling all or a portion of its existing assets, including interests
          in its assets, or subsidiary operations;

     -    negotiating the restructuring and/or refinancing of existing debt;

     -    repaying debt with proceeds from the sale of assets;

     -    exchanging debt for equity;

     -    managing the timing and reducing the scope of its capital
          expenditures; or

     -    issuing additional debt or equity securities or otherwise raising
          additional funds.

     Due to the Company's current debt levels and the restrictions contained in
the indentures governing the First Lien Notes, Second Lien Notes and Old Notes,
the Company's primary opportunity for immediate additional sources

                                      F-55
<Page>

of liquidity and capital will be through the disposition of assets of subsidiary
operations and some of the other alternatives discussed above including the
restructuring of existing debt. There can be no assurance that any of the above
alternatives, or some combination thereof, will be available or, if available,
will be on terms acceptable to the Company or that such efforts will produce
enough cash to fund the Company's immediate operating and capital requirements
or make timely interest payments and principal payments due on the First Lien
Notes, Second Lien Notes and Old Notes.

     In order to meet the Company's need for current additional funds, the
Planning Committee of the Board of Directors is actively pursuing several of the
alternatives set forth above. The Planning Committee has engaged an investment
banking firm to assist in the formulation of a plan of action for consideration
by the Board of Directors. A proposed plan of action is expected before December
31, 2002. A refinancing or renegotiation of the Company's existing debt and the
sale of additional assets likely will be required for the Company to meet its
current liquidity and capital requirements. Management believes that a
successful plan of action can be implemented to provide additional liquidity and
capital, but no assurances can be given that the implementation of such a plan
of action will result in the Company being able to continue as a going concern.
The September 30, 2002 financial statements do not include any adjustments that
might result from the outcome of these going concern uncertainties.

NOTE 3. DIVESTITURE OF ASSETS

     In May of 2002, the wholly owned Canadian subsidiaries, Grey Wolf and
Canadian Abraxas, sold their interest in a natural gas processing plant and
associated crude oil and natural gas reserves in the Quirk Creek and Mahaska
fields in Alberta, Canada for approximately $22.9 million.

     In June 2002, Abraxas sold its interest in the East White Point field in
South Texas for approximately $9.8 million.

     The condensed pro forma financial information presented below summarizes on
an pro forma basis, approximate results of the Company's consolidated results of
operations for the three and nine months ended September 30, 2002, assuming the
divestitures had occurred on January 1, 2002, and the three and nine months
ended September 30, 2001, assuming the divestitures had occurred on January 1,
2001. Additionally, the pro forma information reflects an interest savings
assuming that the Company had applied a portion of the proceeds to reacquire the
Production Payment (see Note 4) on January 1st of the respective years.

<Table>
<Caption>
                                       THREE MONTHS ENDED        NINE MONTHS ENDED
                                          SEPTEMBER 30,            SEPTEMBER 30,
                                      ---------------------   ----------------------
                                         2002        2001        2002        2001
                                      ---------   ---------   ----------   ---------
                                          (in thousands, except per share data)
     <S>                              <C>         <C>         <C>          <C>
     Revenue.......................   $  11,061   $  13,078   $   34,168   $  54,911
                                      =========   =========   ==========   =========
     Net loss......................   $  (8,438)  $  (6,044)  $ (112,349)    (10,726)
                                      =========   =========   ==========   =========
     Loss per common share--basic
       and diluted.................       (0.28)      (0.27)       (3.75)      (0.44)
                                      =========   =========   ==========   =========
</Table>

     In July 2002, Canadian Abraxas and Grey Wolf sold their interest in the
Millarville field in Alberta, Canada for approximately $1.1 million.

     Proceeds from these property sales were deposited with the Trustee for the
First Lien Notes, to be held as restricted cash until disbursement to the
Company under terms permitted by the indenture, or if not disbursed in
accordance with the indentures governing the First Lien Notes, Second Lien Notes
and Old Notes within 180 days of receipt, to be applied against the outstanding
First Lien Notes. As of September 30, 2002 all of the funds had been disbursed
to the Company.

NOTE 4.  DEBT

     Debt consists of the following:

<Table>
<Caption>
                                                                               SEPTEMBER 30   DECEMBER 31
                                                                               --------------------------
                                                                                   2002          2001
                                                                               ------------   -----------
                                                                                     (In thousands)
    <S>                                                                        <C>            <C>
     11.5% Senior Notes due 2004 ("Old Notes")..............................   $        801   $       801
     12.875% Senior Secured Notes due 2003 ("First Lien Notes").............         63,500        63,500
     11.5% Second Lien Notes due 2004 ("Second Lien Notes").................        190,178       190,178
     9.5% Senior Credit Facility ("Grey Wolf Facility"), providing for
          borrowings up to approximately US $96 million (CDN $150 million)
          and secured by the assets of Grey Wolf and non-recourse to
          Abraxas, net of US $2.0 and $2.3 million discount at September
          30, 2002 and December 31, 2001, respectively......................         40,220        22,944
     Production Payment.....................................................              -         8,176
                                                                               ------------   -----------
                                                                                    294,699       285,599
     Less current maturities First Lien Notes...............................         63,500           415
                                                                               ------------   -----------
                                                                               $    231,199   $   285,184
                                                                               ============   ===========
</Table>

                                      F-56
<Page>

     OLD NOTES. On November 14, 1996, the Company consummated the offering of
$215.0 million of its 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of its 11.5% Senior Notes due 2004,
Series C. The Series B Notes and the Series C Notes were subsequently combined
into $275.0 million in principal amount of the Old Notes in June 1998. In
December 1999, Abraxas and Canadian Abraxas completed an exchange offer which
reduced the amount of outstanding Old Notes to $801,000. See the description of
the Second Lien Notes below for more information.

     Interest on the Old Notes is payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of the Company at 100% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption, if redeemed during the 12-month period commencing on November 1,
2002 and thereafter.

     The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank PARI PASSU in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and to the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by Sandia Oil and Gas Company ("Sandia") and
Wamsutter Holdings, Inc. ("Wamsutter"), each of which is a wholly owned
subsidiary of the Company. The guarantees are general unsecured obligations of
Sandia and Wamsutter and rank PARI PASSU in right of payment to all
unsubordinated indebtedness of Sandia and Wamsutter and senior in right of
payment to all subordinated indebtedness of Sandia and Wamsutter. The guarantees
are effectively subordinated to the First Lien Notes and the Second Lien Notes
to the extent of the value of the collateral securing the First Lien Notes and
the Second Lien Notes.

     Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to repurchase
all or a portion of such holder's Old Notes at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the Old Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales.

     FIRST LIEN NOTES. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. Beginning March 15, 2002, the First Lien Notes are redeemable, in whole or
in part, at the option of Abraxas at 100% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption.

     The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter, wholly-owned subsidiaries of the Company (the
"Restricted Subsidiaries"). The guarantees are secured by substantially all of
the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas.

     Upon a Change of Control, as defined in the First Lien Notes Indenture,
each holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.

                                      F-57
<Page>

     The First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas.

     The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except in certain situations as described in the First Lien Notes
indenture.

     SECOND LIEN NOTES. In December 1999, Abraxas and Canadian Abraxas
consummated an exchange offer whereby $269,699,000 of the Old Notes were
exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of
Abraxas common stock and contingent value rights. An additional $5,000,000 of
the Second Lien Notes were issued in payment of fees and expenses.

     Interest on the Second Lien Notes is payable semi-annually in arrears on
May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas
at 100% of the principal amount thereof, plus accrued and unpaid interest to the
date of redemption, if redeemed during the 12-month period commencing on
December 1, 2002 and thereafter.

     The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.

     Upon a Change of Control, as defined in the Second Lien Notes Indenture,
each holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.

     The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.

     The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture.

     The fair value of the Old Notes, First Lien Notes and Second Lien Notes was
approximately $168.6 million as of September 30, 2002. The Company has
approximately $325,000 of standby letters of credit and a $10,000 performance
bond open at September 30, 2002. Approximately $336,000 of cash is restricted
and in escrow related to certain of the letters of credit and the bond.

                                      F-58
<Page>

GREY WOLF FACILITY

     GENERAL. On December 20, 2001, Grey Wolf entered into a credit facility
with Mirant Canada Energy Capital, Ltd. ("Mirant Canada"). The Grey Wolf
Facility established a revolving credit facility with a commitment amount of CDN
$150 million, (approximately US $96 million). Subject to certain restrictions,
the borrowing base may be reduced at the discretion of Mirant Canada upon 30
days written notice. Subject to earlier termination on the occurrence of events
of default or other events, the stated maturity date is December 20, 2007. The
applicable interest rate charged on the outstanding balance under the Grey Wolf
Facility is 9.5%. Any amounts in default will accrue interest at 15%. The Grey
Wolf Facility is non-recourse to Abraxas and its properties, other than Grey
Wolf properties, and Abraxas has no additional direct obligations to Mirant
Canada under the facility.

     PRINCIPAL PAYMENTS. Prior to maturity, Grey Wolf is required to make
principal payments under the Grey Wolf Facility as follows: (i) on the date of
the sale of any of its producing properties, Grey Wolf is required to make a
payment equal to the amount of the net sales proceeds; (ii) on a monthly basis,
Grey Wolf is required to make a payment equal to its net cash flow for the month
prior to the date of the payment; and (iii) on the date that any reduction in
the commitment amount becomes effective, Grey Wolf must repay all amounts over
the commitment amount so reduced.

     Under the Grey Wolf Facility, "net cash flow" generally means the amount of
proceeds received by Grey Wolf from the sale of hydrocarbons less taxes, royalty
and similar payments (including overriding royalty interest payments made to
Mirant Canada), interest payments made to Mirant Canada and operating and other
expenses including approved capital and G&A expenses.

     Grey Wolf may also make pre-payments at any time after December 20, 2002
with no pre-payment penalty.

     The Company treats the Grey Wolf Facility as a revolving line of credit
since, under ordinary circumstances, the lender is paid on a net cash flow
basis. It is anticipated that the Company will be a net borrower for the next
several years due to a large number of exploration and exploitation projects and
the associated capital needs to complete the projects.

     SECURITY. Obligations under the Grey Wolf Facility are secured by a
security interest in substantially all of Grey Wolf's assets, including, without
limitation, working interests in producing properties and related assets owned
by Grey Wolf. None of Abraxas' assets are subject to a security interest under
the Grey Wolf Facility.

     COVENANTS. The Grey Wolf Facility contains a number of covenants that,
among other things, restrict the ability of Grey Wolf to (i) enter into new
business areas, (ii) incur additional indebtedness, (iii) create or permit to be
created any liens on any of its properties, (iv) make certain payments,
dividends and distributions, (v) make any unapproved capital expenditures, (vi)
sell any of its accounts receivable, (vii) enter into any unapproved leasing
arrangements, (viii) enter into any take-or-pay contracts, (ix) liquidate,
dissolve, consolidate with or merge into any other entity, (x) dispose of its
assets, (xi) abandon any property subject to Mirant Canada's security interest,
(xii) modify any of its operating agreements, (xiii) enter into any unapproved
hedging agreements, and (xiv) enter into any new agreements affecting existing
agreements relating to or affecting properties subject to Mirant Canada's
security interests. In addition, Grey Wolf is required to submit a quarterly
development plan for Mirant Canada's approval and Grey Wolf must comply with
specified financial ratios and tests, including a minimum collateral coverage
ratio. Grey Wolf was in compliance with these covenants at September 30, 2002.

     Upon receipt by the Company of a written request from Mirant Canada, the
Company shall promptly, and in any event within 10 days of receipt of such
request, have entered into one or more swap, hedge, floor, collar or similar
agreements which are satisfactory to the lender at a price and for a term which
is mutually acceptable to the Company and Mirant Canada.

     EVENTS OF DEFAULT. The Grey Wolf Facility contains customary events of
default, including nonpayment of principal or interest, violations of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in the financial condition of Grey Wolf.

     OVERRIDING ROYALTY INTERESTS. As a condition to the Grey Wolf Facility,
Grey Wolf has granted two overriding royalty interests to Mirant Canada, each in
the amount of 2.5% of the revenues received by Grey Wolf from oil and gas sales
from all of its properties. These overriding royalty interests resulted in the
recording of a $2.3 million discount on the Grey Wolf Facility borrowings at
December 31, 2001.

                                      F-59
<Page>

PRODUCTION PAYMENT

     In October 1999, the Company entered into a non-recourse Dollar Denominated
Production Payment agreement (the "Production Payment") with a third party. The
Production Payment had an aggregate total availability of up to $50 million at
15% interest. The Production Payment related to a portion of the production from
several natural gas wells in South Texas. The Company reacquired the Production
Payment in June 2002, for approximately $6.8 million.

NOTE 5. EARNINGS PER SHARE

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

<Table>
<Caption>
                                                       THREE MONTHS ENDED           NINE MONTHS ENDED
                                                          SEPTEMBER 30,                SEPTEMBER 30,
                                                  ---------------------------  --------------------------
                                                       2002          2001          2002          2001
                                                  -------------  ------------  ------------  ------------
<S>                                               <C>            <C>           <C>           <C>
Numerator:
  Net loss from continuing operations             $      (8,438) $     (5,849) $   (112,827) $     (6,869)
                                                  -------------  ------------  ------------  ------------

Denominator:
  Denominator for basic earnings per share -
    Weighted-average shares                          29,979,397    22,626,599    29,979,397    24,347,669

  Effect of dilutive securities:
    Stock options, warrants and CVR's                         -             -             -             -
                                                  -------------  ------------  ------------  ------------

  Dilutive potential common shares
    Denominator for diluted earnings per share -
    adjusted weighted-average shares and assumed
    Conversions                                      29,979,397    22,626,599    29,979,397    24,347,669

  Basic loss per share:
    Loss from continuing operations               $       (0.28) $      (0.60) $      (3.76) $      (0.28)
                                                  =============  ============  ============  ============

  Diluted  loss per share:
    Loss from continuing operations               $       (0.28) $      (0.60) $      (3.76) $      (0.28)
                                                  =============  ============  ============  ============
</Table>

     For the three and nine months ended September 30, 2002, none of the shares
issuable in connection with stock options or warrants are included in diluted
shares. Inclusion of these shares would be antidilutive due to losses incurred
in the period. Had there not been losses in this period, dilutive shares would
have been 3,000 shares and 6,487 shares for the three and nine months ended
September 30, 2002, respectively.

CONTINGENT VALUE RIGHTS ("CVRs")

     As part of the exchange offer consummated by the Company in December 1999,
Abraxas issued contingent value rights or CVRs, which entitled the holders to
receive up to a total of 105,408,978 shares of Abraxas common stock under
certain circumstances as defined. On May 21, 2001, Abraxas issued 3,386,488
shares upon the expiration of the CVRs.

NOTE 6.  GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

     The following table presents condensed consolidating balance sheets of
Abraxas, as a parent company, and its significant subsidiaries, Canadian Abraxas
and Grey Wolf, as September 30, 2002 and December 31, 2001 and the related
consolidating statements of operations and cash flows for the three and nine
months ended September 30, 2002 and 2001. Canadian Abraxas is a guarantor of the
First Lien Notes ($63.5 million) and jointly and severally liable with Abraxas
for the Second Lien Notes ($190.2 million) and the Old Notes ($801,000). Grey
Wolf is a non-guarantor with respect to the First Lien Notes, the Second Lien
Notes, and the Old Notes.

                                      F-60
<Page>

       CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                 NON-GUARANTOR BALANCE SHEET SEPTEMBER 30, 2002
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
<S>                                                <C>             <C>           <C>            <C>            <C>
ASSETS:
Current assets:
   Cash .........................................  $       8,694   $     2,591   $       2,073  $          -   $        13,358
   Accounts receivable, less allowance for
     doubtful accounts...........................          3,472         4,836          10,584       (11,401)            7,491
   Equipment inventory ..........................            870           179              12             -             1,061
   Other current assets .........................            268           194             210             -               672
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current assets .......................         13,304         7,800          12,879       (11,401)           22,582
Property and equipment - net.....................         75,236        39,316          34,978             -           149,530
Deferred financing fees, net.....................          2,066           773             113             -             2,952
Other assets ....................................        108,709           787           8,381      (109,048)            8,829
                                                   -------------   -----------   -------------  ------------   ---------------
   Total assets .................................  $     199,315   $   48,676    $      56,351  $   (120,449)  $       183,893
                                                   =============   ===========   =============  ============   ===============
LIABILITIES AND STOCKHOLDER S' DEFICIT:
Current liabilities:
   Accounts payable .............................  $      13,917   $       295   $       8,285  $    (11,317)  $        11,180
   Accrued interest .............................          6,901         2,521               -             -             9,422
   Other accrued expenses .......................          1,993             -               -             -             1,993
   Hedge liability ..............................            354           290               -             -               644
   Current maturities of long-term debt .........         63,500             -               -             -            63,500
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current liabilities ..................         86,665         3,106           8,285       (11,317)           86,739
Long-term debt ..................................        138,350        52,629          40,220             -           231,199
Future site restoration  ........................             -          3,274             713             -             3,987
                                                   -------------   -----------   -------------  ------------   ---------------
                                                         225,015        59,009          49,218       (11,317)          321,925
Stockholders' equity (deficit)...................        (25,700)      (10,333)          7,133      (109,132)         (138,032)
                                                   -------------   -----------   -------------  ------------   ---------------
Total liabilities and stockholders' equity
(deficit)........................................  $     199,315   $    48,676   $      56,351  $   (120,449)  $       183,893
                                                   =============   ===========   =============  ============   ===============
</Table>

     (1)  Includes amounts for insignificant U.S. subsidiaries, Sandia and
          Wamsutter, which are guarantors of the First and Second Lien Notes.
          Sandia is also a guarantor of the Old Notes. Additionally, these
          subsidiaries are designated as Restricted Subsidiaries along with
          Canadian Abraxas.


                                      F-61
<Page>

       CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                  NON-GUARANTOR BALANCE SHEET DECEMBER 31, 2001
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
<S>                                                <C>             <C>           <C>            <C>            <C>
ASSETS:
Current assets:
   Cash .........................................  $       3,593   $     1,245   $       2,767  $          -   $         7,605
   Accounts receivable, less allowance for
     doubtful accounts...........................         17,281           792           6,782       (16,808)            8,047
   Equipment inventory ..........................          1,061           178              12             -             1,251
   Other current assets .........................            250            99              94             -               443
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current assets .......................         22,185         2,314           9,655       (16,808)           17,346
Property and equipment - net.....................        116,462       122,486          42,946             -           281,894
Deferred financing fees, net.....................          2,779         1,042             107             -            3,928
Other assets ....................................        108,704           784           6,281      (115,321)              448
                                                   -------------   -----------   -------------  ------------   ---------------
   Total assets .................................  $     250,130   $   126,626   $      58,989  $   (132,129)  $       303,616
                                                   =============   ===========   =============  ============   ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
   Accounts payable .............................  $      10,642   $    17,009   $       9,472  $    (22,985)  $        14,138
   Accrued interest .............................          5,000         1,009               4             -             6,013
   Other accrued expenses .......................          1,052             -              64             -             1,116
   Hedge liability ..............................            438           220               -             -               658
   Current maturities of long-term debt .........            415             -               -             -               415
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current liabilities ..................         17,547        18,238           9,540       (22,985)           22,340
Long-term debt ..................................        209,611        52,629          22,944             -           285,184
Deferred income taxes ...........................              -        17,718           2,903             -            20,621
Future site restoration  ........................              -         3,399             657             -             4,056
                                                   -------------   -----------   -------------  ------------   ---------------
                                                         227,158        91,984          36,044       (22,985)          332,201
Stockholders' equity (deficit)...................         22,972        34,642          22,945      (109,144)          (28,585)
                                                   -------------   -----------   -------------  ------------   ---------------
Total liabilities and stockholders' equity
(deficit)........................................  $     250,130   $   126,626   $      58,989  $   (132,129)  $       303,616
                                                   =============   ===========   =============  ============   ===============
</Table>


                                      F-62
<Page>

 CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
      STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
<S>                                                <C>             <C>           <C>            <C>            <C>
Revenues:
   Oil and gas production revenues ..............  $       4,630   $     2,657   $       2,842  $          -   $        10,129
   Gas processing revenues ......................              -           436              86             -               522
   Rig revenues .................................            169             -               -             -               169
   Other  .......................................              1           184              56             -               241
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           4,800         3,277           2,984             -            11,061
Operating costs and expenses:
   Lease operating and production taxes .........          1,897           975           1,071             -             3,943
   Depreciation, depletion, and amortization ....          2,108         1,737           1,241             -             5,086
   Rig operations ...............................            143             -               -             -               143
   General and administrative ...................            686           426             287             -             1,399
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           4,834         3,138           2,599             -            10,571
                                                   -------------   -----------   -------------  ------------   ---------------
Operating income ................................            (34)          139             385             -               490

Other (income) expense:
   Interest income ..............................            (15)            -               -             -               (15)
   Amortization of deferred financing fees.......            331            91               3             -               425
   Interest expense..............................          6,119         1,656             841             -             8,616
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           6,435         1,747             844             -             9,026
                                                   -------------   -----------   -------------  ------------   ---------------
Loss from operations before income tax and
   extraordinary item............................         (6,469)       (1,608)           (459)            -            (8,536)
Income tax benefit...............................              -            (8)            (90)            -               (98)
                                                   -------------   -----------   -------------  ------------   ---------------
Net  loss........................................  $      (6,469)  $    (1,600)  $        (369) $          -   $        (8,438)
                                                   =============   ===========   =============  ============   ===============
</Table>


                                      F-63
<Page>

 CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
      STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
<S>                                                <C>             <C>           <C>            <C>            <C>
Revenues:
   Oil and gas production revenues ..............  $      14,592   $    10,432   $       9,134  $          -   $        34,158
   Gas processing revenues ......................              -         1,593             340             -             1,933
   Rig revenues .................................            513             -               -             -               513
   Other  .......................................             70           291             138             -               499
                                                   -------------   -----------   -------------  ------------   ---------------
                                                          15,175        12,316           9,612             -            37,103
Operating costs and expenses:
   Lease operating and production taxes .........          5,666         2,809           2,730             -            11,205
   Depreciation, depletion, and amortization ....          7,167         9,030           4,813             -            21,010
   Proved property impairment....................         28,179        60,501          27,315             -           115,995
   Rig operations ...............................            439             -               -             -               439
   General and administrative ...................          2,893           787             898             -             4,578
                                                   -------------   -----------   -------------  ------------   ---------------
                                                          44,344        73,127          35,756             -           153,227
                                                   -------------   -----------   -------------  ------------   ---------------
Operating loss...................................        (29,169)      (60,811)        (26,144)            -          (116,124)

Other (income) expense:
   Interest income ..............................            (56)            -               -             -               (56)
   Amortization of deferred financing fees.......            994           274              15             -             1,283
   Interest expense..............................         18,650         4,998           2,142             -            25,790
                                                   -------------   -----------   -------------  ------------   ---------------
                                                          19,588         5,272           2,157             -            27,017
                                                   -------------   -----------   -------------  ------------   ---------------
Loss from operations before income tax and
   extraordinary item............................        (48,757)     (66,083)         (28,301)            -          (143,141)
Income tax benefit...............................              -       (18,522)        (11,792)            -           (30,314)
                                                   -------------   -----------   -------------  ------------   ---------------
Net  loss........................................  $     (48,757)  $   (47,561)  $     (16,509) $          -   $      (112,827)
                                                   =============   ===========   =============  ============   ===============
</Table>


                                      F-64
<Page>

 CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
      STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                      ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
<S>                                                <C>             <C>           <C>            <C>            <C>
Revenues:
   Oil and gas production revenues ..............  $       7,485   $     4,114   $       2,068  $          -   $        13,667
   Gas processing revenues ......................              -           677             100             -               777
   Rig revenues .................................            199             -               -             -               199
   Other  .......................................              3           164              91             -               258
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           7,687         4,955           2,259             -            14,901
Operating costs and expenses:
   Lease operating and production taxes .........          2,096         1,735             657             -             4,488
   Depreciation, depletion, and amortization ....          3,397         3,431           1,193             -             8,021
   Rig operations ...............................            204             -               -             -               204
   General and administrative ...................            945           280             142             -             1,367
   General and administrative (Stock-based
     Compensation)...............................         (1,366)            -               -             -            (1,366)
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           5,276         5,446           1,992             -            12,714
                                                   -------------   -----------   -------------  ------------   ---------------
Operating income (loss)..........................          2,411          (491)            267             -             2,187

Other (income) expense:
   Interest income ..............................           (226)            -               -           180               (46)
   Amortization of deferred financing fees.......            347            58               -             -               405
   Interest expense .............................          6,384         1,789              97          (180)            8,090
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           6,505         1,847              97             -             8,449
                                                   -------------   -----------   -------------  ------------   ---------------
Income (loss) from operations before income tax
   and extraordinary item........................         (4,094)       (2,338)            170             -            (6,262)
Income tax expense (benefit).....................              -          (677)             69             -              (608)
Minority interest in income of consolidated
   foreign subsidiary ...........................              -             -               -          (195)             (195)
                                                   -------------   -----------   -------------  ------------   ---------------
Net income (loss)................................  $      (4,094)  $    (1,661)  $         101  $       (195)  $        (5,849)
                                                   =============   ===========   =============  ============   ===============
</Table>


                                      F-65
<Page>

 CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
                             STATEMENT OF OPERATIONS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                     ABRAXAS                                                       ABRAXAS
                                                    PETROLEUM      RESTRICTED         NON-        RECLASSIFI-     PETROLEUM
                                                   CORPORATION     SUBSIDIARY      GUARANTOR        CATIONS      CORPORATION
                                                  INC. - PARENT    (CANADIAN         AND             AND             AND
                                                   COMPANY (1)      ABRAXAS)       GREY WOLF)    ELIMINATIONS    SUBSIDIARIES
                                                  -------------   ------------    ------------   ------------    ------------
<S>                                               <C>             <C>             <C>            <C>             <C>
Revenues:
   Oil and gas production revenues ............   $     30,033    $     20,537    $     11,473   $          -    $     62,043
   Gas processing revenues ....................              -           1,470             241              -           1,711
   Rig revenues ...............................            607               -               -              -             607
   Other ......................................             82             399             261              -             742
                                                  ------------    ------------    ------------   ------------    ------------
                                                        30,722          22,406          11,975              -          65,103
Operating costs and expenses:
   Lease operating and production taxes .......          6,837           5,084           1,758              -          13,679
   Depreciation, depletion, and amortization ..          9,584          11,587           3,979              -          25,150
   Rig operations .............................            548               -               -              -             548
   General and administrative .................          3,495             979             577              -           5,051
   General and administrative (Stock-based
     Compensation) ............................         (2,767)              -               -              -          (2,767)
                                                  ------------    ------------    ------------   ------------    ------------
                                                        17,697          17,650           6,314              -          41,661
                                                  ------------    ------------    ------------   ------------    ------------
Operating income ..............................         13,025           4,756           5,661              -          23,442

Other (income) expense:
   Interest income ............................           (930)              -               -            856             (74)
   Amortization of deferred financing fees ....          1,042             273               -              -           1,315
   Interest expense ...........................         18,815           5,413             328           (856)         23,700
   Other ......................................             16               -               -              -              16
                                                  ------------    ------------    ------------   ------------    ------------
                                                        18,943           5,686             328              -          24,957
                                                  ------------    ------------    ------------   ------------    ------------
Income (loss) from operations before income tax
   and extraordinary item .....................         (5,918)           (930)          5,333              -          (1,515)
Income tax expense ............................            505           1,048           2,124              -           3,677
Minority interest in income of consolidated
   foreign subsidiary .........................              -               -               -         (1,676)         (1,676)
                                                  ------------    ------------    ------------   ------------    ------------
Net loss ......................................   $     (6,423)   $     (1,978)   $      3,209   $     (1,676)   $     (6,868)
                                                  ============    ============    ============   ============    ============
</Table>


                                      F-66
<Page>

     CONDENSED CONSOLIDATING PARENT, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
                             STATEMENT OF CASH FLOW
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                   ABRAXAS                                                        ABRAXAS
                                                  PETROLEUM      RESTRICTED          NON-        RECLASSIFI-     PETROLEUM
                                                 CORPORATION     SUBSIDIARY      GUARANTOR        CATIONS       CORPORATION
                                                INC. -PARENT     (CANADIAN       SUBSIDIARY         AND             AND
                                                 COMPANY (1)      ABRAXAS)      (GREY WOLF)     ELIMINATIONS    SUBSIDIARIES
                                                ------------    ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>             <C>
OPERATING ACTIVITIES
Net loss ....................................   $    (48,757)   $    (47,561)   $    (16,509)   $          -    $   (112,827)
Adjustments to reconcile net loss to net
   cash provided by operating activities:
     Depreciation, depletion, and
       amortization .........................          7,167           9,030           4,813               -          21.010
     Proved property impairment .............         28,179          60,501          27,314               -         115,994
     Deferred income tax benefit ............              -         (18,522)        (11,792)              -         (30,314)
     Amortization of deferred financing fees             994             274              16               -           1,284
     Amortization of debt discount ..........              -               -             287               -             287
     Changes in operating assets and
       liabilities:
         Accounts receivable ................         19,401         (20,786)          2,441            (557)            499
         Equipment inventory ................            191               -               -               -             191
         Other ..............................            (22)           (165)            (62)              -            (249)
         Accounts payables and accrued
           expenses .........................            525           1,520          (1,297)            557           1,305
                                                ------------    ------------    ------------    ------------    ------------
Net cash provided (used) by operating
   activities ...............................          7,678         (15,709)          5,211               -
                                                                                                                      (2,820)

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............         (3,845)         (4,462)        (25,085)              -         (33,392)
Proceeds from sale of oil and gas properties           9,725          21,669           2,284               -          33,678
                                                ------------    ------------    ------------    ------------    ------------
Net cash provided (used) by investing .....
   activities ...............................          5,880          17,207         (22,801)              -             286

FINANCING ACTIVITIES
Proceeds from long-term borrowings ..........              -               -          17,084               -          17,084
Payments on long-term borrowings ............         (8,176)              -               -               -          (8,176)
Deferred financing fees .....................           (281)                            (22)                           (303)
                                                ------------    ------------    ------------    ------------    ------------
Net cash provided (used) by financing
 Activities .................................         (8,457)              -          17,062               -           8,605
                                                ------------    ------------    ------------    ------------    ------------
Effect of exchange rate changes on cash .....              -            (152)           (166)              -            (318)
                                                ------------    ------------    ------------    ------------    ------------
Increase (decrease) in cash .................          5,101           1,346            (694)              -           5,753
Cash at beginning of year                              3,593           1,245           2,767               -           7,605
                                                ------------    ------------    ------------    ------------    ------------
Cash at end of year .........................   $      8,694    $      2,591    $      2,073    $          -    $     13,358
                                                ============    ============    ============    ============    ============
</Table>

                                      F-67
<Page>

     CONDENSED CONSOLIDATING PARENT, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
                             STATEMENT OF CASH FLOW
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                       ABRAXAS
                                                      PETROLEUM      RESTRICTED           NON-        RECLASSIFI-        ABRAXAS
                                                     CORPORATION     SUBSIDIARY         GUARANTOR      CATIONS         PETROLEUM
                                                    INC. - PARENT    (CANADIAN         SUBSIDIARY        AND         CORPORATION AND
                                                    COMPANY (1)        ABRAXAS)       (GREY WOLF)    ELIMINATIONS     SUBSIDIARIES
                                                    -------------   -------------    -------------   -------------   --------------
<S>                                                 <C>             <C>              <C>             <C>              <C>
OPERATING ACTIVITIES
Net income (loss) ...............................   $      (6,423)  $      (2,062)   $       2,815   $      (1,198)   $      (6,868)

Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
     Minority interest in income of foreign
       subsidiary ...............................               -               -                -           1,676            1,676
     Depreciation, depletion, and
       amortization .............................           9,585          11,587            3,978               -           25,150
     Deferred income tax expense ................               -             878            2,079               -
                                                                                                                              2,957
     Amortization of deferred financing fees ....           1,042             273                -               -
                                                                                                                              1,315
     Stock-based compensation ...................          (2,767)              -                -               -
                                                                                                                             (2,767)
     Changes in operating assets and liabilities:
         Accounts receivable ....................          20,727          (8,817)           1,688               -           13,598
         Equipment inventory ....................            (234)              -                -               -             (234)
         Accounts payables and accrued
           expenses .............................          (7,280)            364           (1,822)              -           (8,738)
                                                    -------------   -------------    -------------   -------------    -------------
Net cash provided by operating activities .......          14,650           2,223            8,738             478           26,089

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ................         (15,984)        (14,340)         (13,991)           (478)         (44,793)
Proceeds from sale of oil and gas
   properties ...................................               -          11,968            3,393               -           15,361
Acquisition of minority interest ................          (2,248)         (2,248)
                                                    -------------   -------------    -------------   -------------    -------------
Net cash  used by investing activities ..........         (18,232)         (2,372)         (10,598)           (478)         (31,680)

FINANCING ACTIVITIES
Proceeds from long-term borrowings ..............          11,256               -            1,610               -           12,866
Payments on long-term borrowings ................          (8,873)              -                -               -           (8,873)
Exercise of stock options .......................              16               -                -               -               16
Other ...........................................             (52)              -              283               -              231
                                                    -------------   -------------    -------------   -------------    -------------
Net cash provided by  financing activities ......           2,347               -            1,893               -            4,240
                                                    -------------   -------------    -------------   -------------    -------------
Effect of exchange rate changes on cash .........               -            (128)             (33)              -             (161)
                                                    -------------   -------------    -------------   -------------    -------------
Decrease in cash ................................          (1,235)           (277)               -               -           (1,512)
Cash at beginning of period .....................             326           1,678                -               -            2,004
                                                    -------------   -------------    -------------   -------------    -------------
Cash at end of period ...........................   $        (909)  $       1,401       $        -    $          -    $         492
                                                    =============   =============    =============   =============    =============
</Table>


                                      F-68
<Page>

NOTE 7. BUSINESS SEGMENTS

    Business segment information about the three months and nine months ended
   September 30, 2002 in different geographic areas is as follows:

<Table>
<Caption>
                                                THREE MONTHS ENDED SEPTEMBER 30, 2002
                                             --------------------------------------------
                                                  U.S.            CANADA        TOTAL
                                             -------------     -----------    -----------
                                                             (In thousands)
<S>                                          <C>               <C>            <C>
Revenues ...............................     $       4,800     $     6,261    $    11,061
                                             =============     ===========    ===========
Operating loss..........................     $         651     $       525    $     1,176
                                             =============     ===========
General Corporate.........................................................           (686)
Interest expense and amortization of
   deferred financing fees................................................         (9,026)
                                                                              -----------
Loss before income taxes..................................................    $    (8,536)
                                                                              ===========
</Table>

<Table>
<Caption>
                                                THREE MONTHS ENDED SEPTEMBER 30, 2001
                                             --------------------------------------------
                                                  U.S.            CANADA         TOTAL
                                             -------------     -----------    -----------
                                                            (In thousands)
<S>                                          <C>               <C>            <C>
Revenues ...............................     $       7,687     $     7,214    $    14,901
                                             =============     ===========    ===========
Operating profit........................     $       2,170     $      (224)   $     1,946
                                             =============     ===========
General Corporate.......................................................              241
Interest expense and amortization of
   deferred financing fees..............................................           (8,449)
                                                                              -----------
Income before income taxes..............................................      $    (6,262)
                                                                              ===========
</Table>

<Table>
<Caption>
                                                 NINE MONTHS ENDED SEPTEMBER 30, 2002
                                             --------------------------------------------
                                                  U.S.           CANADA         TOTAL
                                             -------------     -----------    -----------
                                                             (In thousands)
<S>                                          <C>               <C>            <C>
Revenues ...............................     $      15,175     $    21,928    $    37,103
                                             =============     ===========    ===========
Operating loss..........................     $     (26,187)    $   (86,954)   $  (113,141)
                                             =============     ===========
General Corporate.........................................................         (2,983)
Interest expense and amortization of
   deferred financing fees................................................        (27,017)
                                                                              -----------
Loss before income taxes..................................................    $  (143,141)
                                                                              ===========
</Table>

<Table>
<Caption>
                                                 NINE MONTHS ENDED SEPTEMBER 30, 2001
                                             --------------------------------------------
                                                  U.S.            CANADA        TOTAL
                                             -------------     -----------    -----------
                                                            (In thousands)
<S>                                          <C>               <C>            <C>
Revenues ...............................     $      30,722     $    34,381    $    65,103
                                             =============     ===========    ===========
Operating profit........................     $      14,023     $    10,417    $    24,440
                                             =============     ===========
General Corporate.........................................................           (998)
Interest expense and amortization of
   deferred financing fees................................................        (24,957)
                                                                              -----------
Income before income taxes................................................    $    (1,515)
                                                                              ===========
</Table>

<Table>
<Caption>
                                                        AT SEPTEMBER 30, 2002
                                             --------------------------------------------
                                                  U.S.            CANADA         TOTAL
                                             -------------     -----------    -----------
                                                          (In thousands)
<S>                                          <C>               <C>            <C>
Identifiable assets ....................     $      88,659     $    83,168    $   171,827
                                             =============     ===========
Corporate assets..........................................................         12,066
                                                                              -----------
Total assets .............................................................    $   183,893
                                                                              ===========
</Table>

<Table>
<Caption>
                                                       AT DECEMBER 31, 2001
                                             --------------------------------------------
                                                   U.S.          CANADA          TOTAL
                                             -------------     -----------    -----------
                                                               (In thousands)
<S>                                          <C>               <C>            <C>
Identifiable assets ....................     $     124,993     $   174,063    $   299,056
                                             =============     ===========
Corporate assets..........................................................          4,560
                                                                              -----------
Total assets .............................................................    $   303,616
                                                                              ===========
</Table>

NOTE 8. HEDGING PROGRAM AND DERIVATIVES

    On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, the Company
uses only

                                      F-69
<Page>

cash flow hedges and the remaining discussion will relate exclusively to this
type of derivative instrument. If the derivative qualifies for hedge accounting,
the gain or loss on the derivative is deferred in Other Comprehensive
Income/Loss, a component of Stockholders' Equity, to the extent that the hedge
is effective. Any ineffective portion is reflected in current operations.

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

     Gains and losses on hedging instruments related to Accumulated Other
Comprehensive Income/Loss and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in the
period that the related production is delivered.

     The following table sets forth the Company's hedge position as of September
30, 2002.

<Table>
<Caption>
             Time Period                      Notional Quantities                     Price              Fair Value
-------------------------------------- ---------------------------------- ------------------------------ ------------
<S>                                    <C>                                <C>                            <C>
October 1, 2002 - October 31, 2002     20,000  Mcf/day  of  natural  gas  Fixed price swap  $2.60-$2.95  $(0.6)
                                       or 1,000 Bbl/day of crude oil      natural gas or                 million
                                                                          $18.90 Crude oil
</Table>

     On January 1, 2001, in accordance with the transition provisions of SFAS
133, the Company recorded $31.0 million, net of tax, in Other Comprehensive
Income/Loss representing the cumulative effect of an accounting change to
recognize the fair value of cash flow derivatives. The Company recorded cash
flow hedge derivative liability of $38.2 million on that date and a deferred tax
asset of $7.2 million.

     During the first nine months of 2002 the fair value of the hedge increased
by $2.5 million. For the three and nine months ended September 30, 2002, the
ineffective portion of the cash flow hedges were not material.

     As of September 30, 2002, $0.5 million of deferred net losses on derivative
instruments were recorded in other comprehensive income, of which $0.5 million
is expected to be reclassified to earnings upon the expiration of the hedge in
October 2002.

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

NOTE 9.  CONTINGENCIES

     LITIGATION - In 2001 the Company and a limited partnership, of which a
subsidiary of the Company is the general partner (the "Partnership"), were named
in a lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by the Company
and the Partnership related to the responsibility for year 2000 ad valorem taxes
on crude oil and natural gas properties sold by the Company and the Partnership.
In February 2002, a summary judgment was granted to the plaintiff in this matter
and a final judgment in the amount of $1.3 million was entered. The Company and
the Partnership have filed an appeal. The Company believes these charges are
without merit. The Company has established a reserve in the amount of $845,000,
which represents the Company's share of the judgment. The Company believes that
the remaining portion of the judgment represents the other partner's share of
such judgment.

     In late 2000, the Company received a Final De Minimis Settlement Offer from
the United States Environmental Protection Agency concerning the Casmalia
Disposal Site, Santa Barbara County, California. The Company's liability for the
cleanup at the Superfund site is based on its acquisition of Bennett Petroleum
Corporation, which is

                                      F-70
<Page>

alleged to have transported or arranged for the transportation of oil field
waste and drilling muds to the Superfund site. The Company has engaged
California counsel to evaluate the notice of proposed de minimis settlement and
its notice of potential strict liability under the Comprehensive Environmental
Response, Compensation and Liability Act. Defense of the action is handled
through a joint group of oil companies, all of which are claiming a petroleum
exclusion that would limit the Company's liability. The potential financial
exposure and any settlement posture has yet not been developed, but is
considered by the Company to be immaterial.

     Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At September 30, 2002, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.

NOTE 10.  COMPREHENSIVE INCOME

     Comprehensive income includes net income, losses and certain items recorded
directly to Stockholders' Equity and classified as Other Comprehensive Income.

     The following table illustrates the calculation of comprehensive loss for
the three and nine months ended September 30, 2002:

<Table>
<Caption>
                                                                                     Accumulated
                                                                                       Other
                                                                                    Comprehensive
                                                      Comprehensive Income (Loss)   Income (Loss)
                                                      ---------------------------   -------------
                                                          Nine       Three Months       As of
                                                         Months          Ended      September 30,
                                                         Ended                          2002
                                                                                    -------------
                                                          September 30, 2002
                                                                     (In thousands)
                                                      -------------------------------------------
<S>                                                   <C>            <C>            <C>
Accumulated other comprehensive loss at
December 31, 2001..................................                                 $     (13,561)
   Net loss........................................   $   (112,827)  $     (8,438)

Other Comprehensive loss:
Hedging derivatives (net of tax) - See Note
      Reclassification adjustment for settled
       hedge contracts.............................          2,034            883
      Change in fair market value of outstanding
       hedge positions.............................         (1,980)            (4)

   Foreign currency translation adjustment.........          3,326         (1,830)
                                                      ------------   ------------
Other comprehensive income (loss)..................          3,380           (951)          3,380
                                                      ------------   ------------

Comprehensive loss.................................   $   (109,447)  $     (9,389)
                                                      ============   ============   -------------

Accumulated other comprehensive loss at
 September 30, 2002................................                                 $     (10,181)
                                                                                    =============
</Table>

NOTE 11.  PROVED PROPERTY IMPAIRMENT

     In accordance with the Securities and Exchange Commission requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the end of a period, or alternatively, if prices
subsequent to that date have increased, a price near the periodic filing date of
the Company's financial statements. As of June 30, 2002, the Company's net
capitalized costs of crude oil and natural gas properties exceeded the present
value of its estimated proved reserves by $138.7 million ($28.2 million on the
U.S. properties and $110.5 million on the Canadian properties). These amounts
were calculated considering June 30, 2002 period-end prices of $26.12 per Bbl
for crude oil and $2.16 per Mcf for natural gas as adjusted to reflect the
expected realized prices for each of the full cost pools. The Company used the
subsequent increased prices in Canada to evaluate its Canadian properties, and
reduced the period end June 30, 2002 write-down to an amount of $87.8 million on
those properties. The subsequent prices in the U.S. would not have resulted in a
reduction of the write-down for the U.S. properties. An expense recorded in one
period may not be reversed in a subsequent period even though

                                      F-71
<Page>

higher crude oil and natural gas prices may have increased the ceiling
applicable to the subsequent period. At September 30, 2002 the Company's net
capitalized cost of crude oil and natural gas properties did not exceed the
present value of its estimated reserves, due to increased commodity prices
during the third quarter and as such no write down was recorded for the three
months ended September 30, 2002.

     The Company cannot assure you that it will not experience additional
write-downs in the future. Should commodity prices decline or if any of our
proved reserves are revised downward, a further write-down of the carrying value
of our crude oil and natural gas properties may be required.

NOTE 12.  NEW ACCOUNTING STANDARDS

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to
be recorded at fair value during the period incurred and an equal amount
recorded as an increase in the value of the related long-lived asset. The
capitalized cost is depreciated over the useful life of the asset and the
obligation is accreted to its present value each period. SFAS No. 143 is
effective for the Company beginning January 1, 2003. The Company is currently
evaluating the impact the standard will have on its future results of operations
and financial condition.

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

     In April 2002, the FASB issued SFAS No. 145, "Recission of FASB No. 4, 44,
and 64, Amendments of FASB Statement No. 13 and Technical Corrections." SFAS No.
145 clarifies guidance related to the reporting of gains and losses from
extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. SFAS No. 145 also amends
other existing pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions relating to the reporting of gains and losses from extinguishment of
debt become effective for the Company beginning January 1, 2003 with earlier
adoption encouraged. All other provisions of this standard have been effective
for the Company as of May 15, 2002 and did not have a significant impact on its
financial condition or results of operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities." SFAS No. 146 requires costs associated with
exit of disposal activities to be recognized when they are incurred rather than
at the date of commitment to an exit or disposal plan. SFAS No. 146 is effective
for the Company beginning January 1, 2003. The Company is currently evaluating
the impact the standard will have on its results of operations and financial
condition.

     The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. The
Company is currently evaluating the impact on its results of operations and
financial condition if this proposed Statement of Position is adopted in its
current form.

NOTE 13.  SUBSEQUENT EVENT (UNAUDITED)

CANADIAN STOCK SALES AND EXCHANGE OFFER -  2003

     On January 23, 2003 the Company sold to a third party all of the
outstanding capital stock of it's wholly owned subsidiaries, Canadian Abraxas
and Grey Wolf, for approximately $138 million, subject to closing adjustments
(certain assets were retained); repaid the Grey Wolf Facility indebtedness of
approximately $46.3 million; redeemed the First Lien Notes, at 100% of the
principal amount of the First Lien Notes, plus accrued and unpaid interest, for
approximately $66.4 million; and entered into a new senior credit agreement
providing for a revolving credit facility with an initial borrowing capacity of
$50 million and a new term facility for $4.2 million.

     On January 23, 2003 the Company completed an exchange offer, pursuant to
which it offered to exchange cash and securities for all of the outstanding
Second Lien Notes and Old Notes. In connection with the exchange offer, the
Company made cash payments of approximately $59.2 million, issued new 11.5%
secured notes due 2007 and

                                      F-72
<Page>

issued approximately 5.6 million shares of Common Stock. Such new secured notes
are subordinate to the new senior credit agreement which includes provisions
regarding the payment of interest on the new secured notes.

                                      F-73
<Page>

FINANCIAL STATEMENTS

GREY WOLF EXPLORATION INC.

DECEMBER 31, 2001, 2000 AND 1999

                                      F-74
<Page>

                                AUDITORS' REPORT

To the Directors of
Grey Wolf Exploration Inc.

We have audited the balance sheets of Grey Wolf Exploration Inc. as at December
31, 2001 and 2000 and the statements of earnings and retained earnings and of
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

With respect to the financial statements for each of the years in the two year
period ended December 31, 2001, we conducted our audits in accordance with
Canadian generally accepted auditing standards and auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2001 and 2000
and the results of its operations and its cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.

On February 23, 2001, we reported separately to the shareholders of the Company
on financial statements for the year ended December 31, 2000, prepared in
accordance with the Canadian generally accepted accounting principles, which
excluded Note 10 on differences between Canadian and United States generally
accepted accounting principles.

Calgary, Canada                                    /s/ Deloitte & Touche LLP
March 28, 2002 (except for Note 11                   Chartered Accountants
for which the date is January 23, 2003)

                                      F-75
<Page>

                    COMMENTS BY AUDITORS FOR U.S. READERS ON

                       CANADA - U.S. REPORTING DIFFERENCES

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) outlining changes in
accounting principles that have been implemented in the financial statements. As
discussed in Note 7 to the financial statements, in 2001 the Company changed its
method of computing diluted earnings per share to conform to the new Canadian
Institute of Chartered Accountants Handbook recommendations section 3500. In
addition, as discussed in Note 6 to the financial statements, in 2000 the
Company changed its method of accounting for income taxes to conform to the new
Canadian Institute of Chartered Accounts Handbook recommendations section 3465.

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) outlining significant
subsequent events that have been disclosed in the financial statements. We have
not audited any financial statements of the Company for any period subsequent to
December 31, 2001. However, as discussed in Note 11, the Company sold various
petroleum and natural gas assets in May 2002. Also as discussed in Note 11, the
Company's parent company sold all of the outstanding common shares of the
Company in January 2003.

Calgary, Canada                                    /s/ Deloitte & Touche LLP
March 28, 2002 (except for Note 11                   Chartered Accountants
for which the date is January 23, 2003)

                                      F-76
<Page>

                                AUDITORS' REPORT

To the Directors of
Grey Wolf Exploration Inc.

We have audited the statements of earnings and retained earnings and cash flows
of Grey Wolf Exploration Inc. for the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material
respects, the results of the Company's operations and cash flows for the year
ended December 31, 1999 in accordance with Canadian generally accepted
accounting principles.

Calgary, Canada                                    /s/ Ernst & Young LLP
March 10, 2000                                     Chartered Accountants

                                      F-77
<Page>

GREY WOLF EXPLORATION INC.

BALANCE SHEETS
AS AT DECEMBER 31
(THOUSANDS OF DOLLARS)
                                                       2001          2000
                                                         $             $
                                                    -----------   -----------
ASSETS
CURRENT
Cash (Note 4)                                             4,405             -
Accounts receivable (Note 9)                              9,980         9,815
                                                    -----------   -----------
                                                         14,385         9,815

Long-term receivable (Note 9)                            10,000             -
Property and equipment (Note 3)                          71,879        54,782
Deferred financing fees (Note 4)                            170             -
                                                    -----------   -----------
                                                         96,434        64,597
                                                    ===========   ===========

LIABILITIES
CURRENT
Accounts payable and accrued liabilities (Note 9)        15,183        15,764

Long-term debt (Note 4)                                  36,526        11,793
Future site restoration                                   1,050           898
Future income taxes (Note 6)                              6,359         3,297
                                                    -----------   -----------
                                                         59,118        31,752
                                                    -----------   -----------

SHAREHOLDERS' EQUITY
Share capital (Note 5)                                   27,891        27,555
Retained earnings                                         9,425         5,290
                                                    -----------   -----------
                                                         37,316        32,845
                                                    -----------   -----------
                                                         96,434        64,597
                                                    ===========   ===========

SEE ACCOMPANYING NOTES

                                      F-78
<Page>

GREY WOLF EXPLORATION INC.

<Table>
<Caption>
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31
(THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
                                                       2001          2000          1999
                                                         $             $             $
                                                    -----------   -----------   -----------
<S>                                                  <C>           <C>           <C>
REVENUE
Petroleum and natural gas sales                          30,268        26,009        15,427
Royalties, net of Alberta Royalty Tax Credit             (7,615)       (5,380)       (2,363)
                                                    -----------   -----------   -----------
                                                         22,653        20,629        13,064
                                                    -----------   -----------   -----------
EXPENSES
Operating                                                 3,844         3,462         3,236
General and administrative                                1,278         1,384           903
Interest and finance charges                              1,827         1,126           576
Depletion, depreciation and site restoration              8,364         7,924         6,663
                                                    -----------   -----------   -----------
                                                         15,313        13,896        11,378
                                                    -----------   -----------   -----------

Earnings before taxes                                     7,340         6,733         1,686
                                                    -----------   -----------   -----------
Provision for taxes (Note 6)
    Capital tax                                             144            61           110
    Income taxes                                          3,061         2,732           229
                                                    -----------   -----------   -----------
                                                          3,205         2,793           339
                                                    -----------   -----------   -----------

NET EARNINGS                                              4,135         3,940         1,347

Retained earnings, beginning of year                      5,290         1,912           565
Adoption of income tax accounting standard change
 (Note 6)                                                     -          (562)            -
                                                    -----------   -----------   -----------
RETAINED EARNINGS, END OF YEAR                            9,425         5,290         1,912
                                                    ===========   ===========   ===========

BASIC AND DILUTED EARNINGS PER SHARE (Note 7)              0.32          0.31          0.11
                                                    ===========   ===========   ===========

Weighted average number of shares
    Basic                                            12,776,407    12,660,528    12,695,313
    Diluted                                          12,776,407    12,732,251    12,707,805
                                                    ===========   ===========   ===========
</Table>

SEE ACCOMPANYING NOTES

                                      F-79
<Page>

GREY WOLF EXPLORATION INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)

<Table>
<Caption>
                                                       2001          2000          1999
                                                         $             $             $
                                                    -----------   -----------   -----------
<S>                                                  <C>           <C>           <C>
OPERATING ACTIVITIES
Net earnings                                              4,135         3,940         1,347
Depletion, depreciation and site restoration              8,364         7,924         6,663
Future income taxes                                       3,061         2,732           229
                                                    -----------   -----------   -----------
Cash flow from operations                                15,560        14,596         8,239
Changes in non-cash working capital items (Note 8)         (746)        1,936          (289)
                                                    -----------   -----------   -----------
                                                         14,814        16,532         7,950
                                                    -----------   -----------   -----------

FINANCING ACTIVITIES
Increase (decrease) in long-term debt                    28,334          (273)        2,094
Increase in long-term receivable                        (10,000)            -             -
Issue (repurchase) of common shares                         336             3           (78)
                                                    -----------   -----------   -----------
                                                         18,670          (270)        2,016
                                                    -----------   -----------   -----------
TOTAL CASH RESOURCES PROVIDED                            33,484        16,262         9,966
                                                    -----------   -----------   -----------

INVESTING ACTIVITIES
Property and equipment received under property
 swap agreement                                               -        10,779             -
Disposal of property and equipment under property
 swap agreement                                               -       (12,332)            -
                                                    -----------   -----------   -----------
Net cash proceeds                                             -        (1,553)            -
Other acquisitions (Note 9)                               1,071            13         3,662
Expenditures for property and equipment                  36,800        17,941        10,737
Sale of property and equipment                           (8,838)         (342)       (2,629)
Site restoration                                             46           203             -
                                                    -----------   -----------   -----------
                                                         29,079        16,262        11,770
                                                    -----------   -----------   -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          4,405             -        (1,804)
Cash and cash equivalents, beginning of year                  -             -         1,804
                                                    -----------   -----------   -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                    4,405             -             -
                                                    ===========   ===========   ===========

CASH FLOW FROM OPERATIONS PER SHARE (Note 7)
Basic and diluted                                          1.22          1.15          0.65
                                                    ===========   ===========   ===========

Cash interest paid                                        1,840         1,123           614
Cash taxes paid                                              82            72           104
                                                    ===========   ===========   ===========
</Table>

SEE ACCOMPANYING NOTES

                                      F-80
<Page>

GREY WOLF EXPLORATION INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS

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

1.   DESCRIPTION OF BUSINESS

     Grey Wolf Exploration Inc. ("Grey Wolf" or "the Company") was incorporated
     under the laws of the Province of Alberta on December 23, 1986. The
     Company's primary business is the exploration, development and production
     of crude oil and natural gas in western Canada. As at December 31, 2001,
     the Company is a wholly-owned subsidiary of Abraxas Petroleum Corporation
     ("Abraxas").

2.   SIGNIFICANT ACCOUNTING POLICIES

     The financial statements have been prepared in accordance with Canadian
     generally accepted accounting principles and are expressed in Canadian
     dollars. Differences between Canadian and U.S. GAAP are outlined in Note 10
     to the financial statements.

     PETROLEUM AND NATURAL GAS PROPERTIES

     The Company follows the full cost method of accounting in accordance with
     the guideline issued by the Canadian Institute of Chartered Accountants
     ("CICA") whereby all costs associated with the exploration for and
     development of petroleum and natural gas reserves, whether productive or
     unproductive, are capitalized in a Canadian cost centre and charged to
     income as set out below. Such costs include acquisition, drilling,
     geological and geophysical costs related to exploration and development
     activities. Costs of acquiring and evaluating unproved properties are
     excluded from the depletion base until it is determined whether or not
     proved reserves are attributable to the properties or impairment occurs.

     Gains or losses are not recognized upon disposition of petroleum and
     natural gas properties unless crediting the proceeds against accumulated
     costs would result in a change in the rate of depletion of 20% or more.

     Depletion of petroleum and natural gas properties and depreciation of
     production equipment, except for gas plants and related facilities, is
     provided on accumulated costs using the unit-of-production method based on
     estimated proved petroleum and natural gas reserves, before royalties, as
     determined by independent engineers. For purposes of the depletion
     calculation, proven petroleum and natural gas reserves are converted to a
     common unit of measure on the basis of one barrel of oil or liquids being
     equal to six thousand cubic feet of natural gas. Depreciation of gas plants
     and related facilities is calculated on a straight-line basis over an
     average 18-year term.

     The depletion and depreciation cost base includes capitalized costs, less
     costs of unproved properties, plus provision for future development costs
     of proved undeveloped reserves.

                                      F-81
<Page>

     The net carrying value of the Company's petroleum and natural gas
     properties is limited to an ultimate recoverable amount. This amount is the
     aggregate of estimated future net revenues from proved reserves and the
     costs of unproved properties, net of impairment allowances, less future
     estimated production costs, general and administration costs, financing
     costs, site restoration and abandonment costs, and income taxes. Future net
     revenues are estimated using prices and costs without escalation or
     discounting, and the income tax and Alberta Royalty Tax Credit legislation
     in effect at year end.

     FUTURE ABANDONMENT AND SITE RESTORATION COSTS

     The estimated cost of future abandonment and site restoration is based on
     the current cost and the anticipated method and extent of site restoration
     in accordance with existing legislation and industry practice. The annual
     charge is provided for on a unit-of-production basis for all properties
     except for gas plants for which the annual charge is calculated on a
     straight-line basis over the estimated remaining life of the plants. Actual
     site restoration expenditures are charged to the accumulated liability
     account as incurred.

     OTHER ASSETS

     Furniture, leasehold improvements, computer hardware, software and office
     equipment are carried at cost and are depreciated over the estimated useful
     life of the assets at rates varying between 20 percent and 30 percent, on a
     declining-balance basis.

     USE OF ESTIMATES

     The amounts recorded for depletion and depreciation of property and
     equipment and the provision for abandonment and site restoration are based
     on estimates. The ceiling test calculation is based on estimates of proved
     reserves, production rates, oil and natural gas prices, future costs and
     other relevant assumptions. By their nature, these estimates are subject to
     uncertainty and the effect on the financial statements of changes in such
     estimates could be significant.

     JOINT OPERATIONS

     Substantially all of the Company's exploration and development activities
     are conducted jointly with others, and accordingly, the financial
     statements reflect only the Company's proportionate interest in such
     activities.

     REVENUE RECOGNITION

     Petroleum and natural gas sales are recognized when the commodities are
     delivered to purchasers.

                                      F-82
<Page>

     FUTURE INCOME TAXES

     The Company has adopted, on a retroactive basis without restatement of the
     1999 financial statements, the CICA new accounting recommendation, "Income
     Taxes". Under this standard, future income tax assets and liabilities are
     measured based upon temporary differences between the carrying values of
     assets and liabilities and their tax basis. Income tax expense (recovery)
     is computed based on the change during the year in the future tax assets
     and liabilities. Effects of changes in tax laws and tax rates are
     recognized when substantially enacted.

     FINANCIAL INSTRUMENTS

     Financial instruments of the Company consist of accounts receivable,
     long-term receivable, accounts payable and accrued liabilities, and
     long-term debt. As at December 31, 2001 and 2000, there were no significant
     differences between the carrying amounts of these financial instruments
     reported on the balance sheets and their estimated fair values.

     The Company also from time to time employs financial instruments to manage
     its exposure to commodity prices. These instruments are not used for
     speculative trading purposes. Gains and losses on commodity price hedges
     are included in revenues upon the sale of the related production provided
     there is reasonable assurance that the hedge is and will continue to be
     effective.

     STOCK OPTIONS

     The Company has a stock option plan as described in Note 5. No compensation
     expense is recognized when the stock options are issued. Consideration
     received on exercise of stock options is credited to share capital.

     EARNINGS PER SHARE

     Basic earnings per share is calculated using the weighted average number of
     common shares outstanding during the year. Diluted earnings per share is
     calculated on the basis of the weighted average number of shares
     outstanding during the year plus the additional common shares that would
     have been outstanding if potentially dilutive common shares had been issued
     using the "treasury stock" method.

     Effective January 1, 2001, the Company retroactively adopted, with
     restatement of prior periods, the recommendations of new CICA Handbook
     Section 3500 for calculating earning per share. Under the revised standard,
     the treasury stock method is used for determining the dilutive effect of
     options issued. Prior to the adoption of the new recommendations, diluted
     per share amounts were determined using the imputed earnings method.

                                      F-83
<Page>

3.   PROPERTY AND EQUIPMENT

<Table>
<Caption>
                                                                      2001
                                                    -----------------------------------------
                                                                   ACCUMULATED
                                                                  DEPLETION AND       NET
                                                       COST       DEPRECIATION     BOOKVALUE
                                                         $              $              $
                                                    -----------   -------------   -----------
     <S>                                                <C>             <C>            <C>
     Petroleum and natural gas properties                89,516         (25,901)       63,615
     Gas plants and related production facilities        11,010          (2,845)        8,165
     Other assets                                           597            (498)           99
                                                    -----------   -------------   -----------
     Net property and equipment                         101,123         (29,244)       71,879
                                                    ===========   =============   ===========

<Caption>
                                                                      2000
                                                    -----------   -------------   -----------
                                                                   ACCUMULATED
                                                                  DEPLETION AND       NET
                                                       COST        DEPRECIATION    BOOKVALUE
                                                         $              $              $
                                                    -----------   -------------   -----------
     <S>                                                 <C>            <C>            <C>
     Petroleum and natural gas properties                69,543         (19,384)       50,159
     Gas plants and related production facilities         5,786          (1,326)        4,460
     Other assets                                           531            (368)          163
                                                    -----------   -------------   -----------
     Net property and equipment                          75,860         (21,078)       54,782
                                                    ===========   =============   ===========
</Table>

     Undeveloped property costs of $6,065,907 at December 31, 2001 (2000 -
     $6,441,705, 1999 - $7,365,579) have been excluded from the depletion base.

                                      F-84
<Page>

4.   LONG-TERM DEBT

     At December 31, 2001, the Company had a credit facility with Mirant Canada
     Energy Capital Ltd., (the "Mirant Facility") with a maximum available limit
     of $150,000,000. At December 31, 2001, $40,127,000 was drawn down against
     this facility. Of the $40,127,000 drawn, $10,000,000 was advanced to
     Canaxas (Note 9). Under the Mirant Facility, the Company is required to pay
     an amount equal to monthly net cash flow from operations less interest
     payments, general and administrative expenses and approved capital
     expenditures. It is anticipated the Company will be a net borrower due to a
     number of planned capital projects over the next several years.
     Accordingly, the outstanding balance has been classified as long-term on
     the balance sheet. The facility matures in December 2007.

     Under the facility, loan advances bear interest at 9.5%, plus a 5%
     overriding royalty which will decrease to 2 1/2% when certain conditions
     are met. The overriding royalty granted to Mirant was treated as a
     disposition of petroleum and natural gas properties, with a corresponding
     deferred financing charge recorded of $3,600,000 based on the fair value at
     the date of disposition. This deferred charge was netted against the
     outstanding loan balance and will be amortized over a 6-year period ended
     in 2007. Loan advances are supported by a first charge demand debenture in
     the amount of $200,000,000 covering all the assets of the Company.

     The Mirant credit facility was used to extinguish the previous revolving
     term credit facility. As at December 31, 2001, all of the previous
     revolving term credit facility had been repaid except for a bankers
     acceptance for $5,000,000. As at December 31, 2001, equivalent cash had
     been placed in trust to cover the $5,000,000 repayment, and accordingly was
     netted against the loan for financial statement purposes. The remaining
     $5,000,000 was repaid in January 2002.

     At December 31, 2000, the Company had a revolving term credit facility with
     a Canadian chartered bank with a maximum limit of $20,000,000. At December
     31, 2000, $11,792,690 was drawn down against this facility. Under the
     facility, loan advances bore interest at bank prime plus 1/8%, or if
     bankers acceptances were utilized, the then current bankers acceptances
     rate plus 1 1/8%. Loan advances were supported by a first floating charge
     demand debenture in the amount of $25,000,000 covering all the assets of
     the Company. During May 2001, the maximum limit under the revolving term
     credit facility was increased to $27,000,000 and remained at this level
     replaced by the Mirant Facility in December 2001.

                                      F-85
<Page>

5.   SHARE CAPITAL

     AUTHORIZED

     Unlimited number of common shares without nominal or par value.

     ISSUED
                                                     NUMBER OF       AMOUNT
                                                      SHARES            $
                                                    -----------   -------------

     BALANCE, DECEMBER 31, 1998                      12,704,341          27,630
     Issuer bid                                         (44,600)            (78)
                                                    -----------   -------------
     BALANCE, DECEMBER 31, 1999                      12,659,741          27,552
     Exercise of stock options                            1,800               3
                                                    -----------   -------------
     BALANCE, DECEMBER 31, 2000                      12,661,541          27,555
     Exercise of stock options                          179,786             336
                                                    -----------   -------------
     BALANCE, DECEMBER 31, 2001                      12,841,327          27,891
                                                    ===========   =============

     On May 20, 1999, the Company's shareholders approved the consolidation of
     the share capital of the Company on the basis of one common share for each
     ten common shares outstanding. All common share and per share amounts have
     been reflected on a post consolidation basis.

     STOCK OPTIONS

     A maximum of 1,270,000 options to purchase common shares have been
     authorized for issuance under the Company's stock option plan. The options
     were exercisable on a cumulative basis at 25% per year commencing one year
     after grant date and expire five years from the date of grant. During the
     year ended December 31, 2001, all options outstanding in the Company were
     cancelled and new options were issued by Abraxas.

                                                 NUMBER       WEIGHTED AVERAGE
                                               OF OPTIONS       OPTION PRICE
                                              -------------   ----------------
     BALANCE, DECEMBER 31, 1998                     897,816               3.20
     Issued                                         328,470               1.91
     Cancelled                                     (192,571)              2.83
                                              -------------   ----------------
     BALANCE, DECEMBER 31, 1999                   1,033,715               2.84
     Issued                                         398,376               1.60
     Exercised                                       (1,800)              1.60
     Cancelled                                     (420,262)              2.53
                                              -------------   ----------------
     BALANCE, DECEMBER 31, 2000                   1,010,029               2.30
                                              -------------   ----------------
     Cancelled                                    1,010,029               2.30
                                              -------------   ----------------
     BALANCE DECEMBER 31, 2001                            -                  -
                                              =============   ================


                                      F-86
<Page>

6.   PROVISION FOR TAXES

     The Company accounts for future income taxes using the liability method.
     Future income tax assets and liabilities are measured based upon temporary
     differences between the carrying values of assets and liabilities and their
     tax bases. Income tax expense (recovery) is computed based on the change
     during the year in the future tax assets and liabilities. Future income tax
     liabilities or assets are calculated using tax rates anticipated to apply
     in the periods that the temporary differences are expected to reverse.
     Effects of changes in tax laws and tax rates are recognized when
     substantially enacted.

     The provision for taxes recorded on the statements of earnings and retained
     earnings differs from the tax calculated by applying the combined statutory
     Canadian corporate and provincial income tax rate as follows:

<Table>
<Caption>
                                                           2001         2000         1999
                                                            $            $            $
                                                        ----------   ----------   ----------
     <S>                                                    <C>          <C>          <C>
     Calculated income tax expense at 42.62%,
     (2000 and 1999 - 44.62%)                                3,128        3,004          752
     Increase (decrease) in tax resulting from:
     Non-deductible crown royalties and other charges        2,950        2,254        2,147
     Resource allowance and related items                   (2,757)      (2,066)      (1,174)
     Alberta Royalty Tax Credit                               (177)        (231)      (1,392)
     Non-deductible depletion and depreciation                   -            -           43
     Benefit of losses not previously recognized                 -            -         (147)
     Large Corporation Tax                                     144           61          110
     Tax rate adjustment                                      (151)           -            -
     Other                                                      68         (229)           -
                                                        ----------   ----------   ----------
     Provision for taxes                                     3,205        2,793          339
                                                        ==========   ==========   ==========
</Table>

     The major components of future income tax liability at December 31, 2001
     and 2000 are related to the following accounts:
                                                           2001         2000
                                                            $            $
                                                        ----------   ----------

     Property and equipment                                  7,672        4,767
     Future site restoration                                  (447)        (401)
     Share issue costs                                        (117)         (94)
     Non-capital losses carried forward                          -         (557)
     Attributed royalty income carried forward                (511)        (144)
     Resource allowance                                       (310)        (274)
     Deferred financing costs                                   72            -
                                                        ----------   ----------
     Balance, December 31                                    6,359        3,297
                                                        ==========   ==========

                                      F-87
<Page>

     Upon adoption of the new accounting recommendation of the CICA, the Company
     recorded a future income tax liability of $562,000 and decreased the
     Company's retained earnings by $562,000. Had the new method not been
     adopted, 2000 net earnings would have been increased by $88,000.

     As at December 31, 2001 and 2000, the Company has exploration and
     development costs, undepreciated capital costs, non-capital losses and
     unamortized share issue costs available for deduction against future
     taxable income in the following approximate amounts:

                                                           2001         2000
                                                            $            $
                                                        ----------   ----------
     Canadian oil and gas property expense                  14,816       21,158
     Canadian development expense                           18,526        9,838
     Canadian exploration expense                           11,245        5,735
     Undepreciated capital cost                              9,290        7,097
     Non-capital losses                                          -        1,249
     Unamortized share issue costs                             276          210
                                                        ----------   ----------
                                                            54,153       45,287
                                                        ==========   ==========

     The Company's non-capital losses are available to be carried forward to
     offset taxable income in future years and expire between 2002 and 2004.

7.   EARNINGS PER SHARE

     The treasury method of calculating earnings per share was adopted
     retroactively effective January 1, 2001, with restatement of prior periods.

     If the imputed earnings method was utilized for 2000, diluted net earnings
     per share would be $0.31 per share (1999 - $0.11) and diluted cash flow
     from operations per share would be $1.11 (1999 - $0.62).

     There is no impact on 2001 diluted per share figures as a result of
     adopting the new treasury method.

8.   SUPPLEMENTARY CASH FLOW INFORMATION

<Table>
<Caption>
                                                           2001         2000         1999
                                                            $            $            $
                                                        ----------   ----------   ----------
     <S>                                                      <C>        <C>          <C>
     Accounts receivable                                      (165)      (5,712)      (1,390)
     Accounts payable and accrued liabilities                 (581)       7,648        1,101
                                                        ----------   ----------   ----------
     Changes in non-cash working capital items                (746)       1,936         (289)
                                                        ==========   ==========   ==========
</Table>

                                      F-88
<Page>

9.   RELATED PARTY TRANSACTIONS

     The Company manages the assets and operations of Canadian Abraxas Petroleum
     Limited ("Canaxas") pursuant to a Management Agreement dated November 12,
     1996. Canaxas is a wholly-owned subsidiary of Abraxas. As at December 31,
     2001, Abraxas owned 97.3% (2000 - 46.0%) of the common shares of the
     Company and Canaxas owned 2.7% (2000 - 2.7%) of the common shares of the
     Company. The aggregate common costs of operations and administration of the
     Canaxas and Grey Wolf assets are shared on a pro-rata basis, based on
     revenue.

     Amounts due to and from these related parties with respect to the
     Management Agreement are $3,741,000 at December 31, 2001 (2000 -
     $3,823,000). Abraxas also charged the Company a corporate service charge of
     $849,000 in 2001 (2000 and 1999 - $Nil) of which $589,000 was charged out
     to Canaxas. The amounts are non-interest earning, are not collateralized
     and are due on demand. In addition, at December 31, 2001, the Company had a
     long-term receivable from Canaxas in the amount of $10,000,000 (Note 4)
     (2000 - $Nil). The balance bears interest at 9.65% and has no fixed terms
     of repayment.

                                                           2001         2000
                                                            $            $
                                                        ----------   ----------
     Receivable from Canaxas                                 4,330        3,823
     Long-term receivable from Canaxas                      10,000            -
     Payable to Abraxas                                        849            -

     In July 1999, the Company purchased undeveloped property from a wholly-owed
     subsidiary of Canaxas for a total cost of $3,421,000. As a result of this
     acquisition, the Company was committed to spend $6,000,000 prior to June
     30, 2002 pursuant to the terms of a farm-in agreement between the Company
     and the wholly-owned subsidiary of Canaxas.

10.  DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
     ACCOUNTING PRINCIPLES

     RECONCILIATION OF FINANCIAL STATEMENTS TO UNITED STATES GENERALLY ACCEPTED
     ACCOUNTING PRINCIPLES

     The financial statements of the Company have been prepared in accordance
     with Canadian generally accepted accounting principles ("Canadian GAAP"),
     which in most respects, conform to accounting principles generally accepted
     in the United States of America ("U.S. GAAP"). Differences from U.S. GAAP
     having a significant effect on the Company's balance sheets and statements
     of earnings and retained earnings and of cash flows are described and
     quantified below for the years indicated:

                                      F-89
<Page>

     (a)  Under U.S. GAAP, interest costs associated with certain capital
          expenditures are required to be capitalized as part of the historical
          cost of the oil and gas assets. Under Canadian GAAP, the calculation
          of interest costs eligible for capitalization differs from the
          calculation under U.S. GAAP in certain respects and is optional at the
          discretion of the entity. Accordingly, no amounts have been
          capitalized with respect to the Canadian GAAP financial statements.
          The impact of recording capitalized interest under U.S. GAAP would be
          to increase the carrying value of property and equipment by $119,000
          in 2001 and $69,000 in 2000 with a corresponding decrease in interest
          expense in the respective periods.

     (b)  Under U.S. GAAP, deferred taxes are recorded based upon the liability
          method. When a business combination occurs, deferred taxes are
          recognized for the tax effect of timing differences, with a
          corresponding increase in property and equipment. Under Canadian GAAP,
          prior to the adoption of the new CICA accounting recommendation,
          "Future Income Taxes" effective January 1, 2000, the Company followed
          the deferral method of accounting for income taxes. The impact of the
          difference in 1999 is an additional deferred tax expense under U.S.
          GAAP of $480,000. Upon adoption of the new recommendation for Canadian
          GAAP, companies were permitted to record the impact of differences in
          accounting and tax bases related to prior business combinations to
          retained earnings as a one-time transition adjustment. Accordingly,
          property and equipment is higher under U.S. GAAP by $682,000 for 2001
          and 2000 before the impact of depletion. The impact of the additional
          depletion expense related to the increased property and equipment for
          U.S. GAAP purposes is to decrease net income by $62,000 in 2001,
          $88,000 in 2000, and $77,000 in 1999. The cumulative impact of the
          depletion expense relating to years prior to 1999 is $78,000.

     (c)  In September 2001, Abraxas acquired the remaining non-controlling
          interest of the Company. Consideration was comprised of 0.6 common
          shares of Abraxas, in exchange for each common share of the Company.
          Under U.S. GAAP, the costs assigned to assets and liabilities by the
          acquiring company under a business combination are considered to
          constitute a new basis of accounting. Accordingly, the historical
          carrying values of assets and liabilities of the subsidiary are
          comprehensively revalued based on the purchase price assigned for
          consolidation purposes at the time it becomes wholly owned ("push down
          accounting"). Under Canadian GAAP, comprehensive revaluation of assets
          and liabilities in the financial statements of a subsidiary based on a
          purchase transaction involving acquisition of all of the equity
          interests is permitted, but not required. Had the consolidation
          entries of Abraxas related to the acquisition been applied in the
          Company's financial statements using "push down accounting", property
          and equipment and future income tax liability would be reduced by
          $4,074,000 and $1,736,000, respectively, accounts receivable would be
          increased and interest and finance charges decreased by $984,000
          (relating to certain costs of the transaction paid by the Company),
          with the remaining amount of $2,338,000 recorded as a revaluation
          adjustment within shareholders'equity.

                                      F-90
<Page>

     (d)  Prior to 2001, Canadian GAAP required the use of the imputed earnings
          method for purposes of the calculation of fully diluted earnings per
          share. For fiscal periods beginning on or after January 1, 2001,
          retroactive application of the treasury stock method with restatement
          of prior periods is required, which is substantially the same as No.
          SFAS 128 under U.S. GAAP. Accordingly, no adjustments are required to
          conform the diluted earnings per share figures to U.S. GAAP, except
          for the net income effect of the above-noted Canadian - U.S. GAAP
          differences identified.

     (Tabular amounts are in thousands of Canadian dollars, except per share
     amounts)

     STATEMENTS OF EARNINGS

     The application of U.S. GAAP would have the following effect on the
     Statements of Earnings:

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                        ----------   ----------   ----------
                                                           2001         2000         1999
                                                            $            $            $
                                                        ----------   ----------   ----------
     <S>                                                     <C>          <C>          <C>
     Net earnings, as reported                               4,135        3,940        1,347

        Capitalized interest (a)                               119           69            -
        Depreciation, depletion and amortization (b)           (62)         (88)         (77)
        Deferred income tax expense benefit (b)                  -            -         (480)
        Interest and finance charges (c)                       984            -            -
                                                        ----------   ----------   ----------

     Net earnings, U.S. GAAP                                 5,176        3,921          790
                                                        ==========   ==========   ==========

     Basic earnings per share, as reported                    0.32         0.31         0.11
        Effect of increase (decrease) in net earnings
         under U.S. GAAP (d)                                  0.09            -        (0.05)
                                                        ----------   ----------   ----------
     Basic earnings per share, U.S. GAAP                      0.41         0.31         0.06
                                                        ==========   ==========   ==========

     Diluted earnings per share, as reported                  0.32         0.31         0.11
        Effect of increase (decrease) in net earnings
         under U.S. GAAP (d)                                  0.09            -        (0.05)
                                                        ----------   ----------   ----------
     Diluted earnings per share, U.S. GAAP                    0.41         0.31         0.06
                                                        ==========   ==========   ==========
</Table>

                                      F-91
<Page>

          BALANCE SHEETS

          The application of U.S. GAAP would have the following effect on the
          Balance Sheets:

<Table>
<Caption>
                                                    AS AT DECEMBER 31, 2001                       AS AT DECEMBER 31, 2000
                                            ----------------------------------------      ---------------------------------------
                                                                                                         CUMULATIVE
                                                AS           INCREASE         U.S.            AS          INCREASE         U.S.
                                             REPORTED       (DECREASE)        GAAP         REPORTED      (DECREASE)        GAAP
                                            ----------     ------------     --------      ----------     -----------     --------
<S>                                             <C>              <C>          <C>              <C>              <C>        <C>
ASSETS

Accounts receivable (c)                          9,980              984       10,964            9,815             -         9,815
Property and equipment (a) (b) (c)              71,879           (3,509)      68,370           54,782           510        55,292

LIABILITIES

Deferred income taxes (c)                        6,359           (1,736)       4,623            3,297             -         3,297

SHAREHOLDERS' EQUITY

Revaluation adjustment (c)                           -           (2,338)      (2,338)               -             -             -
Retained earnings (a) (b)                        9,425            1,549       10,974            5,290           510         5,800
</Table>

                                      F-92
<Page>

     STATEMENTS OF CASH FLOWS

     The application of U.S. GAAP would have the following effect on the
     Statements of Cash Flows:

<Table>
<Caption>
                                                                     YEARS ENDED DECEMBER 31,
                                                           --------------------------------------------
                                                               2001             2000           1999
                                                                $                $              $
                                                           ------------     -----------     -----------
     <S>                                                         <C>           <C>             <C>
     OPERATING ACTIVITIES

     Cash flow from operating activities, as reported            14,814        16,532           7,950

     Increase (decrease) in:
        Net earnings (loss)                                       1,041           (19)           (557)
        Depletion, depreciation and amortization (b)                 62            88              77
        Deferred income taxes (b)                                     -             -             480
        Changes in non-cash working capital items (c)              (984)            -               -
                                                           ------------     -----------     -----------
     Cash flow from operating activities, U.S. GAAP              14,933        16,601           7,950
                                                           ============     ===========     ===========

     INVESTING ACTIVITIES

     Net cash (used) provided by investing activities,
      as reported                                               (29,079)      (16,262)        (11,770)

        Increase in capital expenditures (a)                       (119)          (69)              -
                                                           ------------     -----------     -----------

     Net cash (used) provided by investing activities,
        U.S. GAAP                                               (29,198)      (16,331)        (11,770)
                                                           ============     ===========     ===========
</Table>

     STATEMENTS OF CASH FLOWS

     The investing activities portion of the statement of cash flows for 2000
     prepared under Canadian GAAP discloses the aggregate costs related to a
     property swap arrangement, with adjustments to arrive at the cash component
     of the transaction. Under U.S. GAAP only the net cash amount would be
     presented on the statement of cash flows.

                                      F-93
<Page>

     Under Canadian GAAP, corporations are permitted to present a sub-total
     prior to changes in non-cash working capital within operating activities.
     This information is perceived to be useful information for various users of
     the financial statements and is commonly presented by Canadian public
     corporations. Under U.S. GAAP, this sub-total is not permitted to be shown
     and would be removed in the statements of cash flows for all periods
     presented. In addition, cash flow from operations per share figures would
     not be presented under U.S. GAAP.

     RECENT DEVELOPMENTS IN U.S. ACCOUNTING

     The Financial Accounting Standards Board recently issued Statement No. 141,
     "Business Combinations" (FAS No. 141) and Statement No. 142 "Goodwill and
     Other Intangible Assets" (FAS No. 142). FAS No. 141 requires the purchase
     method of accounting to be used for all business combinations after July 1,
     2001. FAS No. 142 requires that goodwill and intangible assets with an
     indefinite useful life no longer be amortized, but instead tested for
     impairment at least annually. Enterprises are required to adopt FAS No. 142
     for fiscal years beginning after December 15, 2001. FAS No. 141 has been
     applied with respect to the acquisition by Abraxas of the remaining
     non-controlling interest in Grey Wolf. The Company currently has no
     goodwill or other intangible assets that will be impacted by the adoption
     of FAS No. 142.

     Statement No. 143, "Accounting for Asset Retirement Obligations" (FAS No.
     143) was released by the Financial Accounting Standards Board in June 2001.
     FAS No. 143 requires liability recognition for retirement obligations
     associated with tangible long-lived assets. The initial market of the asset
     retirement obligation is to be at fair value. The asset retirement cost
     equal to the fair value of the retirement obligation is to be capitalized
     as part of the cost of the related long-lived asset and amortized to
     expense over the useful life of the asset. Enterprises are required to
     adopt FAS No. 143 for fiscal years beginning after June 15, 2002. The
     Company is currently assessing the impact that adoption of this standard
     would have on its financial position and results of operations.

                                      F-94
<Page>

     The Financial Accounting Standards Board also recently issued Statement No.
     144, "Accounting for the Impairment of Disposal of Long-Lived Assets" (FAS
     No. 144). FAS No. 144 will replace previous Untied States generally
     accepted accounting principles regarding accounting for impairment of
     long-lived assets and accounting and reporting for discontinued operations.
     FAS No. 144 retains the fundamental provisions of the prior standard for
     recognizing and measuring impairment losses on long-lived assets. FAS No.
     144 retains the basic provisions of the prior standard for presentation of
     discontinued operations in the income statement, but broadens that
     presentation to include a component of an entity rather than a segment of a
     business. Enterprises are required to adopt FAS No. 144 for fiscal years
     beginning after December 15, 2001. The Company has adopted the accounting
     standard effective January 1, 2002 which is not expected to have a
     significant impact on the Company's financial position and results of
     operations.

11.  SUBSEQUENT EVENTS

     In May 2002, the Company sold its non-operated interest in the Quirk Creek
     gas processing facilities and related petroleum and natural gas rights, and
     certain other producing properties in the Mahaska and Millarville areas for
     total gross proceeds of $3,617,000.

     In January 2003, Abraxas completed the sale of all of the outstanding
     common shares of the Company to an unrelated third party (the "Purchaser")
     for gross cash proceeds of approximately $110,790,000, subject to closing
     adjustments. Upon closing of the sale, the Company was required to repay
     the outstanding indebtedness under the Mirant Facility, totaling
     $72,847,000, including accrued interest. Prior to the sale, certain
     petroleum and natural gas assets of the Company were transferred to a
     newly-formed subsidiary of Abraxas, a portion of which will be developed
     jointly under farmout arrangements with the Purchaser.

                                      F-95
<Page>

                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

         The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by us. All of such amounts
(except the SEC Registration Fee) are estimated.

<Table>
<Caption>

         <S>                                                           <C>
         SEC Registration Fee.......................................   $5,986
                                                                       ------
         Federal Taxes..............................................   $
                                                                       ------
         State and Local Taxes......................................   $
                                                                       ------
         Trustee and Transfer Agent Fees............................   $
                                                                       ------
         Printing and Mailing Costs.................................   $
                                                                       ------
         Legal Fees and Expenses....................................   $
                                                                       ------
         Accounting Fees and Expenses...............................   $
                                                                       ------
         Miscellaneous..............................................   $
                                                                       ------
</Table>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

         Abraxas' Articles of Incorporation contain a provision that eliminates
the personal monetary liability of directors and officers to Abraxas and its
stockholders for a breach of fiduciary duties to the extent currently allowed
under the Nevada General Corporation Law (the "Nevada Statute"). If a director
or officer of Abraxas were to breach his fiduciary duties, neither Abraxas nor
its stockholders could recover monetary damages, and the only course of action
available to Abraxas' stockholders would be equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty.
To the extent certain claims against directors or officers are limited to
equitable remedies, this provision of Abraxas' Articles of Incorporation may
reduce the likelihood of derivative litigation and may discourage stockholders
or management from initiating litigation against directors or officers for
breach of their duty of care. Additionally, equitable remedies may not be
effective in many situations. If a stockholder's only remedy is to enjoin the
completion of the Board of Director's action, this remedy would be ineffective
if the stockholder did not become aware of a transaction or event until after it
had been completed. In such a situation, it is possible that the stockholders
and Abraxas would have no effective remedy against the directors or officers.

         Liability for monetary damages has not been eliminated for acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law or payment of an improper dividend in violation of section 78.300 of the
Nevada Statute. The limitation of liability also does not eliminate or limit
director liability arising in connection with causes of action brought under the
Federal securities laws.

         The Nevada Statute permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
against all expenses (including attorneys' fees) actually and reasonably
incurred by, or imposed upon, him in connection with the defense by reason of
his being or having been a director or officer if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
where he has been adjudged by a court of competent jurisdiction (and after
exhaustion of all appeals) to be liable for gross negligence or willful
misconduct in the performance of his duty. The Bylaws of Abraxas provide
indemnification to the same extent allowed pursuant to the foregoing provisions
of the Nevada Statute.

         Nevada corporations also are authorized to obtain insurance to
protect officers and directors from certain liabilities, including liabilities
against which the corporation cannot indemnify its directors and officers.
Alberta Business Corporation Act corporations are permitted to obtain such
insurance also, except for liability relating to the failure to act honestly
and in good faith with a view to the best interests of the corporation.
Abraxas currently has a directors' and officers' liability insurance policy in
effect providing $3.0 million in coverage and an additional $1.0 million in
coverage for certain employment related claims.

                                      II-1

<Page>

         Abraxas has entered into indemnity agreements with each of its
directors and officers. These agreements provide for indemnification to the
extent permitted by the Nevada Statute.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since January 2000, we have issued and sold the following unregistered
securities:

(a) On August 1, 2000, Abraxas issued a warrant to purchase 750,000 shares at an
exercise price of $3.50 per share. The warrant was issued pursuant to Section
4(2) of the Securities Act of 1933, as amended.

(b) On January 23, 2003, Abraxas issued $109,523,000 principal amount of 11 1/2%
Secured Notes due 2007, Series A and 5,633,291 shares of Abraxas common stock.
These securities were issued pursuant to Section 4(2) of the Securities Act of
1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

3.1      Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to Abraxas'
         Registration Statement on Form S-4, No. 33-36565).

3.2      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         October 22, 1990 (Filed as Exhibit 3.3 to Abraxas' Registration
         Statement on Form S-4, No. 33-36565).

3.3      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         December 18, 1990 (Filed as Exhibit 3.4 to Abraxas' Registration
         Statement on Form S-4, No. 33-36565).

3.4      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         June 8, 1995 (Filed as Exhibit 3.4 to the Abraxas' Registration
         Statement on Form S-3, No. 333-00398 (the "1995 S-3 Registration
         Statement")).

3.5      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         as of August 12, 2000 (Filed as Exhibit 3.5 to Abraxas' Annual Report
         on Form 10-K filed April 2, 2001).

3.6      Articles of Incorporation of Sandia Oil & Gas Corporation (Filed as
         Exhibit 3.7 to Abraxas and Canadian Abraxas' Registration Statement on
         Form S-4, No. 333-79349 (the "1999 Exchange Offer Registration
         Statement")).

*3.7     Articles of Incorporation of Sandia Operating Corp.

3.8      Articles of Incorporation of Wamsutter Holdings, Inc. (Filed as Exhibit
         3.7 to the Abraxas, Sandia Oil & Gas Corporation and New Cache
         Petroleums Ltd. Registration Statement on Form S-1, No. 333-95281 (the
         "2000 S-1 Registration Statement")).

*3.9     Articles of Incorporation of Western Associated Energy Corporation.

*3.10    Articles of Incorporation of Eastside Coal Company, Inc.

*3.11    Certificate of Incorporation of Grey Wolf Exploration Inc.

3.12     Amended and Restated Bylaws of Abraxas (Filed as Exhibit 3.6 to
         Abraxas' Annual Report on Form 10-K filed April 5, 2002).



                                      II-2
<Page>

*3.13    Amended and Restated By-Laws of Sandia Oil & Gas Corporation.

*3.14    By-Laws of Sandia Operating Corp.

3.15     By-Laws of Wamsutter Holdings, Inc. (Filed as Exhibit 3.11 to the 2000
         S-1 Registration Statement).

*3.16    By-Laws of Western Associated Energy Corporation.

*3.17    By-Laws of Eastside Coal Company, Inc.

*3.18    By-Laws of Grey Wolf Exploration Inc.

4.1      Specimen Common Stock Certificate of Abraxas (Filed as Exhibit 4.1 to
         Abraxas' Registration Statement on Form S-4, No. 33-36565).

4.2      Specimen Preferred Stock Certificate of Abraxas (Filed as Exhibit 4.2
         to Abraxas' Annual Report on Form 10-K filed on March 31, 1995).

4.3      Rights Agreement dated as of December 6, 1994 between Abraxas and First
         Union National Bank of North Carolina ("FUNB") (Filed as Exhibit 4.1 to
         Abraxas' Registration Statement on Form 8-A filed on December 6, 1994).

4.4      Amendment to Rights Agreement dated as of July 14, 1997 by and between
         Abraxas and American Stock Transfer and Trust Company (Filed as
         Exhibit 1 to Amendment No. 1 to Abraxas' Registration Statement on
         Form 8-A filed on August 20, 1997).

4.5      Second Amendment to Rights Agreement as of May 22, 1998, by and between
         Abraxas and American Stock Transfer & Trust Company (Filed as Exhibit 1
         to Amendment No. 2 to Abraxas' Registration Statement on Form 8-A filed
         on August 24, 1998).

4.6      Indenture dated as of January 23, 2003, among Abraxas, as Issuer, the
         Subsidiary Guarantors party thereto, and U.S. Bank, N.A., as Trustee,
         relating to Abraxas' 11-1/2% Secured Notes due 2007 (the "Indenture")
         (Filed as Exhibit 4.1 to Abraxas' Current Report on Form 8-K filed
         February 6, 2003).

4.7      Registration Rights Agreement dated as of January 23, 2003 by and among
         Abraxas, Sandia Oil & Gas Corporation, Sandia Operating Corp.,
         Wamsutter Holdings, Inc., Grey Wolf Exploration Inc. and Jefferies &
         Company, Inc. (Filed as Exhibit 10.4 to Abraxas' Current Report on Form
         8-K filed February 6, 2003).

4.8      Form of 111/2% Secured Note due 2007 (Filed as Exhibit A to the
         Indenture).

*5.1     Opinion of Cox & Smith Incorporated.

**5.2    Opinion of Osler, Hoskin & Harcourt LLP.

+10.1    Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
         amended and restated (Filed as Exhibit 10.7 to Abraxas' Annual Report
         on Form 10-K filed April 14, 1993).

+10.2    Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, as
         amended and restated (Filed as Exhibit 10.8 to Abraxas' Annual Report
         on Form 10-K filed April 14, 1993).

+10.3    Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan
         (Filed as Exhibit 10.9 to Abraxas' Annual Report on Form 10-K filed
         April 14, 1993).

+10.4    Abraxas Petroleum Corporation 401(k) Profit Sharing Plan (Filed as
         Exhibit 10.4 to Abraxas' Registration Statement on Form S-4,
         No. 333-18673 (the "1996 Exchange Offer Registration Statement)).


                                      II-3

<Page>

+10.5    Abraxas Petroleum Corporation Director Stock Option Plan (Filed as
         Exhibit 10.5 to 1996 Exchange Offer Registration Statement).

+10.6    Abraxas Petroleum Corporation Restricted Share Plan for Directors
         (Filed as Exhibit 10.20 to Abraxas' Annual Report on Form 10-K filed on
         April 12, 1994).

+10.7    Abraxas Petroleum Corporation 1994 Long Term Incentive Plan (Filed as
         Exhibit 10.21 to Abraxas' Annual Report on Form 10-K filed on April 12,
         1994).

+10.8    Abraxas Petroleum Corporation Incentive Performance Bonus Plan (Filed
         as Exhibit 10.24 to Abraxas' Annual Report on Form 10-K filed on
         April 12, 1994).

10.9     Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
         Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to Abraxas'
         and Canadian Abraxas' Registration Statement on Form S-1, Registration
         No. 33-66446).

10.10    Form of Indemnity Agreement between Abraxas and each of its directors
         and officers (Filed as Exhibit 10.30 to Abraxas' and Canadian Abraxas'
         Registration Statement on Form S-1, Registration No. 33-66446).

+10.11   Employment Agreement between Abraxas and Robert L. G. Watson (Filed as
         Exhibit 10.19 to the 2000 S-1 Registration Statement).

+10.12   Employment Agreement between Abraxas and Chris E. Williford (Filed as
         Exhibit 10.20 to the 2000 S-1 Registration Statement).

+10.13   Employment Agreement between Abraxas and Stephen T. Wendel (Filed as
         Exhibit 10.26 to the 1995 S-3 Registration Statement).

+10.14   Employment Agreement between Abraxas and Robert W. Carington, Jr (Filed
         as Exhibit 10.22 to the 2000 S-1 Registration Statement).

10.15    Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
         Basil Street Company (Filed as Exhibit 10.15 to Abraxas Annual Report
         on Form 10-K filed on April 2, 2001).

10.16    Common Stock Purchase Warrant dated September 1, 2000 between Jessup &
         Lamont Holdings (Filed as Exhibit 10.16 to Abraxas Annual Report on
         Form 10-K filed on April 2, 2001).

10.17    Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
         TNC, Inc. (Filed as Exhibit 10.17 to Abraxas Annual Report on Form 10-K
         filed on April 2, 2001).

10.18    Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
         Charles K. Butler (Filed as Exhibit 10.17 to Abraxas Annual Report on
         Form 10-K filed on April 2, 2001).

10.19    Agreement of Limited Partnership of Abraxas Wamsutter L.P. dated as of
         November 12, 1998 by and between Wamsutter Holdings, Inc. and
         TIFD III-X Inc. (Filed as Exhibit 10.2 to Abraxas' Current Report on
         Form 8-K filed November 30, 1998).

10.20    Purchase Agreement for Dollar Denominated Production Payment dated as
         of October 6, 1999 by and between Abraxas and Southern Producer
         Services, L.P. (Filed as Exhibit 10.1 to Abraxas' Quarterly Report on
         Form 10-Q filed November 15, 1999).

10.21    Conveyance of Dollar Denominated Production Payment dated as of
         October 6, 1999 by and between Abraxas and Southern Producer
         Services, L.P. (Filed as Exhibit 10.2 to Abraxas' Quarterly Report on
         Form 10-Q filed November 15, 1999).


                                      II-4
<Page>

10.22    Purchase and Sale Agreement dated November 21, 2002, by and among
         Abraxas, as Seller, Primewest Gas Inc., as Purchaser, Primewest Energy
         Inc., as Guarantor, Canadian Abraxas and Grey Wolf Exploration Inc.,
         as the Companies (Filed as Exhibit 10.1 to Abraxas' Current Report on
         Form 8-K/A filed December 9, 2002).

10.23    Farmout Agreement between Grey Wolf Exploration Limited and PrimeWest
         Energy, Inc. (Previously filed as Exhibit 10.2 to Abraxas' Current
         Report on Form 8-K/A filed on December 9, 2002).

10.24    Farmout Agreement between Grey Wolf Exploration Limited and PrimeWest
         Energy, Inc. (Previously filed as Exhibit 10.3 to Abraxas' Current
         Report on Form 8-K/A filed on December 9, 2002).

10.25    Loan And Security Agreement dated as of January 22, 2003, by and among
         Abraxas, as Borrower, the Subsidiaries of Abraxas that are Signatories
         thereto, as Guarantors, the Lenders that are Signatories thereto, as
         Lenders, and Foothill Capital Corporation, as the Arranger and
         Administrative Agent (Filed as Exhibit 10.5 to Abraxas' Current Report
         on Form 8-K filed February 6, 2003).

10.26    Intercreditor and Subordination Agreement dated as of January 23, 2003,
         by and among Foothill, in its capacity as agent (in such capacity,
         together with any successor in such capacity, the "Senior Agent") for
         the lenders who are from time to time parties to the Loan Agreement
         (the "Senior Lenders"), U.S. Bank, N.A., a national banking association
         in its capacity as trustee (in such capacity, together with any
         successor in such capacity, the "Trustee") for the holders of the
         11 1/2% Secured Notes Due 2007, issued under the Indenture. (Filed as
         Exhibit 10.6 to Abraxas' Current Report on Form 8-K filed February 6,
         2003).

16.1     Letter addressing change in certifying accountant (Filed on Abraxas'
         Form 8-K filed on August 22, 2001).

*21.1    Subsidiaries of Abraxas.

*23.1    Consent of Delloite & Touche LLP

*23.2    Consent of Ernst & Young LLP

*23.3    Consent of Delloite & Touche LLP Chartered Accountants

*23.4    Consent of Ernst & Young LLP Chartered Accountants

*23.5    Consent of DeGolyer and MacNaughton.

*23.6    Consent of McDaniel & Associates Consultants, Ltd.

*23.7    Consent of Cox & Smith Incorporated (Included in Exhibit 5.1).

*23.8    Consent of Osler, Hoskin & Harcourt LLP.

*24.1    Power of Attorney of Craig S. Bartlett, Jr.

*24.2    Power of Attorney of Franklin Burke.

*24.3    Power of Attorney of Frederick M. Pevow, Jr.

*24.4    Power of Attorney of James C. Phelps.


                                      II-5
<Page>


*24.5    Power of Attorney of Joseph A. Wagda.

*25.1    Statement of eligibility of trustee for the Indenture.

27.1     Financial Data Schedule (Omitted pursuant to Regulation S-K,
         Item 601(c)).

----------------------
*   Filed herewith.

**  To be filed by amendment.

+   Management Compensatory Plan or Agreement.

ITEM 17.  UNDERTAKINGS

     A. The undersigned registrants hereby undertake:

     (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

         (i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

         (ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.

         (iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

     (2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.


     B. Each of the undersigned registrants hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

     C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
each of the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person in the successful
defense of any action, suit or proceedings) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the


                                      II-6
<Page>

registrants will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by either of them is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.



                                      II-7
<Page>



                                   SIGNATURES


         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.



                                          ABRAXAS PETROLEUM CORPORATION




                              By: /s/ Robert L. G. Watson
                              --------------------------------------------------
                              Chairman of the Board, Chief Executive Officer and
                              President



                                      II-8
<Page>


         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>

Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----

<S>                                         <C>                                             <C>
/s/ Robert L.G. Watson                      Chairman of the Board,                          February 7,  2003
------------------------------              President, Chief Executive Officer
Robert L.G. Watson                          (Principal Executive Officer) and
                                            Director of Abraxas


/s/ Chris E. Williford                      Executive Vice President,                       February 7, 2003
------------------------------              Treasurer, and Chief Financial
Chris E. Williford                          Officer (Principal Financial and
                                            Accounting Officer) of Abraxas


/s/ Robert W. Carington                     Executive Vice President of Abraxas             February 7, 2003
------------------------------
Robert W. Carington, Jr.


             *                              Director of Abraxas                             February 7, 2003
------------------------------
Craig S. Bartlett, Jr.


              *                             Director of Abraxas                             February 7, 2003
------------------------------
Franklin A. Burke


                                            Director of Abraxas                             February 7, 2003
------------------------------
Ralph F. Cox


              *                             Director of Abraxas                             February 7, 2003
------------------------------
Frederick M. Pevow, Jr.


              *                             Director of Abraxas                             February 7, 2003
------------------------------
James C. Phelps


              *                             Director of Abraxas                             February 7, 2003
------------------------------
Joseph A. Wagda



*By: /s/ Chris E. Williford
------------------------------
Chris E. Williford
Attorney-in-fact

</Table>



                                      II-9
<Page>


                                   SIGNATURES


     Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.



                                      SANDIA OIL & GAS CORPORATION



                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President





                                     II-10


<Page>


     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>

Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----

<S>                                         <C>                                             <C>
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Sandia Oil & Gas Corporation


/s/ Chris E. Williford                      Vice President  (Principal                      February 7, 2003
------------------------------              Financial and Accounting Officer)
Chris E. Williford                          and Director of Sandia Oil &
                                            Gas Corporation


/s/ Robert W. Carington                     Vice President and Director                     February 7, 2003
------------------------------              of Sandia Oil & Gas Corporation
Robert W. Carington, Jr.

</Table>


                                     II-11
<Page>



                                   SIGNATURES


         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.



                                      SANDIA OPERATING CORP.


                                      By: /s/ Robert L.G. Watson
                                         -----------------------
                                         President




                                     II-12
<Page>


     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>

Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----

<S>                                         <C>                                             <C>
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Sandia Operating Corp.


/s/ Chris E. Williford                      Vice President (Principal Financial             February 7, 2003
------------------------------              and Accounting Officer) and
Chris E. Williford                          Director of Sandia Operating Corp.


/s/ Robert W. Carington                     Vice President and Director                     February 7, 2003
------------------------------              of Sandia Operating Corp.
Robert W. Carington, Jr.

</Table>


                                     II-13
<Page>


                                   SIGNATURES


     Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.



                                      WAMSUTTER HOLDINGS, INC.



                                      By: /s/ Robert L.G. Watson
                                          -------------------------
                                          President



                                     II-14
<Page>


         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>

Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----

<S>                                         <C>                                             <C>
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of Wamsutter
Robert L.G. Watson


/s/ Chris E. Williford                      Vice President (Principal Financial and         February 7, 2003
------------------------------              Accounting Officer) and Director
Chris E. Williford                          of Wamsutter


/s/ Robert W. Carington                     Vice President and Director                     February 7, 2003
------------------------------              of Wamsutter
Robert W. Carington, Jr.

</Table>



                                     II-15
<Page>


                                   SIGNATURES


         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.



                                      WESTERN ASSOCIATED ENERGY CORPORATION



                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President





                                     II-16
<Page>


         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>

Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----

<S>                                         <C>                                             <C>
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Western Associated Energy
                                            Corporation


/s/ Chris E. Williford                      Vice President (Principal                       February 7, 2003
------------------------------              Accounting Officer) and
Chris E. Williford                          Director of Western Associated
                                            Energy Corporation


/s/ Robert W. Carington                     Vice President and Director of                  February 7, 2003
------------------------------              Western Associated Energy Corporation
Robert W. Carington, Jr.

</Table>


                                     II-17
<Page>


                                   SIGNATURES


     Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.



                                      EASTSIDE COAL COMPANY, INC.



                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President



                                     II-18
<Page>


     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>

Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----

<S>                                         <C>                                             <C>
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Eastside Coal Company, Inc.


/s/ Chris E. Williford                      Vice President (Principal                       February 7, 2003
------------------------------              Accounting Officer) and
Chris E. Williford                          Director of Eastside Coal
                                            Company, Inc.


/s/ Robert W. Carington                     Vice President and                              February 7, 2003
------------------------------              Director of Eastside Coal
Robert W. Carington, Jr.                    Company, Inc.


</Table>


                                     II-19
<Page>


                                   SIGNATURES


         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.



                                      GREY WOLF EXPLORATION INC.



                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President



                                     II-20
<Page>


     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>

Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----

<S>                                         <C>                                             <C>
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Grey Wolf Exploration Inc.

/s/ Chris E. Williford                      Vice President (Principal                       February 7, 2003
------------------------------              Financial and Accounting
Chris E. Williford                          Officer) of Grey Wolf
                                            Exploration Inc.

/s/ Vince Tkachick                          Vice President/COO and Director                 February 7, 2003
------------------------------              of Grey Wolf Exploration Inc.
Vince Tkachick

</Table>


                                     II-21
<Page>



                                 EXHIBIT INDEX

<Table>
<Caption>

Exhibit                                                                          Page
Number:     Exhibit                                                             Number
-------     -------                                                             ------

<S>         <C>                                                                 <C>
3.7         Articles of Incorporation of Sandia Operating Corp.

3.9         Articles of Incorporation of Western Associated Energy Corporation

3.10        Articles of Incorporation of Eastside Coal Company, Inc.

3.11        Certificate of Incorporation of Grey Wolf Exploration Inc.

3.13        Amended and Restated By-Laws of Sandia Oil & Gas Corporation

3.14        By-Laws of Sandia Operating Corp.

3.16        By-Laws of Western Associated Energy Corporation

3.17        By-Laws of Eastside Coal Company, Inc.

3.18        By-Laws of Grey Wolf Exploration Inc.

5.1         Opinion of Cox & Smith Incorporated

21.1        Subsidiaries of Abraxas

23.1        Consent of Deloitte & Touche LLP

23.2        Consent of Ernst & Young LLP

23.3        Consent of Deloitte & Touche LLP Chartered Accountants

23.4        Consent of Ernst & Young LLP Chartered Accountants

23.5        Consent of DeGolyer and MacNaughton

23.6        Consent of McDaniel & Associates Consultants, Ltd.

23.7        Consent of Cox & Smith Incorporated (included in Exhibit 5.1)

23.8        Consent of Osler, Hoskin & Harcourt LLP

24.1        Power of Attorney of Craig S. Bartlett, Jr.

24.2        Power of Attorney of Franklin Burke

24.3        Power of Attorney of Frederick M. Pevow, Jr.

24.4        Power of Attorney of James C. Phelps

</Table>


                                     1
<Page>

<Table>
<Caption>

Exhibit                                                                          Page
Number:     Exhibit                                                             Number
-------     -------                                                             ------

<S>         <C>                                                                 <C>
24.5     Power of Attorney of Joseph A. Wagda

25.1     Statement of eligibility of trustee for the Indenture

</Table>


                                     2
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[{"company-data": {"conformed-name": "SANDIA OPERATING CORP", "cik": "0001216640", "irs-number": "742468708", "state-of-incorporation": "TX", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-103027-04", "film-number": "03543725"}, "mail-address": {"street1": "500 N LOOP 1604 E", "street2": "STE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "70232"}}, {"company-data": {"conformed-name": "EAST SIDE COAL CO INC", "cik": "0001217497", "irs-number": "742275407", "state-of-incorporation": "CO", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-103027-01", "film-number": "03543722"}, "mail-address": {"street1": "500 NORTH LOOP EAST SUITE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232"}}, {"company-data": {"conformed-name": "WESTERN ASSOCIATED ENERGY CORP", "cik": "0001217492", "irs-number": "741937878", "state-of-incorporation": "TX", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-103027-02", "film-number": "03543723"}, "mail-address": {"street1": "500 NORTH LOOP EAST SUITE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232"}}, {"company-data": {"conformed-name": "WAMSUTTER HOLDINGS INC", "cik": "0001217490", "irs-number": "742897013", "state-of-incorporation": "TX", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-103027-03", "film-number": "03543724"}, "mail-address": {"street1": "500 NORTH LOOP EAST SUITE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232"}}, {"company-data": {"conformed-name": "ABRAXAS PETROLEUM CORP", "cik": "0000867665", "assigned-sic": "1311", "irs-number": "742584033", "state-of-incorporation": "NV", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-103027", "film-number": "03543721"}, "business-address": {"street1": "500 N LOOP 1604 E STE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232", "phone": "2104904788"}, "mail-address": {"street1": "500 N LOOP 1604 EAST STE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232"}}, {"company-data": {"conformed-name": "SANDIA OIL & GAS CORP", "cik": "0000824269", "state-of-incorporation": "TX", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-103027-05", "film-number": "03543726"}, "business-address": {"street1": "C/O ABRAXAS PETROLEUM CORP", "street2": "500 NROTH LOOP 1604 EAST STE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232", "phone": "2104904788"}, "mail-address": {"street1": "C/O ABRAXAS PETROLEUM CORP", "street2": "500 NORTH LOOP 1604 EAST STE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232"}}, {"company-data": {"conformed-name": "GREY WOLF EXPLORATION INC", "cik": "0001138268", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-103027-06", "film-number": "03543727"}, "business-address": {"street1": "500 NORTH LOOP 1604 EAST", "street2": "SUITE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232", "phone": "2104904788"}, "mail-address": {"street1": "500 NORTH LOOP 1604 EAST", "street2": "SUITE 100", "city": "SAN ANTONIO", "state": "TX", "zip": "78232"}}]
As filed with the Securities and Exchange Commission on February 7, 2003.

                                                    Registration No. 333-_______

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

                                    FORM S-1

             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

           ----------------------------------------------------------
           (Exact Name of Registrants as Specified in their Charters)
Nevada                                1331                             74 2584033
                 Alberta                                1331                                N/A
                  Texas                                 1331                             74-2368968
                  Texas                                 1331                             74-2468708
                 Wyoming                                1331                             74-2897013
                  Texas                                 1331                             74-1937878
                 Colorado                               1331                             74-2275407
     (State or other jurisdiction of        (Primary Standard Industrial      (I.R.S. Employer Identification
      incorporation or organization)        Classification Code Number)                   Number)
500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, (210) 490-4788
           ----------------------------------------------------------
                   (Address, including zip code, and telephone
             number, including area code, of registrants' principal
                               executive offices)

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

                                 With a copy to:

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

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

     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [x]

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

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

     If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

                         CALCULATION OF REGISTRATION FEE
Proposed        Proposed
                                                                         Maximum         Maximum         Amount of
                 Title of Each Class of               Amount to be    Offering Price    Aggregate      Registration
               Securities to be Registered             Registered        Per Unit     Offering Price        Fee
               ---------------------------            ------------    --------------  --------------   -------------
11 1/2% Secured Notes Due 2007, Series A       $ 184,000,000(1)      32.5%(3)     $ 59,800,000       $ 5,501.60
       Guarantees                                                  (2)        --                   --             None(4)
       Common Stock, par value $0.01 per share            6,583,291       $ 0.80(3)      $  5,266,633       $   484.53
(1)  Of the $184,000,000 to be registered, $109,523,000 represents outstanding
     principal and the remainder represents interest to be paid by the issuance
     of additional notes in lieu of cash interest during the term of the notes.

(2)  The 11 1/2% Secured Notes due 2007, Series A of Abraxas Petroleum
     Corporation being registered are guaranteed by each of the subsidiary
     guarantors.

(3)  Estimated solely for the purpose of calculating the registration fee in
     accordance with Rule 457(c).

(4)  Pursuant to Rule 457(n).

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

                                       ii
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2003

                                   PROSPECTUS

                          ABRAXAS PETROLEUM CORPORATION

                    11 1/2% SECURED NOTES DUE 2007, SERIES A

                    6,583,291 SHARES OF ABRAXAS COMMON STOCK

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

     This prospectus relates to the offering for resale of Abraxas Petroleum
Corporation's 11 1/2% Secured Notes due 2007, Series A, and 6,583,291 shares of
common stock of Abraxas Petroleum Corporation. The notes and 5,633,291 shares
of common stock were issued in connection with an overall financial
restructuring through a private exchange offer exempt from, or not subject
to, the registration requirements of the Securities Act of 1933, as amended.
The remaining 950,000 shares of common stock represent shares issuable upon
exercise of outstanding warrants. This prospectus will be used by selling
security holders to resell the notes and shares of common stock. We will not
receive any of the proceeds from the sale of notes or common stock by the
selling security holders.

THE NOTES

          -    accrue interest from the date of issuance, at a fixed annual rate
               of 11 1/2%, payable in cash semi-annually on each May 1 and
               November 1, commencing May 1, 2003, PROVIDED THAT, if we fail, or
               are not permitted pursuant to our new senior credit agreement or
               the intercreditor agreement between the trustee under the
               indenture for the notes and the lenders under the new senior
               credit agreement, to make such cash interest payments in full, we
               will pay such unpaid interest in kind by the issuance of
               additional notes with a principal amount equal to the amount of
               accrued and unpaid cash interest on the notes plus an additional
               1% accrued interest for the applicable period;

          -    will, upon an event of default, accrue interest at an annual rate
               of 16.5%;

          -    are guaranteed by all of Abraxas' current subsidiaries, Sandia
               Oil & Gas Corp., Sandia Operating Corp., Wamsutter Holdings,
               Inc., Western Associated Energy Corporation, Eastside Coal
               Company, Inc., and our newly-formed, wholly-owned Canadian
               subsidiary, Grey Wolf Exploration Inc., or New Grey Wolf, and
               will be guaranteed by all of Abraxas' future subsidiaries;

          -    are secured by a second lien or charge on all of our current and
               future assets, including, but not limited to, our crude oil and
               natural gas properties; and

          -    are not listed on any national securities exchange.

THE ABRAXAS COMMON STOCK

          -    is currently traded on the American Stock Exchange under the
               symbol "ABP." On February 5, 2003, the closing sale price of
               Abraxas common stock was $0.78 per share.

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

         YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 12 OF
THIS PROSPECTUS IN EVALUATING AN INVESTMENT IN THE NOTES OR COMMON STOCK.

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

         NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THE NOTES OR THE ABRAXAS COMMON STOCK OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

                                ___________, 2003
TABLE OF CONTENTS
Page
Cautionary Statements Regarding Forward-Looking Information..............................................3
Summary..................................................................................................4
Risk Factors............................................................................................12
Use of Proceeds.........................................................................................22
Ratio of Earnings to Fixed Charges......................................................................22
Capitalization..........................................................................................22
Price Range of Abraxas Common Stock.....................................................................23
Unaudited Pro Forma Condensed Consolidated Financial Statements.........................................24
Selected Historical Financial Data......................................................................29
Management's Discussion and Analysis of Financial Condition and Results of Operations...................30
Business  ..............................................................................................49
Management..............................................................................................66
Executive Compensation..................................................................................68
Certain Transactions....................................................................................71
Principal Stockholders..................................................................................72
Selling Security Holders................................................................................74
Plan of Distribution....................................................................................77
Description of the Notes................................................................................79
Description of Capital Stock...........................................................................129
Registration Rights; Liquidated Damages................................................................133
Certain U.S. Federal Income Tax Considerations.........................................................134
Legal Matters..........................................................................................141
Experts   .............................................................................................141
Where You Can Find More Information....................................................................141
Glossary of Terms......................................................................................142
----------------------

     You should rely only on the information contained in this prospectus or a
document that we have referred you to. We have not authorized anyone to provide
you with information that is different. The delivery of this prospectus shall
not, under any circumstances, create any implication that the information herein
is correct as of any time subsequent to the date hereof.

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

     THE DISTRIBUTION OF THIS PROSPECTUS AND THE SALE OF THE NOTES OR SHARES OF
ABRAXAS COMMON STOCK MAY BE RESTRICTED BY LAW IN CERTAIN JURISDICTIONS. PERSONS
WHO RECEIVE THIS PROSPECTUS OR ANY OF THE NOTES OR SHARES OF ABRAXAS COMMON
STOCK MUST INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS.

                                        2
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

     We make forward-looking statements throughout this prospectus. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur or what we
"intend" to do, and other similar statements), you must remember that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this prospectus is generally located in
the material set forth under the headings "Summary," "Risk Factors," "Business,"
and "Managements 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:

       -  our high debt level;

       -  our ability to raise capital;

       -  our limited liquidity;

       -  economic and business conditions;

       -  price and availability of alternative fuels;

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

       -  our success in development, exploitation and exploration activities;

       -  planned capital expenditures;

       -  prices for crude oil and natural gas;

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

       -  our acquisition and divestiture activities;

       -  results of our hedging activities; and

       -  other factors discussed elsewhere in this prospectus.

                                        3
SUMMARY

     THE FOLLOWING SUMMARIZES THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, "ABRAXAS" REFERS TO ABRAXAS
PETROLEUM CORPORATION AND NOT TO ANY OF ITS SUBSIDIARIES, AND "WE," "OUR" AND
"US" REFER TO ABRAXAS AND ALL OF ITS SUBSIDIARIES. EXCEPT AS OTHERWISE NOTED,
(I) THE RESERVE DATA REPORTED IN THIS PROSPECTUS IS BASED ON THE RESERVE
ESTIMATES OF OUR INDEPENDENT PETROLEUM ENGINEERS, (II) THE TERMS "ON A PRO FORMA
BASIS" OR "PRO FORMA" REFER TO WHAT OUR BUSINESS MIGHT HAVE LOOKED LIKE IF THE
FINANCIAL RESTRUCTURING DESCRIBED IN THIS PROSPECTUS HAD OCCURRED AT THE TIMES
INDICATED, AND (III) ALL DOLLAR AMOUNTS REFERENCED IN THIS PROSPECTUS ARE
REFERENCES TO U.S. DOLLARS. SEE "GLOSSARY OF TERMS" FOR DEFINITIONS OF SOME
TECHNICAL TERMS USED IN THIS PROSPECTUS.

                                  ABOUT ABRAXAS

     We are an independent energy company engaged primarily in the exploration,
exploitation, development and production of crude oil and natural gas. Since
January 1, 1991, our principal means of growth has been through the acquisition
and subsequent development and exploitation of producing properties and related
assets. As a result of our historical acquisition activities, we believe we have
a substantial inventory of low risk opportunities, the exploitation and
development of which are critical to the maintenance and growth of our current
production levels. We seek to complement our exploitation and development
activities by selectively participating in exploration projects with experienced
industry partners.

     Our principal areas of operation are Texas, western Canada and Wyoming. At
September 30, 2002, on a pro forma basis, we owned interests in 467,234 gross
acres (372,860 net acres) and operated properties accounting for the majority of
our PV-10, affording us substantial control over the timing and incurrence of
operating and capital expenditures. At June 30, 2002, on a pro forma basis,
estimated total proved reserves were 111.6 Bcfe with an aggregate PV-10 of $81.3
million. We have not obtained an updated independent reserve report since June
30, 2002.

     Our principal offices are located at 500 North Loop 1604 East, Suite 100,
San Antonio, Texas 78232 and the telephone number is (210) 490-4788.

                             FINANCIAL RESTRUCTURING

     We recently completed a series of transactions designed to reduce our
indebtedness, improve our ability to meet our debt service obligations and
provide us with working capital necessary to develop our existing crude oil and
natural gas properties. As a result of the financial restructuring, we have
reduced the principal amount of our overall outstanding indebtedness from
approximately $295 million to approximately $156 million and have reduced our
annual cash interest payments from approximately $34 million to approximately $4
million, assuming that, as required under the new senior credit agreement,
Abraxas issues additional notes in lieu of cash interest payments. Although the
principal amount of our current outstanding indebtedness is approximately $156
million, due to the accounting treatment under generally accepted accounting
principles for financial restructurings with respect to the notes, the reported
carrying value of our total outstanding indebtedness will be approximately $175
million. The transactions comprising the financial restructuring are summarized
below. For a more complete description of the transactions, you should read the
section entitled "Business--Recent Developments--Financial Restructuring"
beginning on page 49.

     EXCHANGE OFFER

     On January 23, 2003 Abraxas completed an exchange offer, pursuant to which
it offered to exchange cash and securities for all of the outstanding 11 1/2%
Senior Secured Notes due 2004, Series A, or second lien notes, and 11 1/2%
Senior Notes due 2004, Series D, or old notes, issued by Abraxas and Canadian
Abraxas Petroleum Limited, a former wholly-owned subsidiary of Abraxas. In
exchange for each $1,000 principal amount of notes tendered in the exchange
offer, tendering noteholders received

                                        4
-    cash in the amount of $264;

          -    an 11 1/2% Secured Note due 2007, Series A, with a principal
               amount equal to $610; and

          -    31.36 shares of Abraxas common stock.

     At the time the exchange offer was made, there were approximately $190.1
million of the second lien notes and $800,000 of the old notes outstanding.
Holders of approximately 94% of the aggregate outstanding principal amount of
the second lien notes and old notes tendered their notes for exchange in the
offer. Pursuant to the procedures for redemption under the applicable indenture
provisions, the remaining 6% of the aggregate outstanding principal amount of
the second lien notes and old notes were redeemed at 100% of the principal
amount plus accrued and unpaid interest, for approximately $11.8 million. The
indentures for the second lien notes and old notes have been duly discharged. In
connection with the exchange offer, Abraxas made cash payments of approximately
$47.4 million and issued approximately $109.5 million in principal amount of new
notes and 5,633,291 shares of Abraxas common stock, each of which are being
offered for resale under this prospectus. Fees and expenses incurred in
connection with the exchange offer were approximately $3.8 million.

     The selling security holders identified in this prospectus are the holders
of the notes and shares of Abraxas common stock issued in the exchange offer.
The exchange offer was conducted pursuant to an exemption from the registration
requirements of the Securities Act of 1933, and as such, the notes and shares of
Abraxas common stock issued in the exchange offer are restricted securities.
Pursuant to a registration rights agreement with the dealer manager for the
exchange offer on behalf of the tendering noteholders, we agreed to file a
registration statement with the SEC with respect to the notes and Abraxas common
stock, of which this prospectus forms a part, and to use our reasonable best
efforts to keep the registration statement effective until two years after its
effective date. Upon effectiveness of the registration statement, the notes and
shares of Abraxas common stock will be freely tradable by the selling security
holders and any subsequent purchasers.

     SALE OF STOCK OF CANADIAN ABRAXAS AND OLD GREY WOLF

     Contemporaneously with the closing of the exchange offer, on January 23,
2003, Abraxas completed the sale to a wholly-owned subsidiary of PrimeWest
Energy Inc. of all of the outstanding capital stock of two of Abraxas' former
wholly-owned subsidiaries, Canadian Abraxas and Grey Wolf Exploration Inc.,
referred to herein as Old Grey Wolf, for approximately $138 million before net
adjustments of $3.4 million. Under the terms of the agreement with PrimeWest, we
have retained certain assets formerly held by Canadian Abraxas and Old Grey
Wolf, including all of Canadian Abraxas' and Old Grey Wolf's undeveloped acreage
existing at the time of the sale, which includes all of our interests in the
Ladyfern area. These assets have been contributed to New Grey Wolf. Portions of
this undeveloped acreage will be developed by PrimeWest and New Grey Wolf under
a farmout arrangement.

     Abraxas used the proceeds from the sale of the capital stock of Canadian
Abraxas and Old Grey Wolf for the following purposes:

     -    to pay fees and expenses of the sale of Canadian Abraxas and Old
          Grey Wolf of approximately $2.5 million;

     -    to redeem our outstanding 12?% Senior Secured Notes, Series A, or
          first lien notes, at 100% of their principal amount, plus accrued
          and unpaid interest, for approximately $66.4 million; and

     -    to pay approximately $19.4 million of the cash portion of the
          exchange offer.

In addition, upon the closing of the sale, Old Grey Wolf repaid all of its
outstanding indebtedness of approximately $46.3 million.

                                        5
REDEMPTION OF FIRST LIEN NOTES

     On January 24, 2003, we completed the redemption of 100% of our outstanding
12?% Senior Secured Notes, Series A, or first lien notes with approximately
$66.4 million of the proceeds from the sale of Canadian Abraxas and Old Grey
Wolf. Prior to the redemption, we had $63.5 million of our first lien notes
outstanding. Under the terms of the indenture for the first lien notes, as of
March 15, 2002, we had the right to redeem the first lien notes at 100% of the
outstanding principal amount of the notes, plus accrued and unpaid interest to
the date of redemption, and to discharge the indenture upon call of the first
lien notes for redemption and deposit of the redemption funds with the trustee.
We exercised these rights on January 23, and upon the discharge of the
indenture, the trustee released the collateral securing our obligations under
the first lien notes.

     NEW SENIOR CREDIT AGREEMENT

     Contemporaneously with the closing of the exchange offer and the sale of
Abraxas' Canadian subsidiaries, Abraxas entered into a new senior credit
agreement providing a term loan facility and a revolving credit facility as
described below. Subject to earlier termination on the occurrence of events of
default or other events, the stated maturity date for both the term loan
facility and the revolving credit facility is January 22, 2006. Outstanding
amounts under both facilities bear interest at the prime rate announced by Wells
Fargo Bank, N.A. plus 4.5%. Any amounts in default under the term loan facility
will accrue interest at an additional 4%. At no time will the amounts
outstanding under the senior credit agreement bear interest at a rate less than
9%.

     TERM LOAN FACILITY. Abraxas has borrowed $4.2 million pursuant to a term
loan facility, all of which was used to make cash payments in connection with
the financial restructuring. Accrued interest under the term loan facility will
be capitalized and added to the principal amount of the term loan facility until
maturity.

     REVOLVING CREDIT FACILITY. Lenders under the new senior credit agreement
have provided a revolving credit facility to Abraxas with a maximum borrowing
base of up to $50 million. Our current borrowing base under the revolving credit
facility is $49.9 million, subject to adjustments based on periodic calculations
and mandatory prepayments under the senior credit agreement. Portions of accrued
interest under the revolving credit facility may be capitalized and added to the
principal amount of the revolving credit facility. As of the date of this
prospectus, we have borrowed $42.5 million under the revolving credit facility,
all of which was used to make cash payments in connection with the financial
restructuring. We plan to use the remaining borrowing availability under the new
senior credit agreement to fund our operations, including capital expenditures.

                             SUMMARY OF THE OFFERING

     The selling security holders are offering to sell up to 6,583,291 shares of
Abraxas common stock and $109,523,000 principal amount in currently outstanding
notes, in addition to any notes issued in lieu of cash interest payments
thereon. We will not receive any proceeds from the sale of the notes or common
stock. You should read the discussions under the headings "Description of the
Notes" beginning on page 79 and "Description of Capital Stock" beginning on page
129 for further information regarding the notes and common stock.

                              SUMMARY OF THE NOTES
Notes...................................     Up to $184 million in principal amount of 11 1/2% Secured Notes due
                                             2007, which includes approximately $109.5 million principal amount
                                             in currently outstanding notes, and any notes issued in lieu of cash
                                             interest payments thereon.

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

Maturity Date...........................     May 1, 2007
6
Interest Rate and Payment Dates.........     The notes accrue interest from the date of issuance, at a fixed
                                             annual rate of 11 1/2%, payable in cash semi-annually on each May 1 and
                                             November 1, commencing May 1, 2003, PROVIDED THAT, if we fail, or
                                             are not permitted pursuant to our new senior credit agreement or the
                                             intercreditor agreement between the trustee under the indenture for
                                             the notes and the lenders under the new senior credit agreement, to
                                             make such cash interest payments in full, we will pay such unpaid
                                             interest in kind by the issuance of additional notes with a
                                             principal amount equal to the amount of accrued and unpaid cash
                                             interest on the notes plus an additional 1% accrued interest for the
                                             applicable period.  The notes will, upon an event of default, accrue
                                             interest at an annual rate of 16.5%.

Guarantees..............................     All of Abraxas' current subsidiaries, Sandia Oil & Gas, Sandia
                                             Operating (a wholly-owned subsidiary of Sandia Oil & Gas),
                                             Wamsutter, New Grey Wolf, Western Associated Energy and Eastside
                                             Coal, are guarantors of the notes, and all of Abraxas' future
                                             subsidiaries will guarantee the notes.  If Abraxas cannot make
                                             payments on the notes when they are due, the guarantors must make
                                             them instead.

Ranking.................................     The notes and related guarantees

                                                  -    are subordinated to the
                                                       indebtedness under the new senior
                                                       credit agreement;

                                                  -    rank equally with all of Abraxas'
                                                       current and future senior
                                                       indebtedness; and

                                                  -    rank senior to all of Abraxas'
                                                       current and future subordinated
                                                       indebtedness, in each case, if any.

                                             As of the date of this prospectus, our
                                             total borrowings under the new senior
                                             credit agreement were approximately $46.7
                                             million.

Intercreditor Agreement.................     The notes are subordinated to amounts outstanding under the new
                                             senior credit agreement both in right of payment and with respect to
                                             lien priority and are subject to an intercreditor agreement.  For
                                             more information on the intercreditor agreement, see the section
                                             entitled "Description of the Notes--Intercreditor Agreement"
                                             beginning on page 83 of this prospectus.

Collateral..............................     The notes are secured by a second lien or charge on all of our
                                             current and future assets, including, but not limited to, all of our
                                             crude oil and natural gas properties.

Optional Redemption.....................     Abraxas may redeem some or all of the notes at any time at the
                                             redemption prices described in the section entitled  "Description of
                                             the Notes--Redemption--Optional Redemption" on page 81 of this
                                             prospectus.

Mandatory Offer to Repurchase...........     If Abraxas sells certain assets or experiences specific kinds of
                                             changes of control, Abraxas must offer to repurchase the notes,
                                             subject to certain limitations in the case of assets sales, at the
                                             prices described in the sections "Description of the Notes--Change of
                                             Control" and "--Certain Covenants--Limitation on Asset Sales" on pages
                                             82  and 88, respectively, of this prospectus.
7
Basic Covenants of Indenture............     Abraxas issued the notes under an indenture with U.S. Bank, N.A.
                                             The indenture, among other things, restricts our ability to:

                                                  -    borrow money or issue preferred
                                                       stock;

                                                  -    pay dividends on stock or purchase
                                                       stock;

                                                  -    make other asset transfers;

                                                  -    transact business with affiliates;

                                                  -    sell stock of subsidiaries;

                                                  -    engage in any new line of business;

                                                  -    impair the security interest in any
                                                       collateral for the notes;

                                                  -    use assets as security in other
                                                       transactions; and

                                                  -    sell certain assets or merge with
                                                       or into other companies.

                                             The indenture for the notes also includes
                                             certain financial covenants including
                                             covenants limiting Abraxas' selling,
                                             general and administrative expenses and
                                             capital expenditures, a covenant requiring
                                             Abraxas to maintain a specified ratio of
                                             consolidated EBITDA to cash interest and a
                                             covenant requiring Abraxas to permanently,
                                             to the extent permitted, pay down debt
                                             under the new senior credit agreement and,
                                             to the extent permitted by the new senior
                                             credit agreement, the notes or, if not
                                             permitted, paying indebtedness under the
                                             new senior credit agreement.
THE COMMON STOCK

     Of the 6,583,291 shares of common stock being offered under this
prospectus, 5,633,291 shares were issued in connection with the financial
restructuring exchange offer and 950,000 shares are issuable upon exercise of
currently outstanding warrants to purchase common stock. Abraxas is currently
authorized to issue a total of 200,000,000 shares of common stock, par value
$.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per
share. As of February 6, 2003, there were 35,612,688 shares of Abraxas common
stock outstanding and no shares of preferred stock outstanding. For a more
complete description of the common stock, see the section entitled
"Description of Capital Stock--Common Stock" beginning on page 129 of this
prospectus.

                                        8
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

     The following table presents certain of our summary historical condensed
consolidated financial data and certain pro forma information after giving
effect to and reflecting the exchange offer and each of the other transactions
described under "Business--Recent Developments--Financial Restructuring". The
summary historical financial information presented below for each of the three
years ended December 31, 1999, 2000 and 2001, and as of and for each of the nine
months ended September 30, 2001 and 2002 has been derived from our consolidated
financial statements included in this prospectus. The pro forma statements of
consolidated operations for the year ended December 31, 2001 and the nine months
ended September 30, 2002, give effect to the exchange offer and each of the
other transactions as if they had occurred on January 1, 2001. The pro forma
balance sheet gives effect to the exchange offer and each of the other
transactions as if they had occurred on September 30, 2002. The unaudited pro
forma information set forth below is not necessarily indicative of the results
that actually would have been achieved had the exchange offer and each of the
other transactions described under "Business--Recent Developments--Financial
Restructuring" been consummated on January 1, 2001, or that may be achieved in
the future. It is important that you read this information along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Historical Financial Data," our Consolidated Financial
Statements and the notes thereto and the "Unaudited Pro Forma Condensed
Consolidated Financial Statements" beginning on page 24 of this prospectus.
NINE MONTHS ENDED
                                                        YEARS ENDED DECEMBER 31,                        SEPTEMBER 30,
                                            ----------------------------------------------  ----------------------------------
                                                                                   PRO                                 PRO
                                                                                  FORMA                               FORMA
                                               1999        2000        2001        2001        2001        2002        2002
                                           ----------- -----------  ----------  ----------  ----------  ---------- -----------
                                                                          (DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
  Total operating revenue (1).............. $ 66,770    $ 76,600    $ 77,243    $ 30,352    $ 65,103    $  37,103    $ 14,274
  Lease and other operating expenses (2)...   18,562      19,500      19,318       9,097      14,227       11,644       6,012
  Depreciation, depletion and amortization
     expense...............................   34,811      35,857      32,484      11,399      25,150       21,010       6,367
  Proved property impairment...............   19,100          --       2,638          --          --      115,995      28,179
  General and administrative expense.......    5,269       6,533       6,445       5,390       5,051        4,578       3,718
  Interest expense, net of interest
  income(3).................................  36,149      30,610      31,445      15,479      23,626       25,734      12,351
  Amortization of deferred financing fee...    1,915       2,091       2,268       1,730       1,315        1,283       1,477
  Income (loss) before extraordinary items. $(36,680)   $  6,676    $(19,718)   $(11,455)   $ (6,868)   $(112,827)   $(43,774)
  Net income (loss) applicable to common
     stock................................. $(36,680)      8,449    $(19,718)   $(11,455)   $ (6,868)   $(112,827)   $(43,774)
  Income (loss) before extraordinary items
     per common share:
    Basic.................................. $  (5.41)   $   0.29    $  (0.76)   $  (0.36)   $  (0.28)   $   (3.76)   $  (1.23)
    Diluted................................ $  (5.41)   $   0.21    $  (0.76)   $  (0.36)   $  (0.28)   $   (3.76)   $  (1.23)

OTHER DATA:
  Capital expenditures (including
  acquisitions)............................ $128,708    $ 74,412    $ 57,056    $ 19,241    $ 47,793    $  33,392    $ 10,163
  Ratio of earnings to fixed charges (4)...      n/a       1.36x         n/a         n/a         n/a          n/a         n/a
SEPTEMBER 30, 2002
                                                               ---------------------------------
                                                                    ACTUAL         PRO FORMA
                                                               ---------------  ----------------
                                                                    (DOLLARS IN THOUSANDS)
                 CONSOLIDATED BALANCE SHEET DATA:
Total assets...........................       $  183,893             $ 112,844
                 Total other liabilities................       $   27,226             $   5,237
                 Total debt ............................       $  294,699             $ 175,083
                 Stockholders' deficit..................       $ (138,032)            $ (67,476)
9
----------

(1)  Consists of crude oil and natural gas production sales, revenue from rig
     operations and processing facilities, and other miscellaneous revenue.

(2)  Consists of lease operating expenses, production taxes, rig operating
     expenses and processing costs.

(3)  Interest expense on our indebtedness includes cash interest expense on the
     new revolving credit facility and non-cash (additional notes) interest
     expense on the term loan and the new notes. Non-cash interest expense is
     calculated at 9% on the term loan and at an imputed rate of 8.6% on the new
     notes based on the carrying value of the exchanged notes of $128.4 million.

(4)  Earnings consist of income (loss) from continuing operations before income
     taxes plus fixed charges. Fixed charges consist of interest expense,
     amortization of deferred financing fees and premium on the old notes. Our
     earnings were inadequate to cover fixed charges in 1999, 2001 and Pro
     Forma 2001, and the nine month periods ended September 30, 2001, 2002 and
     Pro Forma 2002, by $49.0 million, $15.6 million, $11.0 million, $1.5
     million, $143.1 million and $43.8 million, respectively. In 2000, we had
     earnings from continued operations of $44.4 million and fixed charges of
     $32.7 million. Our ratio of earnings to fixed charges during 2000 was
     1.36x.

                 SUMMARY HISTORICAL AND PRO FORMA OPERATING DATA
NINE MONTHS
                                                      YEARS ENDED DECEMBER 31,                       ENDED SEPTEMBER 30,
                                              ---------------------------------------------   ----------------------------------
                                                                                      PRO                                  PRO
                                                                                     FORMA                                FORMA
                                                  1999         2000        2001       2001        2001       2002          2002
                                              ----------   ----------  ----------  ---------   ----------  ----------   --------
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
PRODUCTION:
   Crude oil (MBbls)..........................      778          637         454         329         373         216          180
   NGLs (MBbls)...............................      376          315         278          44         203         182            7
   Natural gas (MMcf).........................   25,698       19,962      17,496       7,006      13,420      11,692        4,080
     Mmcfe....................................   32,624       25,675      21,888       9,244      16,876      14,080        5,202
AVERAGE SALES PRICE:(1)

   Crude oil (per Bbl)........................$   14.57    $   18.69   $   24.63   $   25.01   $   25.91   $   22.27    $   22.66
   NGLs (per Bbl).............................    13.40        22.42       21.51       16.02       24.02       16.53        13.52
   Natural gas (per Mcf)......................     1.66         2.71        3.20        2.94        3.54        2.25         2.33
     Per Mcfe.................................     1.81         2.84        3.35        3.19        3.68        2.43         2.63
LOE (PER MCFE)................................$    0.55    $    0.73   $    0.85   $    0.93   $    0.81   $    0.80    $    1.07
NATURAL GAS PROCESSING PLANTS (PERIOD-END):

   Number of natural gas processing plants....       20           13          12          --          12           9           --
   Net plant capacity (MMcfpd)................      120          120         107          --         107         154           --
----------
(1)  Average sales prices include effects of hedging activities.

                                       10
SUMMARY HISTORICAL AND PRO FORMA RESERVES DATA

     The following table sets forth summary information with respect to our
estimated proved crude oil, NGLs and natural gas reserves as of the dates
indicated and sets forth an unaudited summary report of our pro forma reserves
as of December 31, 2001, and June 30, 2002, gives effect to and reflects the
exchange offer and each of the other transactions described under
"Business--Recent Developments--Financial Restructuring" as if all were
consummated as of such dates. The information in these tables should be read in
conjunction with the section entitled "Unaudited Pro Forma Condensed
Consolidated Financial Statements" beginning on page 24 of this prospectus.
AS OF DECEMBER 31,                      AS OF JUNE 30,
                                                   -----------------------------------------------  ------------------------
                                                                                            PRO                        PRO
                                                                                           FORMA                      FORMA
                                                       1999        2000         2001        2001        2002          2002
                                                   ----------  ----------   ----------   ----------  ----------    ---------
                                                                   (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
ESTIMATED PROVED RESERVES:
Crude oil and NGLs (MBbls).......................      9,849       8,844        6,802        3,555       5,093         3,812
Natural gas (MMcf)...............................    164,305     191,327      188,757      105,965     141,963        88,775
Natural gas equivalents (MMcfe)..................    223,399     244,391      229,569      127,295     172,520       111,646
  % Proved developed.............................        78%          66%          62%          42%         65%           49%
Estimated future net revenue before income taxes.  $ 462,518 $ 1,727,909   $  386,762      136,299     238,979       151,651
PV-10............................................    257,104   1,006,521      209,666       73,874     128,692(1)     81,285(1)
  % Proved developed.............................         82%         68%          82%          66%         82%           72%
----------
(1)  The prices used to calculate PV-10 as of June 30, 2002 were $3.25 per Mcf
     of natural gas and $26.86 per barrel of crude oil. At January 28, 2003,
     NYMEX prices were $5.44 per Mcf of natural gas and $32.67 per barrel of
     crude oil. At the January 28, 2003 prices, PV-10 for our reserves at June
     30, 2002 would have been approximately $195.6 million.

                                       11
RISK FACTORS

     YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT IN THE NOTES OR
ABRAXAS COMMON STOCK OFFERED BY THE SELLING SECURITY HOLDERS.

RISKS RELATED TO THE OFFERING

     THE SECURITY FOR THE NOTES MAY BE INADEQUATE TO SATISFY ALL AMOUNTS DUE AND
OWING TO OUR SENIOR SECURED CREDITORS AND THE HOLDERS OF OUR NOTES. Currently,
the notes are secured by a second lien or charge on all of our current and
future assets, including, but not limited to, our crude oil and natural gas
assets. There can be no assurance that, following an acceleration after an event
of default under the indenture for the notes, the proceeds from the sale of the
collateral and allocable to the notes would be sufficient to satisfy all amounts
due on such notes. The ability of the holders of the notes to realize upon the
collateral will also be subject to certain limitations in the indenture for the
notes, the accompanying mortgage and the pledge agreement, including a
prohibition on foreclosing on the collateral for 180 days after an event of
default under the notes, as applicable. In addition, if we become a debtor in a
case under the bankruptcy code, the automatic stay imposed by the bankruptcy
code would prevent the trustee from selling or otherwise disposing of the
collateral without bankruptcy court authorization. In that case, the foreclosure
might be delayed indefinitely. See "Description of the Notes--Security" on page
82 of this prospectus.

     THE GUARANTEES MAY NOT BE ENFORCEABLE IN BANKRUPTCY. Abraxas' obligations
under the notes (and any additional notes issued in lieu of cash interest
payments), are guaranteed by Sandia Oil & Gas, Sandia Operating, Wamsutter, New
Grey Wolf, Western Associated Energy, Eastside Coal and any other future
subsidiaries. Various fraudulent conveyance laws have been enacted for the
protection of creditors and may be utilized by courts to subordinate or void
such guarantees. It is also possible that under certain circumstances a court
could hold that the direct obligations of a guarantor could be superior to the
obligations under its guarantee.

     To the extent that a court were to find that at the time a guarantor
entered into a guarantee either:

     (1)  the guarantee was incurred by the guarantor with the intent to hinder,
          delay or defraud any present or future creditor or that the guarantor
          contemplated insolvency with a design to favor one or more creditors
          to the exclusion in whole or in part of others; or

     (2)  the guarantor did not receive fair consideration or reasonably
          equivalent value for issuing the guarantee and, at the time it issued
          the guarantee, the guarantor

       -  was insolvent or rendered insolvent by reason of the issuance of the
          guarantee;

       -  was engaged or about to engage in a business or transaction for which
          the remaining assets of the guarantor constituted unreasonably small
          capital; or

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

the court could void or subordinate the guarantee in favor of the guarantor's
other creditors. Among other things, a legal challenge of a guarantee issued by
a guarantor on fraudulent conveyance grounds may focus on the benefits, if any,
realized by the guarantor as a result of our issuance of the notes or any
additional notes issued in lieu of cash interest payments. A court might find
that the guarantors did not benefit from incurrence of the indebtedness
represented by such notes.

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

                                       12
Under applicable provisions of Canadian federal bankruptcy law or
comparable provisions of provincial fraudulent preference laws, if a court in an
action brought by an unpaid creditor of New Grey Wolf or by a bankruptcy trustee
thereof were to find that the liens granted by New Grey Wolf over its assets
were intended to prefer the holders of the notes over other creditors, such
liens could be set aside. This would become an issue if New Grey Wolf became
insolvent or bankrupt within a certain period after granting the liens.

     UNDER CERTAIN CIRCUMSTANCES A BANKRUPTCY COURT COULD ORDER THE REPAYMENT OF
INTEREST PAYMENTS MADE UNDER THE NOTES. The bankruptcy code allows the
bankruptcy trustee (or us, acting as debtor-in-possession) to avoid certain
transfers of a debtor's property as a "preference." Under the bankruptcy code a
preference is:

       -  a transfer of the debtor's property;

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

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

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

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

     Our payment of principal and/or accrued interest, or our grant of a lien or
security interest, including payments made or liens or security interests
granted pursuant to the exchange offer, may be deemed to be a preference if all
of the factors discussed above are present. If such transfers were deemed to be
preferential transfers, the payments could be recovered from the noteholders and
the lien or security interest could be avoided.

     If the notes (and any additional notes issued in lieu of cash interest
payments), are fully secured (i.e., the value of collateral exceeds the amount
it secures), payments on such notes would not constitute preferential transfers.
However, if, or to the extent, the notes are undersecured (i.e., the value of
the collateral is less than the amount which it secures), payments would be
deemed to have been applied, first, to the unsecured portion of the notes and,
second, to the secured portion of the notes and the payments attributable to the
unsecured portion could be considered preferential transfers. Therefore, if we
are involved in a bankruptcy proceeding, holders of our notes or any additional
notes issued in lieu of cash interest payments may be required to disgorge
payments made on such notes to the extent the notes are undersecured.

     Additionally, due to Abraxas' and the guarantors' being domiciled in the
United States and in Canada, Abraxas and the guarantors could be subject to
multi-jurisdictional insolvency proceedings in the United States and Canada. If
multi-jurisdictional insolvency proceedings were to occur, this could result in
additional delay in payment of the notes or any additional notes issued in lieu
of cash interest payments, as well as delay in or prevention from enforcing
remedies under such notes, any guarantee thereunder and the liens securing such
notes and the guarantees. Likewise, our notes could be subject to different
treatment inasmuch as the multiple insolvency proceedings would be conducted by
different courts applying different laws.

     IN BANKRUPTCY, THE PAYMENT OF CASH AND THE ISSUANCE OF THE NOTES AND
ABRAXAS COMMON STOCK IN THE EXCHANGE OFFER COULD BE AVOIDED AS A PREFERENTIAL
TRANSFER. If we were to become subject to a petition for relief under the
bankruptcy code within 90 days after the consummation of the exchange offer (or,
with respect to any insiders specified in the bankruptcy code, within one year
after consummation of the exchange offer) and certain other conditions are met,
the consideration paid to noteholders in the exchange offer, absent the presence
of one of the bankruptcy code defenses to avoidance, could be avoided as a
preferential transfer and, to the extent avoided, the value of such
consideration could be recovered from the noteholder and possibly from
subsequent transferees.

     ORIGINAL ISSUE DISCOUNT WILL BE INCLUDED IN YOUR GROSS INCOME FOR U.S.
FEDERAL INCOME TAX PURPOSES BEFORE YOU RECEIVE ANY CASH PAYMENTS ON THE NOTES.
The notes have been deemed to be issued at a substantial discount from their
stated principal amount at maturity because the issue price of the notes will be
determined by reference to the fair market value of the second lien notes and
old notes in exchange for which the notes subject to this prospectus were issued
on January 23, 2003, the closing date of the private exchange offer in which the
notes were issued. Furthermore, periodic interest payments on the notes will be
payable in cash or by the issuance of

                                       13
additional notes and, as such, will be treated as if all interest payments are
made in the form of additional notes, thereby creating original issue discount
on the notes. Consequently, prior to receiving any cash interest payments on the
notes, a holder of notes will be required to include significant original issue
discount in the gross income of such holder for U.S. federal income tax
purposes. For a more detailed discussion of the tax consequences applicable to
holders of the notes, see the section entitled "Certain U.S. Federal Income Tax
Considerations" beginning on page 134 of this prospectus.

     THE AMOUNT OF ANY CLAIM MADE BY YOU IN A BANKRUPTCY ACTION MAY BE LIMITED
AS A RESULT OF THE NOTES BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT. If a
bankruptcy petition is filed by or against us under the U.S. Bankruptcy Code
while the notes are outstanding, the claim of a holder of the notes with respect
to the accreted value of the notes may be limited to an amount equal to the sum
of:

       -  the initial issue price for the notes; and

       -  that portion of the original issue discount that is not deemed to
          constitute "unmatured interest" within the meaning of the United
          States Bankruptcy Code.

     Any original issue discount that was not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest." Accordingly,
holders of the notes under such circumstances may receive a lesser amount than
they would be entitled to under the express terms of the indenture for the
notes, even if sufficient funds are available. In addition, to the extent that
the U.S. Bankruptcy Code differs from the Internal Revenue Code of 1986, as
amended, in determining the method of amortization of original issue discount, a
holder of the notes may realize taxable gain or loss upon payment of that
holder's claim in bankruptcy.

     WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL. Upon
the occurrence of certain change of control events, holders of the notes may
require us to offer to repurchase all or any part of their notes. We may not
have sufficient funds at the time of the change of control to make the required
repurchases of such notes.

     The source of funds for any repurchase required as a result of any change
of control will be our available cash or cash generated from crude oil and
natural gas operations or other sources, including borrowings, sales of assets,
sales of equity or funds provided by a new controlling entity. We cannot assure
you, however, that sufficient funds would be available at the time of any change
of control to make any required repurchases of the notes tendered. Furthermore,
using available cash to fund the potential consequences of a change of control
may impair our ability to obtain additional financing in the future. In
addition, the new senior credit agreement restricts our ability to repurchase
the notes. Any future credit agreements or other agreements relating to debt to
which we may become a party will most likely contain similar restrictions and
provisions.

     AN ACTIVE MARKET MAY NOT DEVELOP FOR THE NOTES OR ABRAXAS COMMON STOCK. The
notes were originally issued on January 23, 2003 and no assurance can be given
that an active market will develop, or, if such a market develops, that such
market will be liquid. The notes will not be listed on any national securities
exchange. Accordingly, no assurance can be given that a holder of the notes will
be able to sell such notes in the future or as to the price at which such sale
may occur. The liquidity of the market for the notes and the prices at which
such notes trade will depend upon the amount outstanding, the number of holders
thereof, the interest of securities dealers in maintaining a market in such
notes and other factors beyond our control. The liquidity of, and trading market
for, the notes also may be adversely affected by general declines in the market
for high yield securities. Such declines may adversely affect the liquidity and
trading markets for the notes.

     The Abraxas common stock is quoted on the American Stock Exchange. While
there is currently one specialist in the Abraxas common stock, this specialist
is not obligated to continue to make a market in the Abraxas common stock. In
this event, the liquidity of the Abraxas common stock could be adversely
impacted and a stockholder could have difficulty obtaining accurate stock
quotes.

     COMPOUND INTEREST ON THE NOTES MAY BE RESTRICTED BY APPLICABLE LAW.
Interest on the notes will compound semi-annually to the extent permitted by
applicable law. Although applicable law provides for enforceability of compound
interest in certain loans and agreements, it may not be enforceable in a loan
with a principal amount of $250,000 or less. It is unclear whether compound
interest is enforceable in a loan with a principal amount of $250,000 or less
when the aggregate amount of the debt incurred under the financing agreement
governing that loan is over $250,000. Accordingly, the ability of the holder of
any note with a principal amount of $250,000 or less to

                                       14
collect compounded interest may be restricted by applicable law. In any event,
Abraxas intends to pay compound interest in accordance with the terms of the
indenture for the notes.

     ABRAXAS DOES NOT PAY DIVIDENDS ON COMMON STOCK. Abraxas has never paid a
cash dividend on its common stock and the terms of the new senior credit
agreement and the indenture relating to the notes limit the ability of Abraxas
to pay dividends on its common stock.

     SHARES ELIGIBLE FOR FUTURE SALE MAY DEPRESS OUR STOCK PRICE. At February 6,
2003 we had 35,612,688 shares of common stock outstanding of which 2,939,757
shares were held by affiliates, 3,291,340 shares of common stock were subject to
outstanding options granted under certain stock option plans (of which 2,136,149
shares were vested at February 6, 2003) and 950,000 shares were issuable upon
exercise of warrants.

     All of the shares of common stock held by affiliates are restricted or
control securities under Rule 144 promulgated under the Securities Act. The
shares of the common stock issuable upon exercise of the stock options have been
registered under the Securities Act. The shares of the common stock issuable
upon exercise of the warrants are subject to certain registration rights and,
therefore, will be eligible for resale in the public market after a registration
statement covering such shares has been declared effective. Sales of shares of
common stock under Rule 144 or another exemption under the Securities Act or
pursuant to a registration statement could have a material adverse effect on the
price of the common stock and could impair our ability to raise additional
capital through the sale of equity securities.

     THE PRICE OF ABRAXAS' COMMON STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO
FLUCTUATE SUBSTANTIALLy. Abraxas' common stock is traded on the American Stock
Exchange. The market price of Abraxas' common stock has been volatile and could
fluctuate substantially based on a variety of factors, including the following:

       -  Fluctuations in commodity prices;

       -  Variations in results of operations;

       -  Legislative or regulator changes;

       -  General trends in the industry;

       -  Market conditions; and

       -  Analysts' estimates and other events in the crude oil and natural gas
          industry.

     WE MAY ISSUE SHARES OF PREFERRED STOCK WITH GREATER RIGHTS THAN OUR COMMON
STOCK. Subject to the rules of the American Stock Exchange, our articles of
incorporation authorize our board of directors to issue one or more series of
preferred stock and set the terms of the preferred stock without seeking any
further approval from holders of our common stock. Any preferred stock that is
issued may rank ahead of our common stock in terms of dividends, priority and
liquidation premiums and may have greater voting rights than our common stock.

     ANTI-TAKEOVER PROVISIONS COULD MAKE A THIRD PARTY ACQUISITION OF ABRAXAS
DIFFICULT. Abraxas' articles of incorporation and by-laws provide for a
classified board of directors, with each member serving a three-year term, and
eliminate the ability of stockholders to call special meetings or take action by
written consent. Abraxas also has adopted a stockholder rights plan. Each of the
provisions in the articles of incorporation and by-laws and the stockholder
rights plan could make it more difficult for a third party to acquire Abraxas
without the approval of Abraxas' board. In addition, the Nevada corporate
statute also contains certain provisions that could make an acquisition by a
third party more difficult.

RISKS RELATED TO OUR BUSINESS

     OUR REDUCED OPERATING CASH FLOW RESULTING FROM THE SALE OF CANADIAN ABRAXAS
AND OLD GREY WOLF MAY PUT SIGNIFICANT STRAIN ON OUR LIQUIDITY AND CASH POSITION.
Our reduced operating cash flow and resulting limited liquidity has caused us,
and the limitations imposed by the new senior credit agreement and the notes
will cause us, to reduce capital expenditures, including exploration,
exploitation and development projects. These reductions will limit our ability
to replenish our depleting reserves, which could negatively impact our cash flow
from operations and results of operations in the future. In addition, under the
terms of the notes, we are required, to the extent

                                       15
permitted, to permanently pay down debt under the new senior credit agreement
and, if permitted, the notes, with our cash flow which is not required to pay
our capital expenditures or make cash interest and tax payments.

     The effects of our reduced operating cash flow will be exacerbated by our
high level of debt, which will affect our operations in several important ways,
including:

       -  A substantial amount of our cash flow from operations will be required
          to make principal and interest payments on our outstanding
          indebtedness and will not be available for other purposes, including
          developing our properties;

       -  The covenants contained in the indenture governing the notes and in
          the new senior credit agreement will limit our ability to borrow
          additional funds or to dispose of assets or use the proceeds of any
          asset sales and may affect our flexibility in planning for, and
          reacting to, changes in our business; and

       -  Our debt level may impair our ability to obtain additional financing
          in the future for working capital, capital expenditures, acquisitions,
          interest payments, scheduled principal payments, general corporate
          purposes or other purposes.

     OUR LIMITED LIQUIDITY AND RESTRICTIONS ON USES OF CASH DICTATED BY BOTH THE
NEW SENIOR CREDIT AGREEMENT AND THE NOTES, COMBINED WITH OUR HIGH DEBT LEVELS
MAY HINDER OUR ABILITY TO SATISFY THE SUBSTANTIAL CAPITAL REQUIREMENTS RELATED
TO OUR OPERATIONS. The success of our future operations will require us to make
substantial capital expenditures for the exploitation, development, exploration
and production of crude oil and natural gas. Volatile commodity prices could
negatively impact our cash flow from operations as well as any future sales of
producing properties.

     Under the terms of the new senior credit agreement, we are required to
establish deposit accounts at financial institutions acceptable to the lenders
and we are required to direct our customers to make all payments into these
accounts. The amounts in these accounts will be transferred to the lender upon
the occurrence and during the continuance of an event of default under the new
senior credit agreement. We will also be required to make mandatory repayments
of the outstanding amounts owing under the new senior credit agreement if the
outstanding amounts exceed the borrowing base.

     In addition, under the terms of the notes, Abraxas is subject to cash and
expenditures covenants including those set forth in the sections entitled
"Description of the Notes--Certain Covenants--Excess Cash Flow and Excess Cash,"
"--Limitations on Expenditures for Selling, General and Administrative
Expenses," "--Limitations on Capital Expenditures" and "--Limitation on Uses of
Cash" beginning on page 87 of this prospectus.

     These limitations imposed on Abraxas by the new senior credit agreement and
the notes will have the effect of limiting our ability to develop our crude oil
and natural gas properties because much of our cash flow will be used for debt
service. As a result, our ability to replace production will be limited. You
should read the discussion under "--Our ability to replace production with new
reserves is highly dependent on acquisitions or successful development and
exploration activities" for more information regarding the risks associated with
limitations on our ability to develop our crude oil and natural gas properties.

     HEDGING TRANSACTIONS MAY LIMIT OUR POTENTIAL GAINS. From time to time, we
enter into hedge agreements and other financial arrangements at various times to
attempt to minimize the effect of crude oil and natural gas price fluctuations.
As of January 23, 2003, we have entered into hedging agreements expiring in six
months with respect to approximately 25% of our current production. We cannot
assure you that our hedging transactions will reduce risk or minimize the effect
of any decline in crude oil or natural gas prices. Any substantial or extended
decline in crude oil or natural gas prices would have a material adverse effect
on our business and financial results. Hedging activities may limit the risk of
declines in prices, but such arrangements may also limit, and have in the past
limited, additional revenues from price increases. In addition, such
transactions may expose us to risks of financial loss under certain
circumstances, such as:

       -  production being less than expected; or

                                       16
-  price differences between delivery points for our production and those
          in our hedging agreements increasing.

     In 2000, 2001 and the nine month period ended September 30, 2002, we
experienced hedging losses of $20.2 million, $12.1 million and $2.8 million,
respectively. Under the terms of the new senior credit agreement, we are
required to enter into hedging transactions with respect to not less than 25%
nor more than 75% of our crude oil and natural gas production on an ongoing
basis. For a more detailed description of the new senior credit agreement and
our hedging sensitivity, see the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 30.

     OUR ABILITY TO REPLACE PRODUCTION WITH NEW RESERVES IS HIGHLY DEPENDENT ON
ACQUISITIONS OR SUCCESSFUL DEVELOPMENT AND EXPLORATION ACTIVITIES. The rate of
production from crude oil and natural gas properties declines as reserves are
depleted. Our proved reserves will decline as reserves are produced unless we
acquire additional properties containing proved reserves, conduct successful
exploration, exploitation and development activities or, through engineering
studies, identify additional behind-pipe zones or secondary recovery reserves.
Our future crude oil and natural gas production is therefore highly dependent
upon our level of success in acquiring or finding additional reserves. While we
have had some success in pursuing these activities, we have not been able to
fully replace the production volumes lost from natural field declines and
property sales. We have implemented a number of measures to conserve our cash
resources, including postponement of exploration and development projects.
However, while these measures will conserve our cash resources in the near term,
they will also limit our ability to replenish our depleting reserves, which
could negatively impact our cash flow from operations in the future. Further, in
addition to the effects of our limited liquidity, our operations may be
curtailed, delayed or cancelled by other factors, such as title problems,
weather, compliance with governmental regulations, mechanical problems or
shortages or delays in the delivery of equipment. We cannot assure you that our
exploration and development activities will result in increases in reserves.

     USE OF OUR NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED. At December 31,
2001, Abraxas had, subject to the limitation discussed below, $115.9 million of
net operating loss carryforwards for U.S. tax purposes. These loss carryforwards
will expire from 2002 through 2021 if not utilized. At December 31, 2001,
Abraxas had approximately $6.7 million of net operating loss carryforwards for
Canadian tax purposes. These carryforwards will expire from 2002 through 2008 if
not utilized. In connection with the financial restructuring, a significant
portion of the U.S. loss carryforwards will be utilized.

     As to a portion of the U.S. net operating loss carryforwards, the amount of
such carryforwards that we can use annually is limited under U.S. tax law.
Additionally, uncertainties exist as to the future utilization of the operating
loss carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, Abraxas has established a valuation allowance of $34,763,000 and
$39,670,000 for deferred tax assets at December 31, 2000 and 2001, respectively.

     CRUDE OIL AND NATURAL GAS PRICES AND THEIR VOLATILITY COULD ADVERSELY
AFFECT OUR REVENUE, CASH FLOWS, PROFITABILITY AND GROWTH. Our revenue, cash
flows, profitability and future rate of growth depend substantially upon
prevailing prices for crude oil and natural gas. Natural gas prices affect us
more than crude oil prices because most of our production and reserves are
natural gas. Prices also affect the amount of cash flow available for capital
expenditures and our ability to borrow money or raise additional capital. In
addition, we may have ceiling limitation write-downs when prices decline. During
the second quarter of 2002, we had a ceiling limitation write down of
approximately $116.0 million. Lower prices may also reduce the amount of crude
oil and natural gas that we can produce economically.

     We cannot predict future crude oil and natural gas prices. Factors that can
cause price fluctuations include:

       -  changes in supply and demand for crude oil and natural gas;

       -  weather conditions;

       -  the price and availability of alternative fuels;

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

                                       17
-  overall economic conditions.

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

       -  reducing the overall volumes of crude oil and natural gas that we can
          produce economically;

       -  causing a ceiling limitation write-down;

       -  increasing our dependence on external sources of capital to meet our
          liquidity requirements; and

       -  impairing our ability to obtain needed equity capital.

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

     At June 30, 2002, our net capitalized costs of crude oil and natural gas
properties exceeded the present value of our estimated proved reserves by $138.7
million ($28.2 million on the U.S. properties and $110.5 million on the Canadian
properties). These amounts were calculated considering June 30, 2002 prices of
$26.12 per Bbl for crude oil and $2.16 per Mcf for natural gas as adjusted to
reflect the expected realized prices for each of the full cost pools. Subsequent
to June 30, 2002, commodity prices increased in Canada and we utilized these
increased prices in calculating the ceiling limitation write-down. The
write-down for our Canadian properties was $87.8 million at June 30, 2002 and
the total write-down was approximately $116.0 million. At September 30, 2002 our
net capitalized cost of crude oil and natural gas properties did not exceed the
present value of our estimated reserves, due to increased commodity prices
during the third quarter and, as such, no further write-down was recorded. We
cannot assure you that we will not experience additional ceiling limitation
write-downs in the future.

     ESTIMATES OF OUR PROVED RESERVES AND FUTURE NET REVENUE ARE UNCERTAIN AND
INHERENTLY IMPRECISe. This prospectus contains estimates of our proved crude oil
and natural gas reserves and the estimated future net revenue from such
reserves. The process of estimating crude oil and natural gas reserves is
complex and involves decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data. Therefore, these
estimates are imprecise.

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

     You should not assume that the present value of future net revenues
referred to in this prospectus is the current market value of our estimated
crude oil and natural gas reserves. In accordance with SEC requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the end of the period of the estimate. Actual
future prices and costs may be materially higher or lower than the prices and
costs as of the end of the year of the estimate. Any changes in consumption by
natural gas purchasers or in governmental regulations or taxation will also
affect actual future net cash flows. The timing of both the production and the
expenses from the development and production of crude oil and natural gas
properties will affect the timing of actual future net cash flows from proved
reserves and their present value. In addition, the 10% discount factor,

                                       18
which is required by the SEC to be used in calculating discounted future net
cash flows for reporting purposes, is not necessarily the most accurate discount
factor. The effective interest rate at various times and the risks associated
with us or the crude oil and natural gas industry in general will affect the
accuracy of the 10% discount factor.

     The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of crude oil and natural gas reserves, future net
revenue from proved reserves and the PV-10 thereof for the crude oil and natural
gas properties described in this prospectus are based on the assumption that
future crude oil and natural gas prices remain the same as crude oil and natural
gas prices at June 30, 2002. The sales prices as of such date used for purposes
of such estimates were $26.16 per Bbl of crude oil, $16.82 per Bbl of NGLs and
$2.16 per Mcf of natural gas. This compares with $18.26 per Bbl of crude oil,
$16.29 per Bbl of NGLs and $2.16 per Mcf of natural gas as of December 31, 2001.
These estimates also assume that we will make future capital expenditures of
approximately $53 million in the aggregate, which are necessary to develop and
realize the value of proved undeveloped reserves on our properties. Any
significant variance in actual results from these assumptions could also
materially affect the estimated quantity and value of reserves set forth herein.

     WE HAVE EXPERIENCED RECURRING NET LOSSES. The following table shows the
losses we had in 1997, 1998, 1999 and 2001 and for the first nine months of
2002:
YEAR ENDED DECEMBER 31,
                                     ------------------------------------------                NINE
                                                                                          MONTHS ENDED
                                     1997        1998        1999          2001        SEPTEMBER 30, 2002
                                     ----        ----        ----          ----        ------------------
                                                           (DOLLARS IN MILLIONS)
Net (loss) applicable to
   common stock                     $ (6.5)    $ (84.0)    $ (36.7)      $ (19.7)           $ (112.8)
While we had net income in 2000 of $8.4 million, if the significant gain on
the sale of an interest in a partnership were excluded, we would have
experienced a net loss for the year of $(25.5) million. We cannot assure you
that we will become profitable in the future.

     THE MARKETABILITY OF OUR PRODUCTION DEPENDS LARGELY UPON THE AVAILABILITY,
PROXIMITY AND CAPACITY OF NATURAL GAS GATHERING SYSTEMS, PIPELINES AND
PROCESSING FACILITIES. The marketability of our production depends in part upon
processing facilities. Transportation space on such gathering systems and
pipelines is occasionally limited and at times unavailable due to repairs or
improvements being made to such facilities or due to such space being utilized
by other companies with priority transportation agreements. Our access to
transportation options can also be affected by U.S. federal and state and
Canadian regulation of crude oil and natural gas production and transportation,
general economic conditions, and changes in supply and demand. These factors and
the availability of markets are beyond our control. If market factors
dramatically change, the financial impact on us could be substantial and
adversely affect our ability to produce and market crude oil and natural gas.

     OUR CANADIAN OPERATIONS ARE SUBJECT TO THE RISKS OF CURRENCY FLUCTUATIONS
AND IN SOME INSTANCES ECONOMIC AND POLITICAL DEVELOPMENTS. We have significant
operations in Canada. The expenses of such operations are payable in Canadian
dollars while most of the revenue from crude oil and natural gas sales is based
upon U.S. dollar price indices. As a result, Canadian operations are subject to
the risk of fluctuations in the relative values of the Canadian and U.S.
dollars. We are also required to recognize foreign currency translation gains or
losses related to any debt issued by our Canadian subsidiary because the debt is
denominated in U.S. dollars and the functional currency of such subsidiary is
the Canadian dollar. Our foreign operations may also be adversely affected by
local political and economic developments, royalty and tax increases and other
foreign laws or policies, as well as U.S. policies affecting trade, taxation and
investment in other countries.

     WE DEPEND ON OUR KEY PERSONNEL. We depend to a large extent on Robert L.G.
Watson, our Chairman of the Board, President and Chief Executive Officer, for
our management and business and financial contacts. The unavailability of Mr.
Watson could have a materially adverse effect on our business. Mr. Watson has a
three-year employment contract with Abraxas commencing on December 21, 1999,
which automatically renews thereafter for successive one-year periods unless
Abraxas gives 120 days notice prior to the expiration of the original term or
any extension thereof of its intention not to renew the employment agreement.
Our success is also dependent upon our

                                       19
ability to employ and retain skilled technical personnel. While we have not
experienced difficulties in employing or retaining such personnel, our failure
to do so in the future could adversely affect our business.

RISKS RELATED TO OUR INDUSTRY

     OUR OPERATIONS ARE SUBJECT TO NUMEROUS RISKS OF CRUDE OIL AND NATURAL GAS
DRILLING AND PRODUCTION ACTIVITIES. Our crude oil and natural gas drilling and
production activities are subject to numerous risks, many of which are beyond
our control. These risks include the following:

       -  that no commercially productive crude oil or natural gas reservoirs
          will be found;

       -  that crude oil and natural gas drilling and production activities may
          be shortened, delayed or canceled; and

       -  that our ability to develop, produce and market our reserves may be
          limited by:

          -    title problems,

          -    weather conditions,

          -    compliance with governmental requirements, and

          -    mechanical difficulties or shortages or delays in the delivery of
               drilling rigs, work boats and other equipment.

     In the past, we have had difficulty securing drilling equipment in certain
of our core areas. We cannot assure you that the new wells we drill will be
productive or that we will recover all or any portion of our investment.
Drilling for crude oil and natural gas may be unprofitable. Dry holes and wells
that are productive but do not produce sufficient net revenues after drilling,
operating and other costs are unprofitable. In addition, our properties may be
susceptible to hydrocarbon draining from production by other operations on
adjacent properties.

     Our industry also experiences numerous operating risks. These operating
risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards. Environmental hazards include
oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of
these industry operating risks occur, we could have substantial losses.
Substantial losses also may result from injury or loss of life, severe damage to
or destruction of property, clean-up responsibilities, regulatory investigation
and penalties and suspension of operations. In accordance with industry
practice, we maintain insurance against some, but not all, of the risks
described above. We cannot assure you that our insurance will be adequate to
cover losses or liabilities. Also, we cannot predict the continued availability
of insurance at premium levels that justify its purchase.

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

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

     We face significant competition for obtaining additional natural gas
supplies for gathering and processing operations, for marketing NGLs, residue
gas, helium, condensate and sulfur, and for transporting natural gas and
liquids. Our principal competitors include major integrated oil companies and
their marketing affiliates and national

                                       20
and local gas gatherers, brokers, marketers and distributors of varying sizes,
financial resources and experience. Certain competitors, such as major crude oil
and natural gas companies, have capital resources and control supplies of
natural gas substantially greater than ours. Smaller local distributors may
enjoy a marketing advantage in their immediate service areas.

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

     OUR CRUDE OIL AND NATURAL GAS OPERATIONS ARE SUBJECT TO VARIOUS U.S.
FEDERAL, STATE AND LOCAL AND CANADIAN FEDERAL AND PROVINCIAL GOVERNMENTAL
REGULATIONS THAT MATERIALLY AFFECT OUR OPERATIONS. Matters regulated include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells and unitization and pooling
of properties and taxation. At various times, regulatory agencies have imposed
price controls and limitations on production. In order to conserve supplies of
crude oil and natural gas, these agencies have restricted the rates of flow of
crude oil and natural gas wells below actual production capacity. Federal,
state, provincial and local laws regulate production, handling, storage,
transportation and disposal of crude oil and natural gas, by-products from crude
oil and natural gas and other substances and materials produced or used in
connection with crude oil and natural gas operations. To date, our expenditures
related to complying with these laws and for remediation of existing
environmental contamination have not been significant. We believe that we are in
substantial compliance with all applicable laws and regulations. However, the
requirements of such laws and regulations are frequently changed. We cannot
predict the ultimate cost of compliance with these requirements or their effect
on our operations.

                                       21
USE OF PROCEEDS

     We will not receive any proceeds from the sale of the notes or the Abraxas
common stock by the selling security holders pursuant to this prospectus.

                       RATIO OF EARNINGS TO FIXED CHARGES

     Earnings consist of income from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing fees and premium on the old notes. Our earnings were
inadequate to cover fixed charges in 1997, 1998, 1999, 2001 and Pro Forma 2001,
and the nine month period ended September 30, 2002 and Pro Forma September 30,
2002, by $6.7 million, $84.0 million, $49.0 million, $15.6 million, $11.0
million, $143.1 million and $43.8 million, respectively. In 2000, we had
earnings from continued operations of $44.4 million and fixed charges of $32.7
million. Our ratio of earnings to fixed charges during 2000 was 1.36x.

                                 CAPITALIZATION

     The following table sets forth our cash position and total consolidated
capitalization at September 30, 2002, on a historical and pro forma basis.
SEPTEMBER 30, 2002
                                                          -------------------------------
                                                            HISTORICAL       PRO FORMA(1)
                                                          --------------   --------------
                                                                (DOLLARS IN THOUSANDS)
Cash.............................................         $     13,665    $        8,694
                                                          ============    ==============
Total debt, including current maturities:
  Old Grey Wolf Credit Facility(2) ..............               40,220                --
  First Lien Notes...............................               63,500                --
  Second Lien Notes .............................              190,178                --
  Old Notes......................................                  801                --
  New Senior Credit Agreement....................                   --            46,700
  New Secured Notes(3)...........................                                128,383
                                                          ------------    --------------
     Total debt..................................              294,699           175,083
Stockholders' equity (deficit)...................             (138,032)          (67,476)
                                                          ------------    --------------

  Total capitalization...........................         $    156,667    $      107,607
                                                          ============    ==============
----------

(1)  Reflects the exchange offer and each of the other transactions described
     under "Business--Recent Developments--Financial Restructuring."

(2)  Indebtedness of Old Grey Wolf, which was non-recourse to Abraxas and
     Canadian Abraxas.

(3)  For accounting purposes, the historical carrying value of the second lien
     notes and old notes has been reduced by exchange offer cash payments of
     $59.2 million and the value of the common stock issued of $3.8 million. The
     outstanding principal amount of the notes currently is $109.5 million.

                                       22
PRICE RANGE OF ABRAXAS COMMON STOCK

     Abraxas common stock began trading on the American Stock Exchange on August
18, 2000, under the symbol "ABP." The following table sets forth certain
information as to the high and low bid quotations quoted for Abraxas' common
stock on the American Stock Exchange.
PERIOD                                              HIGH          LOW
                     ------                                              ----          ---
2001         First Quarter...................................   $ 5.32        $ 3.69
                     Second Quarter..................................     4.98          3.10
                     Third Quarter...................................     3.65          1.70
                     Fourth Quarter..................................     1.85          0.88

        2002

                     First Quarter...................................   $ 1.70        $ 0.89
                     Second Quarter..................................     1.41          0.52
                     Third Quarter...................................     0.98          0.42
                     Fourth Quarter..................................     0.80          0.52

        2003

                     First Quarter (through February 5, 2003)........   $ 0.85          0.55
DIVIDENDS

     Abraxas has not paid any cash dividends on its common stock and it is not
presently determinable when, if ever, Abraxas will pay cash dividends in the
future. In addition, the senior credit facility and the indenture governing the
notes prohibit the payment of cash dividends and stock dividends on Abraxas'
common stock. You should read the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" beginning on page 40 for more information regarding the restrictions
on Abraxas' ability to pay dividends.

                                       23
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The Unaudited Pro Forma Condensed Consolidated Balance Sheet of Abraxas as
of September 30, 2002 has been prepared assuming that the exchange offer and
each of the other transactions described under "Business--Recent
Developments--Financial Restructuring" were consummated on September 30, 2002.
The Unaudited Pro Forma Statements of Operations of Abraxas for the year ended
December 31, 2001 and the nine months ended September 30, 2002 have been
prepared assuming the divestiture of the East White Point, Quirk Creek and
Mahaska and the repurchase of the Production Payment which occurred in the
second quarter of 2002 (collectively, the "Sale of Properties") and the exchange
offer and each of the other transactions described under "Business--Recent
Developments--Financial Restructuring" had occurred on January 1, 2001. The pro
forma financial data are based on assumptions and include adjustments as
explained in the notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements. The unaudited pro forma financial statements are not
necessarily indicative of results that actually would have been achieved had the
exchange offer and each of the other referenced transactions been consummated
on the dates indicated or that may be achieved in the future.

     These unaudited pro forma condensed consolidated financial statements have
been prepared from, and should be read along with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Selected Historical
Financial Data", our Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus.

                                       24
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                      FOR THE YEAR ENDED DECEMBER 31, 2001
HISTORICAL
                                            ABRAXAS
                                           PETROLEUM         SALE OF          FINANCIAL
                                          CORPORATION      PROPERTIES       RESTRUCTURING      PRO FORMA
                                         ------------     ------------     ---------------     ----------
                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
  Oil and gas production revenues...     $   73,201      $   (10,922)(1)  $    (32,768)(4)   $    29,511
  Gas processing revenues...........          2,438             (982)(1)        (1,456)(4)            --
  Rig revenues......................            756                                 --               756
  Other.............................            848                               (763)(4)            85
                                         ----------      -----------      -------------      -----------
         Total revenues.............         77,243          (11,904)          (34,987)           30,352
Operating costs and expenses:
  Lease operating and production
   taxes ...........................         18,616           (2,599)(1)        (7,622)(4)         8,395
  Depreciation, depletion and
    amortization....................         32,484           (3,536)(1)       (17,549)(4)        11,399
  Proved property impairment........          2,638               --            (2,638)(4)            --
  Rig operations....................            702               --                --               702
  General and administrative........          6,445                -            (1,055)(4)         5,390
  General and administrative -
    (Stock-based compensation)......         (2,767)              --                --            (2,767)
                                         -----------     -----------      ------------       ------------
         Total operating expenses...         58,118           (6,135)          (28,864)           23,119
                                         ----------      ------------     -------------      -----------
Operating income (loss).............         19,125           (5,769)           (6,123)            7,233
Other (income) expense:
  Interest income...................            (78)              --                --               (78)
  Amortization of deferred                                                      (2,268)(5)
    financing fees..................          2,268               --             1,730 (5)         1,730
  Interest expense..................                                           (30,314)(5)
                                             31,523           (1,209)(2)        15,479 (5)        15,479
  Loss on equity investment.........            845               --                --               845
  Other.............................            207               --                --               207
                                         ----------      -----------      ------------       -----------
  Income (loss) from operations before
  income tax........................        (15,640)          (4,560)            9,250           (10,950)
Income tax expense (benefit):.......          2,402             (919)(3)          (978)(3)           505
Minority interest in income of
    consolidated foreign subsidiary
    (2001 prior to purchase)........         (1,676)              --             1,676 (4)            --
                                         -----------     -----------      ------------       -----------
Net income (loss) ..................     $  (19,718)     $    (3,641)     $     11,904       $   (11,455)
                                         ===========     ============     ============       ============

Weighted average common shares:

    Basic...........................     25,788,571                          5,633,291 (6)    31,421,862
                                         ----------                       ------------        ----------
    Diluted.........................     25,788,571                          5,633,291 (6)    31,421,862
                                         ----------                       ------------       -----------

Net loss per share:
    Basic...........................     $   (0.76)                                          $     (0.36)
                                         ----------                                          ------------
    Diluted.........................     $   (0.76)                                          $     (0.36)
                                         ----------                                          ------------
See notes to unaudited pro forma financial statements.

                                       25
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
HISTORICAL
                                            ABRAXAS
                                           PETROLEUM          SALE OF           FINANCIAL
                                          CORPORATION       PROPERTIES        RESTRUCTURING      PRO FORMA
                                          -----------       ----------        -------------      ---------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
  Oil and gas production revenues...     $   34,158      $     (2,518)(1)   $    (17,949)(4)   $   13,691
  Gas processing revenues...........          1,933              (417)(1)         (1,516)(4)           --
  Rig revenues......................            513                                   --              513
  Other.............................            499                --               (429)(4)           70
                                         ----------      ------------       -------------      ----------
         Total revenues.............         37,103            (2,935)           (19,894)          14,274
Operating costs and expenses:
  Lease operating and production taxes       11,205              (289)(1)         (5,343)(4)        5,573
  Depreciation, depletion and
    amortization....................         21,010            (1,993)(1)        (12,650)(4)        6,367
  Proved property impairment........        115,995                --            (87,816)(4)       28,179
  Rig operation.....................            439                --                 --              439
  General and administrative........          4,578                --               (860)(4)        3,718
                                         ----------      ------------       -------------      ----------
         Total operating expenses...        153,227            (2,282)          (106,669)          44,276
                                         ----------      -------------      -------------      ----------
Operating income (loss).............       (116,124)             (653)            86,775          (30,002)
Other (income) expense:
  Interest income...................            (56)               --                 --              (56)
  Amortization of deferred                                                        (1,283)(5)
    financing fees..................          1,283                --              1,477 (5)        1,477
  Interest expense..................         25,790              (604)(2)        (12,835)(5)       12,351
                                         ----------      -------------      --------------     ----------
   Income (loss) from operations
     before income tax .............       (143,141)              (49)            99,416          (43,774)
Income tax expense (benefit)........        (30,314)             (253)(3)         30,567(3)            --
                                         -----------     -------------      ------------       ----------
Net income  (loss)..................     $ (112,827)     $        204       $     68,849       $  (43,774)
                                         ===========     ============       ============       ===========

Weighted average common shares:

   Basic............................     29,979,397                            5,633,291(6)    35,612,688
                                         ----------                            ---------       ----------
   Diluted..........................     29,979,397                            5,633,291(6)    35,612,688
                                         ----------                            ---------       ----------

Net loss per share:
   Basic............................     $   (3.76)                                            $   (1.23)
                                         ----------                                            ----------
   Diluted..........................     $   (3.76)                                            $   (1.23)
                                         ----------                                            ----------
See notes to unaudited pro forma financial statements.

                                       26
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

                            AS OF SEPTEMBER 30, 2002
HISTORICAL
                                             ABRAXAS
                                            PETROLEUM       FINANCIAL
                                           CORPORATION     RESTRUCTURING     PRO FORMA
                                          --------------  ---------------   -----------
Assets:
  Cash...............................     $    13,358     $    (4,664)(1)   $    8,694
  Accounts receivable................           7,491          (4,019)(1)        3,472
  Other..............................           1,733            (595)(1)        1,138
                                          -----------     ------------      ----------
         Total current assets........          22,582          (9,278)          13,304
 Net property and equipment..........         149,530         (56,577)(1)       92,953
Deferred financing fees..............           2,952           3,248(5)         6,200
Other assets.........................           8,829          (8,442)(1)          387
                                          -----------     ------------      ----------
         Total assets................     $   183,893     $   (71,049)      $  112,844
                                          ===========     ============      ==========

Liabilities and Stockholders' Equity
  (Deficit):

Current Liabilities:
   Accounts payable..................     $    11,180     $    (8,580)(1)        2,600
   Current maturities of First Lien
    Notes............................          63,500         (63,500)(3)           --
   Other current liabilities.........          12,059          (9,422)(3)        2,637
                                          -----------     ------------      ----------
        Total current liabilities....          86,739         (81,502)           5,237

Long-term debt:
  New Secured Notes..................              --         128,383(5)       128,383
  Senior Credit Agreement ...........              --          46,700(4)        46,700
  Old Grey Wolf Credit Facility......          40,220         (40,220)(1)           --
  Old Notes..........................             801            (801)(5)           --
  Second Lien Notes..................         190,178        (190,178)(5)           --
                                          -----------     ------------      ----------
         Total.......................         231,199         (56,116)         175,083
Deferred income taxes................              --              --               --
Other liabilities....................           3,987          (3,987)(1)           --
Stockholders' equity (deficit):
  Common stock.......................             301              56(2)           357
  Additional paid-in capital.........         136,830           3,718(2)       140,548
  Receivable from stock sale.........             (97)             --              (97)
  Accumulated deficit................        (263,921)         61,638(6)      (202,283)
  Accumulated other comprehensive
   income adjustment.................         (10,181)          5,144(1)        (5,037)
  Treasury stock.....................            (964)             --             (964)
                                          ------------    -----------       -----------
         Total stockholders' equity

           (deficit).................        (138,032)         70,556          (67,476)
                                          ------------    -----------       -----------
         Total liabilities and
           stockholders' equity

           (deficit).................     $   183,893     $   (71,049)      $  112,844
                                          ===========     ============      ==========
See notes to unaudited pro forma financial statements.

                                       27
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(1)  To adjust oil and gas production revenues, gas processing revenues, lease
     operating and production taxes and depreciation, depletion and amortization
     as if the property sales and the repayment of a production payment
     obligation which occurred in the second quarter of 2002 had been completed
     as of January 1, 2001.

(2)  To adjust interest expense, giving effect to pay-down of Abraxas' long-term
     debt and current maturities of long-term debt, at the stated interest rates
     of the associated debt.

(3)  To record income tax expense (benefit) of the pro forma taxable income
     (loss) at Canadian statutory rates, as applicable. No tax expense (benefit)
     for US purposes due to loss carryovers.

(4)  To adjust for revenue and expense to reflect the sale of the Canadian
     operations, excluding the revenue and expense related to assets retained by
     Abraxas.

(5)  To adjust the amortization of deferred financing fees for debt retired and
     record the amortization of additional fees related to new senior credit
     agreement. To adjust interest expense to reflect debt retired and record
     expense on new debt. Interest expense on the new debt includes cash
     interest expense on the new revolving credit facility and non-cash
     (additional notes) interest expense on the term loan and the new secured
     notes. Non cash interest expense is calculated at 9% on the term loan and
     at an imputed rate of 8.6% on the new notes based on the carrying value of
     the exchanged notes of $128.4 million. See note 5 to the unaudited pro
     forma condensed consolidated balance sheet for the calculation of the
     carrying value of the new notes. Additionally, in connection with the
     exchange offer, Abraxas incurred expenses of $3.8 million of non-recurring
     cost which are not reflected in these pro forma financial statements.

(6)  To reflect the issuance of 5.63 million shares of common stock as part of
     the financial restructuring.

     Notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet:

(1)  To adjust balance sheet for disposal of Canadian operations and repayment
     of the Old Grey Wolf credit facility.

(2)  To adjust the balance sheet for the issuance of 5.63 million shares of
     common stock as part of the financial restructuring at an assumed market
     price of $0.67.

(3)  To adjust the balance sheet for the retirement of the existing first lien
     notes and accrued interest.

(4)  To adjust the balance sheet for borrowings under the new senior credit
     agreement.

(5)  To adjust the balance sheet for the restructuring of the second lien notes
     and old notes, to recognize $4.4 million in financing fees which were
     incurred in connection with the new senior credit agreement and to write
     off $1.2 million of deferred financing fees relating to the retired first
     lien notes and the Old Grey Wolf credit facility. For financial reporting
     purposes, the new notes are reflected on the books at the carrying value of
     the second lien notes and old notes prior to the exchange ($191.0 million),
     net of the cash offered in the exchange ($47.4 million) and net of the
     fair market value related to equity ($3.8 million) offered in the exchange.
     In conjunction with this transaction, Abraxas paid cash of $11.8 million
     to redeem certain of the outstanding notes and accrued interest. The result
     of all of these items is a remaining carrying value of the new notes of
     $128.4 million.

(6)  To adjust the accumulated deficit for the estimated gain on the sale of
     Canadian operations. Net proceeds of the sale of the common stock of Old
     Grey Wolf and Canadian Abraxas were $132.1 million reduced by the book
     value of the assets sold ($66.9 million) and accrued interest and debt
     discount on the Old Grey Wolf credit facility retired ($3.6 million).

                                       28
SELECTED HISTORICAL FINANCIAL DATA

     The following historical selected consolidated financial data are derived
from our Consolidated Financial Statements and the notes thereto included in
this prospectus. Separate financial statements for Old Grey Wolf, as of December
31, 2001 and 2000 and for the years ended December 31, 2001 , 2000 and 1999 are
included elsewhere in this prospectus. The statement of operations data for the
nine months ended September 30, 2002, is not necessarily indicative of results
of a full year. The consolidated financial data for each of the nine months
ended September 30, 2001 and 2002, are derived from our unaudited financial
statements and, in the opinion of management, include all adjustments (all of
which are of a normal and recurring nature) that are necessary for a fair
presentation. The selected historical consolidated financial information should
be read in conjunction with our Consolidated Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
NINE MONTHS ENDED
                                                            YEAR ENDED DECEMBER 31,                         SEPTEMBER 30,
                                          ----------------------------------------------------------   ------------------
                                             1997       1998       1999        2000         2001         2001       2002
                                          ---------   --------   ---------   ---------   ----------    ---------   -------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
Operating revenue:
  Oil and gas production revenues......   $  65,826   $  54,263  $  59,025    $ 72,973   $  73,201     $  62,043  $  34,158
  Gas processing revenues..............       3,568       3,159      4,244       2,717       2,438         1,711      1,933
  Other revenue........................       1,537       2,662      3,501         910       1,604         1,349      1,012
                                            -------     -------  ---------    --------   ---------     ---------   --------
          Total operating revenue......      70,931      60,084     66,770      76,600      77,243        65,103     37,103
                                            -------     -------  ---------    --------   ---------     ---------  ---------
Operating costs and expenses:
Lease operating and production taxes...      16,133      18,091     17,938      18,783      18,616        13,679     11,205
Depreciation, depletion and
     amortization expense..............      30,581      31,226     34,811      35,857      32,484        25,150     21,010
General and administrative expense.....       4,171       5,522      5,269       6,533       6,445         5,051      4,578
General and administrative (Stock-based
     compensation).....................          --          --         --       2,767      (2,767)       (2,767)        --
Other..................................         296         521        624         717         702           548        439
Proved property impairment.............       4,600      61,224     19,100          --       2,638            --    115,995
                                            -------     -------  ---------   ---------   ---------     ---------  ---------
          Total operating expenses.....      55,781     116,584     77,742      64,657      58,118        41,661    153,227
                                            -------     -------  ---------    --------   ---------     ---------  ---------
Operating income (loss)................      15,150     (56,500)   (10,972)     11,943      19,125        23,442   (116,124)
Net interest expense...................      24,300      30,043     36,149      30,610      31,445        23,626     25,734
Amortization of deferred financing
    fees...............................       1,260       1,571      1,915       2,091       2,268         1,315      1,283
(Gain) loss  on sale of equity                   --          --         --     (33,983)        845            --         --
investment
Other (income) expense.................         (34)          4                  1,563         207            16         --
                                            -------     -------  ---------    --------   ---------     ---------  ---------
Income (loss) from continuing
   operations before taxes and
   extraordinary items.................     (10,376)    (88,118)   (49,036)     11,662     (15,640)       (1,515)  (143,141)
Income tax (expense) benefit...........       3,891       4,158     12,625      (3,705)     (2,402)       (3,677)    30,314
Minority interest in (income) loss of
   consolidated foreign subsidiary....           --          --        269       1,281       1,676         1,676         --
                                            -------     -------   --------    --------   ---------     ---------  ---------
Income (loss) before extraordinary
   items...............................      (6,485)    (83,960)   (36,680)      6,676     (19,718)       (6,868)  (112,827)
Extraordinary items....................          --          --         --       1,773          --            --         --
                                            -------     -------   --------    --------   ---------     ---------  ---------
Net income (loss)......................      (6,485)    (83,960)   (36,680)      8,449     (19,178)       (6,868)  (112,827)
Preferred dividends....................        (183)         --         --          --          --            --         --
                                            -------     -------   --------    --------   ---------     ---------  ---------
Net income (loss) applicable to
   common  stockholders................   $  (6,668)  $ (83,960) $ (36,680)   $  8,449   $ (19,178)    $  (6,868) $(112,827)
                                            =======   =========  =========    ========   ==========    =========  ==========

Income (loss) before extraordinary item
per
   common share:
  Basic................................       (1.11)     (13.26)     (5.41)       0.29       (0.76)        (0.28)     (3.76)
  Diluted..............................       (1.11)     (13.26)     (5.41)       0.21       (0.76)        (0.28)     (3.76)
CONSOLIDATED BALANCE SHEET DATA:

Total assets...........................     338,528     291,498    322,284     335,560     303,616       310,868    183,893
Long-term debt - excluding current          228,617     299,698    273,421     266,441     285,184       270,635    231,199
maturities.............................
Stockholder's equity (deficit).........      26,813     (63,522)    (9,505)     (6,503)    (28,585)      (15,929)  (138,032)
29
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 elsewhere in this prospectus.

GENERAL

     We have incurred net losses in four of the last five years and for the
first nine months of 2002, and there can be no assurance that operating income
and net earnings will be achieved in future periods. Our revenues, profitability
and future rate of growth are substantially dependent upon prevailing prices for
crude oil and natural gas and the volumes of crude oil, natural gas and natural
gas liquids we produce. Natural gas and crude oil prices weakened during 1998.
Crude oil and natural gas prices increased somewhat in 1999 and increased
substantially in 2000. During 2001, crude oil and natural gas prices weakened
substantially from the 2000 levels. During the first nine months of 2002, prices
began to increase. In addition, because our proved reserves will decline as
crude oil, natural gas and natural gas liquids are produced, unless we acquire
additional properties containing proved reserves or conduct successful
exploration and development activities, our reserves and production will
decrease. Our ability to acquire or find additional reserves in the near future
will be dependent, in part, upon the amount of available funds for acquisition,
exploitation, exploration and development projects. In order to provide us with
liquidity and capital resources, we have sold certain of our producing
properties. However, our production levels have declined as we have been unable
to replace the production represented by the properties we have sold with new
production from the producing properties we have invested in with the proceeds
of our property sales. If crude oil and natural gas prices return to the
depressed levels experienced in the last nine months of 2001, or if our
production levels continue to decrease, our revenues, cash flow from operations
and financial condition will be materially adversely affected. For more
information, see "Liquidity and Capital Resources--Current Liquidity
Requirements" and "--Future Capital Resources."

RESULTS OF OPERATIONS

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

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

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

       -  the ability to raise capital resources and provide liquidity to meet
          cash flow needs;

       -  the level of and interest rates on borrowings; and

       -  the level and success of exploration and development activity.

     Price volatility in the natural gas market has remained prevalent in the
last few years. In the first quarter of 2002, we experienced a decline in energy
commodity prices from the prices that we received in the first quarter of 2001.
During the first quarter of 2001, we had certain crude oil and natural gas
hedges in place that prevented us from realizing the full impact of a favorable
price environment. In January 2001, the market price of natural gas was at its
highest level in our operating history and the price of crude oil was also at a
high level. However, over the course of 2001 and the beginning of the first
quarter of 2002, prices again became depressed, primarily due to the economic
downturn. Beginning in March 2002, commodity prices began to increase and
continued higher through September 2002.

                                       30
The table below illustrates how natural gas prices fluctuated over the
course of 2001 and the first three quarters of 2002. The table below contains
the last three day average of NYMEX traded contracts price and the prices we
realized during each quarter for 2001 and the first three quarters of 2002,
including the impact of our hedging activities.
Natural Gas Prices by Quarter
                                                     (in $ per Mcf)
              -----------------------------------------------------------------------------------------------------
              Quarter Ended
              -----------------------------------------------------------------------------------------------------
                March 31,    June 30,    September 30,    December 31,     March 31,    June 30,    September 30,
                  2001         2001          2001             2001            2002        2002          2002
              ------------  ------------ -------------   -------------   -----------   ---------- ---------------
Index              $ 7.27         $ 4.82     $ 2.98           $ 2.47     $ 2.38        $ 3.36     $ 3.28
Realized             4.85           3.41       2.26             2.09       2.21          2.44       2.08
The NYMEX natural gas price on January 28, 2003 was $5.44 per Mcf.

     Prices for crude oil have followed a similar path as the commodity market
fell throughout 2001 and the first quarter of 2002. The table below contains the
last three day average of NYMEX traded contracts price and the prices we
realized during each quarter for 2001 and the first three quarters of 2002.
Crude Oil Prices by Quarter
                                                     (in $ per Bbl)

              Quarter Ended
              ------------------------------------------------------------------------------------------------------
                March 31,    June 30,   September 30,     December 31,    March 31,    June 30,     September 30,
                  2001         2001         2001             2001           2002         2002           2002
              -------------- --------- ----------------- --------------- ------------- ----------- -----------------
Index             $ 29.86        $ 27.94   $ 26.50           $ 22.12     $  19.48       $ 26.40      $    27.50
Realized            27.22          25.32     25.06             18.72        16.64         23.47           27.19
The NYMEX crude oil price on January 28, 2003 was $ 32.67 per Bbl.

     HEDGING ACTIVITIES. Our results of operations are significantly affected by
fluctuations in commodity prices and we seek to reduce our exposure to price
volatility by hedging our production through swaps, options and other commodity
derivative instruments.

     In 2000, 2001 and the nine month period ended September 30, 2002, we
experienced hedging losses of $20.2 million, $12.1 million and $2.8 million,
respectively. In October 2002, all of these hedge agreements expired. Under the
expired hedge agreements, we made total payments over the term of these
arrangements to various counterparties in the amount of $35.1 million.

     Under the terms of the new senior credit agreement, we are required to
enter into hedging transactions with respect to not less than 25% nor more than
75% of our crude oil and natural gas production on an ongoing basis. As of
January 23, 2003, we have entered into a collar option agreement with respect to
5,000 MMBtu per day, or approximately 25% of our production, at a maximum call
price of $6.25 per MMBtu and a minimum put price of $4.00 per MMBtu, for the
calendar months of February through July 2003. As of the date of this
prospectus, the fair market value of the collar option agreement is $0, which
may change if changes in commodity prices fluctuate outside the range of the
collar option.

                                       31
SELECTED OPERATING DATA. The following table sets forth certain of our
operating data for the periods presented:
NINE MONTHS ENDED
                                                     YEAR ENDED DECEMBER 31,                SEPTEMBER 30,
                                                 1999         2000         2001           2001         2002
                                             --------    ---------     --------       --------      -------
                                                        (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
Operating revenue:
   Crude oil sales......................    $   11,330        11,899      11,184          9,674         4,799
   NGLs sales...........................         5,043         7,061       5,979          4,865         3,014
   Natural gas sales....................        42,652        54,013      56,038         47,504        26,345
   Gas processing revenue...............         4,244         2,717       2,438          1,711         1,933
   Other................................         3,501           910       1,604          1,349         1,012
                                            ----------      --------    --------       --------      --------
       Total operating revenue..........    $   66,770        76,600      77,243         65,103        37,103
                                            ==========      ========    ========       ========      ========
Operating income(loss)..................    $  (10,972)       11,943      19,125         23,442      (116,124)
Crude oil production(MBbls).............         777.9         636.7       454.1          373.4         215.5
NGLs production(MBbls)..................         376.5         314.9       278.0          202.5         182.3
Natural gas production(MMcf)............      25,697.9      19,962.5    17,495.6       13,420.3      11,692.0
Average crude oil sales prices(per Bbl)     $    14.57         18.69       24.63          25.91         22.27
Average NGLs sales price(per Bbl).......    $    13.40         22.42       21.51          24.02         16.53
Average natural gas sales price(per         $     1.66          2.71        3.20           3.54          2.25
Mcf)....................................
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2001

     OPERATING REVENUE. During the nine months ended September 30, 2002,
operating revenue from crude oil, natural gas and natural gas liquid sales
decreased to $34.2 million as compared to $62.0 million in the nine months ended
September 30, 2001. The decrease in revenue was primarily due to decreased
prices realized during the period, as well as a decrease in production volumes.
Production volumes decreased primarily as a result of producing property sales
in the later part of 2001 and in the first nine months of 2002. Lower commodity
prices impacted crude oil and natural gas revenue by $20.1 million while reduced
production volumes had a $7.7 million negative impact on revenue.

     Average sales prices net of hedging losses for the nine months ended
September 30, 2002 were:

       -  $ 22.27 per Bbl of crude oil,

       -  $ 16.53 per Bbl of natural gas liquid, and

       -  $ 2.25 per Mcf of natural gas

     Average sales prices net of hedging losses for the nine months ended
September 30, 2001 were:

       -  $ 25.91 per Bbl of crude oil,

       -  $ 24.02 per Bbl of natural gas liquid, and

       -  $ 3.54 per Mcf of natural gas

     Crude oil production volumes declined from 373.4 MBbls during the nine
months ended September 30, 2001 to 215.5 MBbls for the same period of 2002,
primarily as a result of a de-emphasis on crude oil drilling in prior periods,
and the sale of crude oil producing properties in the later part of 2001 and in
the first half of 2002. Natural gas production volumes declined to 11,692 MMcf
for the nine months ended September 30, 2002 from 13,420 MMcf for the same
period of 2001. This decline was primarily due to the sale of properties in late
2001 and the first half of 2002 and the natural decline in production which was
partially offset by new production from current drilling activities.

                                       32
LEASE OPERATING EXPENSES. Lease operating expenses and natural gas
processing costs ("LOE") for the nine months ended September 30, 2002 decreased
to $11.2 million from $13.7 million for the same period in 2001. The decrease in
LOE was primarily due to a decrease in production tax expense due to higher
commodity prices in the nine months ended September 30, 2001 as compared to the
same period of 2002 and a reduction in the number of producing wells due to
property sales. LOE on a per MCFE basis for the nine months ended September 30,
2002 was $0.80 per MCFE as compared to $0.81 for the same period of 2001.

     GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES. G&A expenses decreased from
$5.1 million for the first nine months of 2001 to $4.6 million for the first
nine months of 2002. G&A expense on a per MCFE basis was $0.33 for the first
nine months of 2002 compared to $0.30 for the same period of 2001. The decrease
in G&A expense was primarily due to a decrease in consulting fees in 2002 as
compared to 2001.

     G&A - STOCK-BASED COMPENSATION. Effective July 1, 2000, the Financial
Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of Accounting
Principles Board Opinion No. ("APB") 25. Under the interpretation, certain
modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be accounted for as variable expenses until they are exercised,
forfeited, or expired. In March 1999, we amended the exercise price to $2.06 per
share on all options with an existing exercise price greater than $2.06 per
share. We recognized income of approximately $2.8 million during the nine months
ended September 30, 2001 related to these repricings. The income was recorded as
a reduction of expense. The income recognized in 2001 was due to a decline in
the price of our common stock. During 2002, we did not recognize any stock
-based compensation due to the decline in the price of our common stock.

     DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES. Depreciation, depletion
and amortization ("DD&A") expense decreased to $21.0 million for the nine months
ended September 30, 2002 from $25.2 million for the same period of 2001. Our
DD&A on a per MCFE basis for the nine months ended September 30, 2002 was $1.49
per MCFE as compared to $1.49 in 2001. These decreases were due to reduced
production volumes in 2002 and reduction in the full cost pool as a result of
prior ceiling limitation write-downs.

     INTEREST EXPENSE. Interest expense increased to $25.8 million for the first
nine months of 2002 compared to $23.7 million in 2001. The increase was due to
an increase in long-term debt primarily relating to the Old Grey Wolf credit
facility.

     PROVED PROPERTY IMPAIRMENT. We record the carrying value of our crude oil
and natural gas properties using the full cost method of accounting for crude
oil and natural gas properties. Under this method, we capitalize the cost to
acquire, explore for and develop crude oil and natural gas properties. Under the
full cost accounting rules, the net capitalized cost of crude oil and natural
gas properties less related deferred taxes, is limited by country, to the lower
of the unamortized cost or the cost ceiling, (defined as the sum of the present
value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes.) If the net
capitalized cost of crude oil and natural gas properties exceeds the ceiling
limit, we are subject to a ceiling limitation write-down to the extent of such
excess. A ceiling limitation write-down is a charge to earnings, which does not
impact cash flow from operating activities. However, such write-downs do impact
the amount of our stockholders' equity. An expense recorded in one period may
not be reversed in a subsequent period even though higher crude oil and natural
gas prices may have increased the ceiling applicable to the subsequent period.

     The risk that we will be required to write-down the carrying value of our
crude oil and natural gas assets increases when crude oil and natural gas prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. As of June 30, 2002, our net
capitalized costs of crude oil and natural gas properties exceeded the present
value of our estimated proved reserves by $138.7 million ($28.2 million on the
U.S. properties and $110.5 million on the Canadian properties). As a result,
during the nine months ended September 30, 2002, we incurred a proved-property
impairment write-down of approximately $116 million primarily due to volatile
commodity prices. These amounts were calculated considering June 30, 2002
period-end prices of $26.12 per Bbl for crude oil and $2.16 per Mcf for natural
gas as adjusted to reflect the expected realized prices for each of the full
cost pools. We used the subsequent prices to evaluate our

                                       33
Canadian properties, and reduced the period end June 30, 2002 write-down to an
amount of $87.8 million on those properties. The subsequent prices in the U.S.
would not have resulted in a reduction of the write-down for the U.S.
properties. At September 30, 2002 our net capitalized cost of crude oil and
natural gas properties did not exceed the present value of our estimated
reserves, due to increased commodity prices during the third quarter and as such
no further write-down was recorded.

     We cannot assure you that we will not experience additional write-downs in
the future. Should commodity prices decline or if any of our proved reserves are
revised downward, a further write-down of the carrying value of our crude oil
and natural gas properties may be required.

     MINORITY INTEREST. We owned a 49% controlling interest in the earnings of
Old Grey Wolf through August 2001. The consolidated financial statements include
the results of Old Grey Wolf. The net income attributable to the minority
interest in Old Grey Wolf for the first nine months of 2001 was $1.7 million. As
of September 30, 2002, we owned 100% of the outstanding capital stock of Old
Grey Wolf. We obtained the additional interest in Old Grey Wolf pursuant to a
tender offer and subsequent compulsory merger, completed in September 2001.

     INCOME TAXES. Income taxes decreased to a benefit of $30.3 million for the
first nine months of 2002 compared to an expense of $3.7 million for the same
period of 2001. This decrease is due to reduced profitability in our operations,
primarily as a result of ceiling limitation write-downs and lower commodity
prices. There is no current or deferred income tax benefit for the U.S. net
losses and a portion of the Canadian net losses due to the valuation allowance
which has been recorded against such benefits. This results in a low
consolidated effective tax rate for the nine months ended September 30, 2002.

COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000

     OPERATING REVENUE. During the year ended December 31, 2001, operating
revenue from crude oil, natural gas and natural gas liquids sales increased by
$200,000 from $73.0 million in 2000 to $73.2 million in 2001. This increase was
primarily attributable to an increase in commodity prices offset by a decline in
production volumes. Increased prices contributed $12.9 million in additional
revenue, which was offset by $12.7 million due to a decrease in production
volumes. The decline in production was due to the disposition of certain
properties, primarily in Canada, natural field declines and our inability to
replace the production represented by the properties we have sold with new
production from the producing properties we invested in with the proceeds of our
property sales.

     Natural gas liquids volumes declined from 314.9 MBbls in 2000 to 278.0
MBbls in 2001. Crude oil sales volumes declined from 636.7 MBbls in 2000 to
454.1 MBbls during 2001. Natural gas sales volumes decreased from 20.0 Bcf in
2000 to 17.5 Bcf in 2001. Production declines were primarily attributable to our
disposition of assets during 2001 and our inability to replace the production
represented by the properties we have sold with new production from the
producing properties we invested in with the proceeds of our property sales.

     Average sales prices in 2001 net of hedging losses were:

       -  $ 24.63 per Bbl of crude oil,

       -  $ 21.51 per Bbl of natural gas liquids, and

       -  $ 3.20 per Mcf of natural gas.

     Average sales prices in 2000 net of hedging losses were:

       -  $18.69 per Bbl of crude oil,

       -  $22.42 per Bbl of natural gas liquids, and

       -  $2.71 per Mcf of natural gas.

     We also had natural gas processing revenue of $2.4 million in 2001 as
compared to $2.7 million in 2000. The decline in processing revenue is due to a
decrease in third party natural gas being processed. We are utilizing more of
the plant capacity to process our own natural gas, leaving less capacity for
third party processing.

                                       34
LEASE OPERATING EXPENSE. Lease operating expense ("LOE") and natural gas
processing costs decreased slightly from $18.8 million in 2000 to $18.6 million
in 2001. LOE on a per Mcfe basis for 2001 was $0.85 per Mcfe as compared to
$0.73 per Mcfe in 2000. The increase in the per Mcfe cost is due to a decline in
production volumes.

     G&A EXPENSE. General and administrative ("G&A") expense decreased from $6.5
million in 2000 to $6.4 million in 2001. The decline in G&A expenses is
primarily due to our efforts to control cost. Our G&A expense on a per Mcfe
basis increased from $0.27 in 2000 to $0.29 in 2001. The increase in the per
Mcfe cost was due primarily to lower production volumes in 2001 as compared to
2000.

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

     DD&A EXPENSE. Depreciation, depletion and amortization ("DD&A") expense
decreased by $3.4 million from $35.9 million in 2000 to $32.5 million in 2001.
Our DD&A expense on a per Mcfe basis for 2001 was $1.48 per Mcfe as compared to
$1.40 per Mcfe in 2000. The decline in DD&A is due to reductions in our full
cost pool resulting from ceiling test write-downs in prior years, as well as
lower production volumes.

     INTEREST EXPENSE. Interest expense increased by $400,000 from $31.1 million
to $31.5 million for 2001 compared to 2000. This increase resulted from an
increase in debt levels during 2001 compared to 2000. The increase in our debt
level was the result of additional sales pursuant to our production payment
arrangement with Mirant Americas, as well as additional funding from the Old
Grey Wolf credit facility.

     CEILING LIMITATION WRITE-DOWN. We record the carrying value of our crude
oil and natural gas properties using the full cost method of accounting for
crude oil and natural gas properties. Under this method, we capitalize the cost
to acquire, explore for and develop crude oil and natural gas properties. Under
the full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties less related deferred taxes, are limited by country, to
the lower of the unamortized cost or the cost ceiling, defined as the sum of the
present value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, we are
subject to a ceiling limitation write-down to the extent of such excess. A
ceiling limitation write-down is a charge to earnings which does not impact cash
flow from operating activities. However, such write-downs do impact the amount
of our stockholders' equity. The cost ceiling represents the present value
(discounted at 10%) of net cash flows from sales of future production, using
commodity prices on the last day of the quarter, or alternatively, if prices
subsequent to that date have increased, a price near the periodic filing date of
our financial statements. As of December 31, 2001, our net capitalized costs of
crude oil and natural gas properties exceeded the present value of its estimated
proved reserves by $71.3 million ($38.9 million on the U.S. properties and $32.4
million on the Canadian properties). These amounts were calculated considering
2001 year-end prices of $19.84 per Bbl for crude oil and $2.57 per Mcf for
natural gas as adjusted to reflect the expected realized prices for each of the
full cost pools. We did not adjust capitalized costs for our U.S. properties
because subsequent to December 31, 2001, crude oil and natural gas prices
increased such that capitalized costs for our U.S. properties did not exceed the
present value of the estimated proved crude oil and natural gas reserves for our
U.S. properties as determined using increased realized prices on March 22, 2002
of $24.16 per Bbl for crude oil and $2.89 per Mcf for natural gas. We also used
the subsequent prices to evaluate our Canadian properties, and reduced the 2001
year-end write-down to an amount of $2.6 million on those properties.

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

                                       35
will not experience additional write-downs in the future. If commodity prices
decline or if any of our proved reserves are revised downward, a further
write-down of the carrying value of our crude oil and natural gas properties may
be required. See Note 18 of Notes to Consolidated Financial Statements.

     MINORITY INTEREST. We owned a 49% interest in the earnings of Old Grey Wolf
through August 2001. The consolidated financial statements include the results
of Old Grey Wolf. The net income attributable to the minority interest in Old
Grey Wolf through August 2001 increased to $1.7 million in 2001 from $1.3
million in 2000. This increase is due to improved profitability of Old Grey Wolf
as a result of improved commodity prices received in 2001 as compared to 2000.
As of December 31, 2001, we owned 100% of the outstanding capital stock of Old
Grey Wolf. We obtained the additional interest in Old Grey Wolf pursuant to a
tender offer and subsequent compulsory merger, completed in September 2001.

     INCOME TAXES. Income tax expense decreased from $3.7 million for the year
ended December 31, 2000 to $2.4 million for the year ended December 31, 2001.
The decrease was primarily due to the tax benefit relating to the ceiling
limitation write-down relating to Canadian producing properties in 2001.

     OTHER. In March 2000, Abraxas Wamsutter L.P. sold all of its interest in
its crude oil and natural gas properties to a third party. Prior to the sale of
these properties, effective January 1, 2000, Abraxas' equity investee share of
crude oil and natural gas property cost, results of operations and amortization
were not material to consolidated operations or financial position. As a result
of the sale, Abraxas received approximately $34 million, which represented a
proportional interest in Abraxas Wamsutter L.P.'s proved properties.

     In June 2000, we retired $3.5 million of the Old Notes and $3.6 million of
the Second Lien Notes at a discount of $1.8 million.

COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999

     OPERATING REVENUE. During the year ended December 31, 2000, operating
revenue from crude oil, natural gas and natural gas liquids sales increased by
$14.0 million from $59.0 million in 1999 to $73.0 million in 2000. This increase
was primarily attributable to an increase in commodity prices. Increased prices
contributed $26.5 million in additional revenue, which was offset by $12.5
million due to a decrease in production volumes. The decline in production was
due to the disposition of certain properties, primarily in Canada.

     Natural gas liquids volumes declined from 376.5 MBbls in 1999 to 314.9
MBbls in 2000. Crude oil sales volumes declined from 777.9 MBbls in 1999 to
636.7 MBbls during 2000. Natural gas sales volumes decreased from 25.7 Bcf in
1999 to 20.0 Bcf in 2000. Production declines were primarily attributable to our
disposition of assets during 2000.

     Average sales prices in 2000 net of hedging losses were:

       -  $18.69 per Bbl of crude oil,

       -  $22.42 per Bbl of natural gas liquids, and

       -  $2.71 per Mcf of natural gas.

     Average sales prices in 1999 net of hedging losses were:

       -  $14.57 per Bbl of crude oil,

       -  $13.40 per Bbl of natural gas liquids, and

       -  $1.66 per Mcf of natural gas.

     We also had natural gas processing revenue of $2.7 million in 2000 as
compared to $4.2 million in 1999. The decline in processing revenue is due to a
decrease in third party natural gas being processed. We are utilizing more of
the plant capacity to process our own natural gas, leaving less capacity for
third party processing.

     LEASE OPERATING EXPENSE. LOE and natural gas processing costs increased by
$0.8 million from $17.9 million for 1999 to $18.8 million for 2000. LOE on a per
Mcfe basis for 2000 was $0.73 per Mcfe as compared to

                                       36
$0.55 per Mcfe in 1999. The increase was due primarily to a general increase in
the cost of services and increased production taxes due to higher commodity
prices in 2000 as compared to 1999. The increase in the per Mcfe cost is due to
a decline in production volumes.

     G&A EXPENSE. G&A expense increased from $5.3 million for the year ended
December 31, 1999 to $6.5 million for the year ended December 31, 2000. The
increase in G&A was due to the loss of approximately $600,000 of overhead billed
to Abraxas Wamsutter L.P., substantially all of the assets of which were sold in
March 2000, and an increase in director compensation as a result of our
restructuring in the fourth quarter of 1999. Our G&A expense on a per Mcfe basis
increased from $0.16 in 1999 to $0.27 in 2000. The increase in the per Mcfe cost
was due partly to lower production volumes in 2000 as compared to 1999 as well
as the increase in expense in 2000 as compared to 1999.

     G&A - STOCK-BASED COMPENSATION EXPENSE. Effective July 1, 2000, the
Financial Accounting Standards Board ("FASB") issued FIN 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of
Accounting Principles Board Opinion No. ("APB") 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be subject to variable accounting until they are exercised, forfeited, or
expired. In March 1999, we amended the exercise price to $2.06 on all options
with an existing exercise price greater than $2.06. We recognized approximately
$2.8 million as stock-based compensation expense during 2000 related to these
repricings.

     DD&A EXPENSE. DD&A expense increased by $1.1 million from $34.8 million for
the year ended December 31, 1999 to $35.9 million for the year ended December
31, 2000. Our DD&A expense on a per Mcfe basis for 1999 was $1.07 per Mcfe as
compared to $1.40 per Mcfe in 2000. The increase in DD&A is the result of higher
finding costs for 2000.

     INTEREST EXPENSE. Interest expense decreased by $5.7 million from $36.8
million to $31.1 million for the year ended December 31, 2000 compared to 1999.
This decrease resulted from reduced debt levels during 2000 compared to 1999.
The reduced debt level was the result of the exchange of approximately $269.7
million principal amount of our ld Notes for approximately $188.8 million
principal of our Second Lien Notes, shares of our common stock and contingent
value rights.

     CEILING LIMITATION WRITE-DOWN. We record the carrying value of our crude
oil and natural gas properties using the full cost method of accounting for
crude oil and natural gas properties. Under this method, we capitalize the cost
to acquire, explore for and develop crude oil and natural gas properties. Under
the full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties less related deferred taxes, is limited by country, to
the lower of the unamortized cost or the cost ceiling, defined as the sum of the
present value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, we are
subject to a ceiling limitation write-down to the extent of such excess. A
ceiling limitation write-down is a charge to earnings, which does not impact
cash flow from operating activities. However, such write-downs do impact the
amount of our stockholders' equity.

     The risk that we will be required to write-down the carrying value of our
crude oil and natural gas assets increases when crude oil and natural gas prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. For the year ended December 31, 1999,
we recorded a write-down of $19.1 million, $11.9 million after tax, related to
our Canadian properties. We cannot assure you that we will not experience
additional write-downs in the future. Should commodity prices decline or if any
of our proved reserves are revised downward , a further write-down of the
carrying value of our crude oil and natural gas properties may be required. See
Note 18 of Notes to Consolidated Financial Statements.

     MINORITY INTEREST. Minority interest in the net income of Old Grey Wolf,
our 49% owned subsidiary during 1999 and 2000, increased to $1.3 million in 2000
from $269,000 in 1999. This increase was due to improved profitability of Old
Grey Wolf as a result of improved commodity prices received in 2000 as compared
to 1999.

                                       37
INCOME TAXES. Income tax expense (benefit) increased from a benefit of
$12.6 million for the year ended December 31, 1999 to expense of $3.7 million
for the year ended December 31, 2000. The benefit for the year ended December
31, 1999 was primarily attributable to the ceiling limitation write down that
occurred in that year.

     OTHER. In March 2000, Abraxas Wamsutter L.P. sold all of its interest in
its crude oil and natural gas properties to a third party. Prior to the sale of
these properties, effective January 1, 2000, Abraxas' equity investee share of
crude oil and natural gas property cost, results of operations and amortization
were not material to consolidated operations or financial position. As a result
of the sale, Abraxas received approximately $34 million, which represented a
proportional interest in Abraxas Wamsutter L.P.'s proved properties.

     In June 2000, we retired $3.5 million of the Old Notes and $3.6 million of
the Second Lien Notes at a discount of $1.8 million.

SUBSEQUENT EVENT - FINANCIAL RESTRUCTURING

     In recent years, our cash flow from operations has been severely impacted
by volatile commodity prices and reduced production resulting from sales of
producing properties. Our reduced operating cash flow and high debt levels have
put significant strain on our liquidity and cash position. During 2002, in order
to address our need for additional liquidity and alternative sources of capital,
the Planning Committee of the Board of Directors of Abraxas engaged Jefferies &
Company, Inc. to assist with a strategic review of Abraxas' options to obtain
additional liquidity. As a result of this strategic review, the Board of
Directors approved an overall financial restructuring, comprised of the
transactions described below, which were completed as of January 23, 2003.

     EXCHANGE OFFER. On January 23, 2003 Abraxas completed an exchange offer,
pursuant to which it offered to exchange cash and securities for all of the
outstanding 11 1/2% Senior Secured Notes due 2004, Series A, or second lien
notes, and 11 1/2% Senior Notes due 2004, Series D, or old notes, issued by
Abraxas and Canadian Abraxas. In exchange for each $1,000 principal amount of
notes tendered in the exchange offer, tendering noteholders received

       -  cash in the amount of $264;

       -  an 11 1/2% Secured Note due 2007, Series A, with a principal amount
          equal to $610; and

       -  31.36 shares of Abraxas common stock.

     At the time the exchange offer was made, there were approximately $190.1
million of the second lien notes and $800,000 of the old notes outstanding.
Holders of approximately 94% of the aggregate outstanding principal amount of
the second lien notes and old notes tendered their notes for exchange in the
offer. Pursuant to the procedures for redemption under the applicable indenture
provisions, the remaining 6% of the aggregate outstanding principal amount of
the second lien notes and old notes were redeemed at 100% of the principal
amount plus accrued and unpaid interest, for approximately $11.8 million. The
indentures for the second lien notes and old notes have been duly discharged. In
connection with the exchange offer, Abraxas made cash payments of approximately
$47.4 million and issued approximately $109.5 million in principal amount of
notes and 5,633,291 shares of Abraxas common stock, each of which are being
offered for resale under this prospectus. Fees and expenses incurred in
connection with the exchange offer were approximately $3.8 million.

     SALE OF STOCK OF CANADIAN ABRAXAS AND OLD GREY WOLF. Contemporaneously with
the closing of the exchange offer, on January 23, 2003, Abraxas completed the
sale to a wholly-owned subsidiary of PrimeWest Energy Inc. of all of the
outstanding capital stock of two of Abraxas' former wholly-owned subsidiaries,
Canadian Abraxas and Old Grey Wolf for approximately $138 million before net
adjustments of $3.4 million. The aggregate purchase price was allocated to the
shares of capital stock of Canadian Abraxas and Old Grey Wolf as follows:
NUMBER OF SHARES               PURCHASE PRICE
Canadian Abraxas        5,751 common shares            $68 million
Old Grey Wolf           12,804,628 common shares       $70 million

                             TOTAL PURCHASE PRICE:     $138  MILLION
                                                       -------------
38
After purchase price adjustments and related costs and expenses of
approximately $5.9 million were made, the purchase price realized for the sale
of Canadian Abraxas and Old Grey Wolf was $132.1 million. Upon consummation of
the sale, Old Grey Wolf repaid the outstanding indebtedness under its credit
agreement with Mirant Canada Energy Capital, Ltd. in the amount of $46.3
million, which reduced the net proceeds from the sale by a corresponding amount.
The net cash proceeds from the sale were $85.8 million, all of which has been
utilized in connection with the financial restructuring.

     The properties transferred in conjunction with the sale of Canadian Abraxas
and Old Grey Wolf amounted to approximately 35% of our total proved reserves at
June 30, 2002 and approximately 60% of our production for the quarter ended
September 30, 2002. Under the terms of the agreement with PrimeWest, Abraxas has
retained certain assets formerly held by Canadian Abraxas and Old Grey Wolf,
including all of Canadian Abraxas' and Old Grey Wolf's undeveloped acreage
existing at the time of the sale, which includes all of our interests in the
Ladyfern area. These assets have been contributed to New Grey Wolf, a new
wholly-owned Canadian subsidiary of Abraxas. Portions of this undeveloped
acreage will be developed by PrimeWest and New Grey Wolf under a farmout
arrangement. Under the farmout arrangements, PrimeWest has agreed to participate
in the development of certain lands of New Grey Wolf in the Caroline and Pouce
Coupe areas of Alberta. PrimeWest has the right to obtain a 60% interest in
certain wells if it bears 100% of the expense of drilling such wells. In
addition, New Grey Wolf and PrimeWest will have an area of mutual interest in
respect of the lands surrounding the Caroline area where each party will be
entitled to participate in the acquisition of the other, with New Grey Wolf
participating with a 40% interest and PrimeWest participating with a 60%
interest.

     REDEMPTION OF FIRST LIEN NOTES. On January 24, 2003, we completed the
redemption of 100% of our outstanding 12?% Senior Secured Notes, Series A, or
first lien notes, with approximately $66.4 million of the proceeds from the sale
of Canadian Abraxas and Old Grey Wolf. Prior to the redemption, we had $63.5
million of our first lien notes outstanding. Under the terms of the indenture
for the first lien notes, as of March 15, 2002, we had the right to redeem the
first lien notes at 100% of the outstanding principal amount of the notes, plus
accrued and unpaid interest to the date of redemption, and to discharge the
indenture upon call of the first lien notes for redemption and deposit of the
redemption funds with the trustee. We exercised these rights on January 23, and
upon the discharge of the indenture, the trustee released the collateral
securing our obligations under the first lien notes.

     NEW SENIOR CREDIT AGREEMENT. Contemporaneously with the closing of the
exchange offer and the sale of Canadian Abraxas and Old Grey Wolf, on January
23, 2003, Abraxas entered into a new senior credit agreement providing a term
loan facility of $4.2 million and a revolving credit facility with a maximum
borrowing base of up to $50 million. For a detailed description of the credit
facilities under the new senior credit agreement, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Indebtedness" beginning on page 43.

     SOURCES AND USES OF FUNDS IN FINANCIAL RESTRUCTURING

     The following table illustrates the sources and uses of funds for the
financial restructuring.
SOURCES OF FUNDS                                         USES OF FUNDS
                                          (US DOLLARS IN MILLIONS)
Sale of Canadian Abraxas and
Old Grey Wolf (1)......................         $ 132.1    Redemption of First Lien Notes (3).....      $ 66.4
New Senior Credit Agreement (2)........            46.7    Exchange Offer Cash Payments (4).......        59.2
                                                           Repayment of Old Grey Wolf

                                                           Credit Facility (5)....................        46.3
                                                           Fees and Expenses......................         6.9
                                                                                                        ------
Total Sources..........................         $ 178.8    Total Uses.............................      $178.8
                                                =======                                                =======
----------
(1)  Represents CDN $205.9 million converted to US $134.6 million at an exchange
     rate of US $0.6538 per CDN $1.00, less fees and expenses of $2.5 million.

(2)  Includes term loan facility of $4.2 million and outstanding amounts under
     the revolving credit facility of $42.5 million at the time of the financial
     restructuring.

(3)  Represents $63.5 million in principal amount of the first lien notes and
     accrued interest of $2.9 million.

                                       39
(4)  Represents payments of $47.4 million for the cash portion of the exchange
     offer consideration and payments of $11.8 million for the redemption of the
     second lien notes and old notes remaining outstanding upon closing of the
     exchange offer.

(5)  Represents CDN $70.8 million converted to US $46.3 million at an exchange
     rate of US $0.6538 per CDN $1.00.

LIQUIDITY AND CAPITAL RESOURCES

     GENERAL. The crude oil and natural gas 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:

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

       -  acquisition of interests in crude oil and natural gas properties; and

       -  production and transportation facilities.

     The amount of capital available to us will affect our ability to service
our existing 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 are primarily cash on hand, cash from operating
activities, the sale of properties and funding under the new revolving credit
facility. Our overall liquidity depends heavily on the prevailing prices of
crude oil and natural gas and our production volumes of crude oil and natural
gas. Significant downturns in commodity prices, such as that experienced in the
last nine months of 2001 and the first quarter of 2002, can reduce our cash from
operating activities. Although we have hedged a portion of our natural gas and
crude oil production and will continue this practice as required pursuant to the
new senior credit agreement, future crude oil and natural gas price declines
would have a material adverse effect on our overall results, and therefore, our
liquidity. Furthermore, low crude oil and natural gas prices could affect our
ability to raise capital on terms favorable to us. Similarly, our cash flow from
operations will decrease if the volume of crude oil and natural gas we produce
decreases. Our production volumes will decline as reserves are produced. In
addition, due to sales of properties in 2002 and January 2003, we now have
significantly reduced reserves and production levels. In the future we may sell
additional properties, which could further reduce our production volumes. To
offset the loss in production volumes resulting from natural field declines and
sales of producing properties, we must conduct successful exploration,
exploitation and development activities, acquire additional producing properties
or identify additional behind-pipe zones or secondary recovery reserves. While
we have had some success in pursuing these activities, historically, we have not
been able to fully replace the production volumes lost from natural field
declines and property sales.

     WORKING CAPITAL. At September 30, 2002, on a pro forma basis, we had
current assets of $13.3 million and current liabilities of $5.2 million
resulting in working capital of $8.1 million. The majority of our current
liabilities at September 30, 2002, on a pro forma basis, were trade accounts
payable of $2.6 million and revenues due third parties of $2.6 million. Our
capital resources and liquidity will be affected by realized crude oil and
natural gas prices, our production levels and by the timing and amount of our
cash interest payments under the revolving credit facility, which we estimate
will be approximately $3.5 million per year. We do not expect to make cash
interest payments with respect to the outstanding notes, and the issuance of new
notes in lieu of cash interest payments will not affect our working capital
balance.

                                       40
CAPITAL EXPENDITURES. Capital expenditures, excluding property divestitures
during the first nine months of 2002, were $33.4 million compared to $44.8
million during the same period of 2001. The table below sets forth the
components of these capital expenditures on a historical basis for the nine
months ended September 30, 2002 and 2001.
NINE MONTHS ENDED
                                                                               SEPTEMBER 30,
                                                                  -----------------------------------
                                                                        2002                 2001
                                                                  ------------------- ---------------
Expenditure category (in thousands):
    Acquisitions................................................   $           -        $         -
    Development.................................................          33,240             44,666
    Facilities and other........................................             152                327
                                                                  --------------        ------------
        Total...................................................         $33,392        $    44,793
                                                                  ==============        ============
Investing activities provided $286,000 net during the first nine months of
2002. $33.7 million was provided from the proceeds of property sales during the
period. $33.2 million was utilized primarily for the development of crude oil
and natural gas properties and other facilities. This compares to using $31.7
million net during the first nine months of 2001, $44.8 million of which was
utilized for the development of crude oil and natural gas properties and $15.4
million of which was provided from the sale of properties.

     Our capital expenditures are subject to limitations imposed under the
revolving credit facility, including a maximum annual capital expenditure budget
of $15 million for 2003, subject to reduction in the event of a reduction in our
net assets. We currently expect to have a capital expenditure budget of up to $8
million for the first quarter of 2003. Our capital expenditures could include
expenditures for acquisition of producing properties if such opportunities
arise, but we currently have no agreements, arrangements or undertakings
regarding any material acquisitions. We have no material long-term capital
commitments and are consequently able to adjust the level of our expenditures as
circumstances dictate. Additionally, the level of capital expenditures will vary
during future periods depending on market conditions and other related economic
factors. Should the prices of crude oil and natural gas decline from current
levels, our cash flows will decrease which may result in a reduction of the
capital expenditures budget. If we decrease our capital expenditures budget, we
may not be able to offset crude oil and natural gas production volumes decreases
caused by natural field declines and sales of producing properties.

     SOURCES OF CAPITAL. The net funds provided by and/or used in each of the
operating, investing and financing activities are summarized in the following
table and discussed in further detail below:
NINE MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                  -------------------------------------
                                                                         2002                2001
                                                                  ------------------- -----------------
                                                                              (IN THOUSANDS)
                                                                  -------------------------------------
Net cash (used) provided by operating activities                   $   (2,820)         $   26,089
  Net cash (used) provided by investing activities                          286             (31,680)
  Net cash provided by financing activities                               8,605               4,240
                                                                  ------------------- -----------------
  Total                                                              $    6,071              (1,351)
                                                                  =================== =================
Operating activities during the nine months ended September 30, 2002 used
$2.8 million cash compared to providing $26.1 million in the same period in
2001. The 2002 period included an operating loss from operations, after non-cash
items, of $4.6 million compared to 2001 results of a $19.8 million gain. Lower
commodity prices realized in 2002 compared to 2001 significantly reduced
operating cash flow. Investing activities provided $286,000 for the first nine
months of 2002 compared to requiring $31.7 million for the same period of 2001.
Capital expenditures for development activities required $44.8 million in the
2001 period compared to only $33.4 million in 2002. Asset sale proceeds total
$33.7 million in the first nine months of 2002, compared to only $15.4 million
in 2001. These additional proceeds were utilized to provide liquidity lost due
to lower commodity prices. Financing activities provided $8.6 million for the
first nine months of 2002 compared to providing $4.2 million for the same

                                       41
period of 2001. Borrowings under the Old Grey Wolf credit facility were $4.2
million higher in 2002 as compared to 2001. These incremental borrowings were
utilized to fund drilling activities on Canadian assets.

     CURRENT LIQUIDITY REQUIREMENTS. We currently have substantial indebtedness
and debt service requirements and we have had recurring net losses in four of
the last five years and for the first nine months of 2002. Our loss of
approximately $112.8 million during the nine months ended September 30, 2002
($43.8 million on a pro forma basis) was due primarily to non-cash proved
property impairments of approximately $116 million ($28 million on a pro forma
basis) resulting from depressed commodity prices. At September 30, 2002,
Abraxas' current liabilities of approximately $86.7 million exceeded current
assets of $22.6 million resulting in a working capital deficit of $64.1 million.
At September 30, 2002, on a pro forma basis, our current assets of $13.3 million
exceeded liabilities of $5.2 million, resulting in working capital of $8.1
million. We also had a shareholders' deficit of $138.0 million ($67.5 million on
a pro forma basis). The success of our future operations will require us to meet
our debt obligations and to make substantial capital expenditures for the
exploitation, development, exploration and production of crude oil and natural
gas. We plan to use cash flow from operations and availability under the
revolving credit facility established under the new senior credit agreement to
continue developing our properties. However, our utilizable cash flow from
operations will be effectively limited by mandatory cash balance reductions
required under the revolving credit facility at the end of each quarter, which
are described in the section entitled "--Indebtedness--New Senior Credit
Agreement" on page 43 of this prospectus.

     FUTURE CAPITAL RESOURCES. We will have four principal sources of liquidity
going forward: (i) cash on hand, (ii) cash flow from operations, (iii)
availability under the revolving credit facility, and (iv) sales of producing
properties. In addition we may attempt to raise additional capital through the
issuance of additional debt or equity securities. However, the terms of the
indenture governing our outstanding notes and the new senior credit agreement
substantially restrict our ability to:

       -  incur additional indebtedness;

       -  incur liens;

       -  pay dividends or make certain other restricted payments;

       -  consummate certain asset sales;

       -  enter into certain transactions with affiliates;

       -  merge or consolidate with any other person; or

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

     Due to the restrictions contained in the indenture and new senior credit
agreement described above, our best opportunity for additional sources of
liquidity and capital will be through the issuance of equity securities or
through the disposition of assets.

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

       -  Long-term debt

       -  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
January 31, 2003.
Payments due in:
----------------------------------------------------------------------------------------------------------------------
Contractual Obligations
(dollars in thousands)              Total          2003          2004          2005          2006           2007
------------------------------- -------------- ------------- ------------- ------------- -------------- --------------
Long-Term Debt (1)               $ 231,996             --            --          --         $ 47,996(2)  $  184,000(3)
Operating Leases (4)             $     885         $  236        $  236      $  236         $    177             --
42
(1)  Includes the amounts outstanding under the term loan facility, the
     revolving credit facility and the outstanding notes.

(2)  Represents repayment of the term loan facility and the revolving credit
     facility and assumes that interest will be capitalized under the term loan
     facility and that periodic interest on the senior credit facility will be
     paid on a monthly basis and that we will not draw down additional funds
     thereunder.

(3)  Assumes that new notes will be issued in lieu of cash interest payments on
     the outstanding notes, through the date of maturity.

(4)  Office lease obligations. Leases for office space for Abraxas and New Grey
     Wolf expire in April 2006 and May 2003, respectively.

     OTHER OBLIGATIONS. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, 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. As cash flow permits our capital expenditure budget for
the remainder of 2002 for existing operations and leaseholds is approximately
$5.1 million.

     INDEBTEDNESS. The recently completed financial restructuring resulted in
the retirement of our first lien notes, second lien notes and old notes,
together with the Old Grey Wolf credit facility. Our existing indebtedness
consists of the senior credit facility and the notes issued in connection with
the financial restructuring.

     11 1/2% SECURED NOTES. On January 23, 2003, Abraxas issued $109.5 million
in principal amount of our 11 1/2% Secured Notes due 2007, Series A, in exchange
for the second lien notes and old notes tendered in the exchange offer. The
notes were issued under an indenture with U.S. Bank, N.A. For a more complete
description of the notes, see "Description of the Notes" beginning on page 79 of
this prospectus.

     NEW SENIOR CREDIT AGREEMENT. Contemporaneously with the closing of the
exchange offer and the sale of Abraxas' Canadian subsidiaries, Abraxas entered
into a new senior credit agreement providing a term loan facility and a
revolving credit facility as described below. Subject to earlier termination on
the occurrence of events of default or other events, the stated maturity date
for both the term loan facility and the revolving credit facility is January 22,
2006. In the event of an early termination, we will be required to pay a
prepayment premium, except in the limited circumstances described in the new
senior credit agreement. Outstanding amounts under both facilities bear interest
at the prime rate announced by Wells Fargo Bank, N.A. plus 4.5%. Any amounts in
default under the term loan facility will accrue interest at an additional 4%.
At no time will the amounts outstanding under the new senior credit agreement
bear interest at a rate less than 9%.

     TERM LOAN FACILITY. Abraxas has borrowed $4.2 million pursuant to a term
loan facility, all of which was used to make cash payments in connection with
the financial restructuring. Accrued interest under the term loan facility will
be capitalized and added to the principal amount of the term loan facility until
maturity.

     REVOLVING CREDIT FACILITY. Lenders under the new senior credit agreement
have provided a revolving credit facility to Abraxas with a maximum borrowing
base of up to $50 million. Our current borrowing base under the revolving credit
facility is $49.9 million, subject to adjustments based on periodic calculations
and mandatory prepayments under the senior credit agreement. Portions of accrued
interest under the revolving credit facility may be capitalized and added to the
principal amount of the revolving credit facility. As of the date of this
prospectus, we have borrowed $42.5 million under the revolving credit facility,
all of which was used to make cash payments in connection with the financial
restructuring. We plan to use the remaining borrowing availability under the new
senior credit agreement to fund our operations, including capital expenditures.

     COVENANTS. Under the new senior credit agreement, Abraxas is subject to
customary covenants and reporting requirements. Certain financial covenants
require Abraxas to maintain minimum levels of consolidated EBITDA (as defined in
the new senior credit agreement), minimum ratios of consolidated EBITDA to cash
interest expense and a limitation on annual capital expenditures. In addition,
at the end of each fiscal quarter, if the aggregate amount of our cash and cash
equivalents exceeds $2.0 million, we are required to repay the loans under the
new senior credit agreement in an amount equal to such excess. The new senior
credit agreement also requires

                                       43
us to enter into hedging agreements on not less than 25% or more than 75% of our
projected oil and gas production. We are also required to establish deposit
accounts at financial institutions acceptable to the lenders and we are required
to direct our customers to make all payments into these accounts. The amounts in
these accounts will be transferred to the lenders upon the occurrence and during
the continuance of an event of default under the new senior credit agreement.

     In addition to the foregoing and other customary covenants, the new senior
credit agreement contains a number of covenants that, among other things,
restrict our ability to:

       -  incur additional indebtedness;

       -  create or permit to be created any liens on any of our properties;

       -  enter into any change of control transactions;

       -  dispose of our assets;

       -  change our name or the nature of our business;

       -  make any guarantees with respect to the obligations of third parties;

       -  enter into any forward sales contracts;

       -  make any payments in connection with distributions, dividends or
          redemptions relating to our outstanding securities, or

       -  make investments or incur liabilities.

     GUARANTEES. The obligations of Abraxas under the new senior credit
agreement are guaranteed by Sandia Oil & Gas, Sandia Operating, Wamsutter, New
Grey Wolf, Western Associated Energy and Eastside Coal. Obligations under the
new senior credit agreement are secured by a first lien security interest in
substantially all of Abraxas' and the guarantors' assets, including all crude
oil and natural gas properties.

     EVENTS OF DEFAULT. The new senior credit facility contains customary events
of default, including nonpayment of principal or interest, violations of
covenants, inaccuracy of representations or warranties in any material respect,
cross default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in our financial condition.

     The foregoing summary is qualified in its entirety by the terms of the new
senior credit agreement, which has been filed with the SEC as an exhibit to the
registration statement of which this prospectus is a part.

     HEDGING ACTIVITIES. Our results of operations are significantly affected by
fluctuations in commodity prices and we seek to reduce our exposure to price
volatility by hedging our production through swaps, options and other commodity
derivative instruments. Under the new senior credit agreement, we are required
to enter into hedging agreements on not less than 25% or more than 75% of our
projected oil and gas production on an on-going basis. See "--Quantitative and
Qualitative Disclosures about Market Risk; Commodity Price Risk--Hedging
Sensitivity" for further information.

     NET OPERATING LOSS CARRYFORWARDS. At December 31, 2001 we had, subject to
the limitation discussed below, $115,900,000 of net operating loss carryforwards
for U.S. tax purposes. These loss carryforwards will expire from 2002 through
2021 if not utilized. At December 31, 2001, we had approximately $6,700,000 of
net operating loss carryforwards for Canadian tax purposes. These carryforwards
will expire from 2002 through 2008 if not utilized. In connection with the
financial restructuring, a significant portion of the U.S. loss carryforwards
will be utilized.

     As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the

                                       44
use of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $3,203,000 will be limited to approximately $235,000 per year.

     During 1992, we acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of the acquired
corporation of $257,000 acquired in the acquisition are limited to approximately
$115,000 per year.

     As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $6,590,000 will be limited as described above and in the following paragraph.

     An ownership change under Section 382 occurred in December 1999, following
the issuance of additional shares, as described in Note 5. It is expected that
the annual use of U.S. net operating loss carryforwards subject to this Section
382 limitation will be limited to approximately $363,000, subject to the lower
limitations described above. Future changes in ownership may further limit the
use of our carryforwards. In 2000 assets with built in gains were sold,
increasing the Section 382 limitation for 2001 by approximately $31,000,000.

     The annual Section 382 limitation may be increased during any year, within
5 years of a change in ownership, in which built-in gains that existed on the
date of the change in ownership are recognized.

     In addition to the Section 382 limitations, uncertainties exist as to the
future utilization of the operating loss carryforwards under the criteria set
forth under FASB Statement No. 109. Therefore, we have established a valuation
allowance of $39,670,000 and $62,496,000 for deferred tax assets at December 31,
2001 and September 30, 2002 respectively.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK; COMMODITY PRICE RISK

     COMMODITY PRICE RISK

     Our exposure to market risk rests primarily with the volatile nature of
crude oil, natural gas and natural gas liquids prices. We manage crude oil and
natural gas prices through the periodic use of commodity price hedging
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". Assuming the production
levels we attained during the nine months ended September 30, 2002, a 10%
decline in crude oil, natural gas and natural gas liquids prices would have
reduced our operating revenue, cash flow and net income (loss) by approximately
$1.4 million for the nine months ended September 30, 2002.

     HEDGING SENSITIVITY

     On January 1, 2001, we adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, we use only
cash flow hedges and the remaining discussion will relate exclusively to this
type of derivative instrument. If the derivative qualifies for hedge accounting,
the gain or loss on the derivative is deferred in Other Comprehensive
Income/Loss, a component of Stockholder's Equity, to the extent that the hedge
is effective.

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

                                       45
Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income and adjustments to carrying amounts on hedged production
are included in natural gas or crude oil production revenue in the period that
the related production is delivered.

     The following table sets forth our hedging position as of the date of this
prospectus.
Time Period                     Notional Quantities                   Price                Fair Value
---------------------------------------- ------------------------------ ------------------------------ ----------------
February 1, 2003--July 31, 2003          5,000  MMBtu  of production    Option  Collar  with floor of        --
                                         per day                        $4.00 and ceiling of $6.25
In 2000, 2001 and the nine month period ended September 30, 2002, we
experienced hedging losses of $20.2 million, $12.1 million and $2.8 million,
respectively. In October 2002, all of these hedge agreements expired. Under the
expired hedge agreements, we made total payments to various counterparties in
the amount of $35.1 million.

     Under the terms of the new senior credit agreement, we are required to
enter into hedging transactions with respect to not less than 25% nor more than
75% of our crude oil and natural gas production on an ongoing basis. As of
January 23, 2003, we have entered into a collar option agreement with respect to
5,000 MMBtu per day, or approximately 25% of our production, at a maximum call
price of $6.25 per MMBtu and a minimum put price of $4.00 per MMBtu. As of the
date of this prospectus, the fair market value of the collar option agreement is
not material. For Abraxas, the fair value of the hedging instrument was
determined based on the base price of the hedged item and NYMEX forward price
quotes.

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

     INTEREST RATE RISK

     At September 30, 2002, substantially all of our long-term debt was at fixed
interest rates and not subject to fluctuations in market rates. At September 30,
2002, on pro forma basis, we had approximately $46.7 million in outstanding
indebtedness under the new senior credit agreement, accruing interest at a rate
of prime plus 4.5%, subject to a minimum interest rate of 9.0%. In the event
that the prime rate (currently 1.5%) rises above 4.5% the interest rate
applicable to our outstanding indebtedness under the new senior credit agreement
will rise accordingly. For every percentage point that the prime rate rises
above 4.5%, our interest expense would increase by approximately $467,000 on an
annual basis. The remainder of our long-term debt accrues interest at fixed
rates and is accordingly not subject to fluctuations in market rates.

     FOREIGN CURRENCY

     Our Canadian operations are measured in the local currency of Canada. As a
result, our financial results could be affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre tax loss of $94.4 million for the nine months ended
September 30, 2002. It is estimated that a 5% change in the value of the U.S.
dollar to the Canadian dollar would have changed our pre tax income by
approximately $4.7 million. We do not maintain any derivative instruments to
mitigate the exposure to translation risk. However, this does not preclude the
adoption of specific hedging strategies in the future.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires that management apply accounting
policies and make estimates and assumptions that affect results of

                                       46
operations and the reported amounts of assets and liabilities in the financial
statements. The following represents those policies that management believes are
particularly important to the financial statements and that require the use of
estimates and assumptions to describe matters that are inherently uncertain.

     FULL COST METHOD OF ACCOUNTING FOR CRUDE OIL AND NATURAL GAS ACTIVITIES.
SEC Regulation S-X defines the financial accounting and reporting standards for
companies engaged in crude oil and natural gas activities. Two methods are
prescribed: the successful efforts method and the full cost method. Abraxas has
chosen to follow the full cost method. At the time it was adopted, management
believed that this method would be preferable, as earnings tend to be less
volatile than under the successful efforts method. See Note 1 of the Notes to
Consolidated Financial Statements.

     However, the full cost method makes us susceptible to significant non-cash
charges during times of volatile commodity prices because the full cost pool may
be impaired when prices are low. These charges are not recoverable when prices
return to higher levels. We have experienced this situation several times over
the years and experienced it again in 2001. Our crude oil and natural gas
reserves have a relatively long life. However, temporary drops in commodity
prices can have a material impact on our business including impact from the full
cost method of accounting.

     Under the full cost method of accounting, we record the carrying value of
our crude oil and natural gas properties, and capitalize the cost to acquire,
explore for and develop crude oil and natural gas properties. The net
capitalized cost of crude oil and natural gas properties less related deferred
taxes, is limited by country, to the lower of the unamortized cost or the cost
ceiling, defined as the sum of the present value of estimated unescalated future
net revenues from proved reserves, discounted at 10%, plus the cost of
properties not being amortized, if any, plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any, less
related income taxes. If the net capitalized cost of crude oil and natural gas
properties exceeds the ceiling limit, we are subject to a ceiling limitation
write-down to the extent of such excess. A ceiling limitation write-down is a
charge to earnings which does not impact cash flow from operating activities.
However, such write-downs do impact the amount of our stockholders' equity.

     The risk that we will be required to write-down the carrying value of our
crude oil and natural gas assets increases when crude oil and natural gas prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. As of June 30, 2002, we recorded a
write-down of approximately $116 million due to volatile commodity prices. For
the year ended December 31, 2001, we recorded a write-down of $2.6 million,
related to our Canadian proved reserves. The write-down in 2001 was due to low
commodity prices. For the year ended December 31, 1999, we recorded a write-down
of $19.1 million, related to our Canadian properties. We cannot assure you that
we will not experience additional write-downs in the future. Should commodity
prices decline, a further write-down of the carrying value of our crude oil and
natural gas properties may be required. See Note 18 of Notes to Consolidated
Financial Statements.

     HEDGE ACCOUNTING. Statement of Financial Accounting Standards, ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", was
effective for us on January 1, 2001. SFAS 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, will be required to be recorded on the balance sheet at fair value. If
the derivative is designated a fair-value hedge, the changes in the fair value
of the derivative and the hedged item will be recognized in earnings. If the
derivative is designated a cash-flow hedge, changes in the fair value of the
derivative will be recorded in other comprehensive income (OCI) and will be
recognized in the income statement when the hedged item affects earnings. SFAS
133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in fair
value will we recognized in earnings. The fair value of hedging instruments is
determined based on the base price of the hedged item and NYMEX forward price
quotes.

NEW ACCOUNTING STANDARDS

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to
be recorded at fair value during the period incurred and an equal

                                       47
amount recorded as an increase in the value of the related long-lived asset. The
capitalized cost is depreciated over the useful life of the asset and the
obligation is accreted to its present value each period. SFAS No. 143 is
effective for us beginning January 1, 2003. We are currently evaluating the
impact the standard will have on our future results of operations and financial
condition.

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

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44,
and 64, Amendments of FASB Statement No. 13 and Technical Corrections." SFAS No.
145 clarifies guidance related to the reporting of gains and losses from
extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. SFAS No. 145 also amends
other existing pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions relating to the reporting of gains and losses from extinguishment of
debt become effective for us beginning January 1, 2003 with earlier adoption
encouraged. All other provisions of this standard have been effective for the us
as of May 15, 2002 and did not have a significant impact on our financial
condition or results of operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires costs
associated with exit of disposal activities to be recognized when they are
incurred rather than at the date of commitment to an exit or disposal plan. SFAS
No. 146 is effective for us beginning January 1, 2003. We are currently
evaluating the impact the standard will have on its results of operations and
financial condition.

     The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, " Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. We
are currently evaluating the impact on our results of operations and financial
condition if this Proposed Statement of Position is adopted in its current form.

     In January, 2003, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123 to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for annual financial statements for fiscal years ending after
December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. We have not
determined whether we will adopt the fair value based method of accounting for
stock-based employee compensation.

                                       48
BUSINESS

GENERAL

     We are an independent energy company engaged primarily in the exploration,
exploitation, development and production of crude oil and natural gas. Since
January 1, 1991, our principal means of growth has been through the acquisition
and subsequent development and exploitation of producing properties and related
assets. As a result of our historical acquisition activities, we believe we have
a substantial inventory of low risk opportunities, the exploitation and
development of which are critical to the maintenance and growth of our current
production levels. We seek to complement our exploitation and development
activities by selectively participating in exploration projects with experienced
industry partners.

     Our principal areas of operation are Texas, western Canada and Wyoming.
Since the beginning of 2002, we have sold a number of our producing properties.
For a description of these recent asset sales, see "--Recent Asset Sales - 2002"
and "--Recent Developments--Financial Restructuring--Sale of Stock of Canadian
Abraxas and Grey Wolf."

     At September 30, 2002, on a pro forma basis, we owned interests in 467,234
gross acres (372,860 net acres) and operated properties accounting for the
majority of our PV-10, affording us substantial control over the timing and
incurrence of operating and capital expenditures. At June 30, 2002, on a pro
forma basis, estimated total proved reserves were 111.6 Bcfe with an aggregate
PV-10 of $81.3 million.

BUSINESS STRATEGY

     Our primary business objectives are to increase reserves, production and
cash flow through the following:

       -  Low Cost Operations. We seek to maintain low lease operating and G&A
          expenses per Mcfe by operating a majority of our producing properties
          and by maintaining a high rate of production on a per well basis. As a
          result of this strategy, we have achieved per unit lease operating and
          G&A expenses that compare favorably with our peer companies.

       -  Exploitation of Existing Properties. We will continue to allocate a
          portion of our operating cash flow to the exploitation of our proved
          oil and natural gas properties. We believe that the proximity of our
          undeveloped reserves to existing production makes development of these
          properties less risky and more cost-effective than other drilling
          opportunities available to us. Given our high degree of operating
          control, the timing and incurrence of operating and capital
          expenditures is largely within our discretion. Abraxas' inventory of
          development opportunities is considerable and growing, our ability to
          exploit that inventory will depend on our ability to raise additional
          capital and on our discretionary cash flow, which in turn is highly
          dependent on future crude oil and natural gas prices.

RECENT DEVELOPMENTS

     FINANCIAL RESTRUCTURING

     In recent years, our cash flow from operations has been severely impacted
by volatile commodity prices and reduced production resulting from sales of
producing properties. Our reduced operating cash flow and high debt levels have
put significant strain on our liquidity and cash position. During 2002, in order
to address our need for additional liquidity and alternative sources of capital,
the Planning Committee of the Board of Directors of Abraxas engaged Jefferies &
Company, Inc. to assist with a strategic review of Abraxas' options to obtain
additional liquidity. As a result of this strategic review, the Board of
Directors approved an overall financial restructuring, comprised of the
transactions described below, which were completed as of January 23, 2003.

     EXCHANGE OFFER. On January 23, 2003 Abraxas completed an exchange offer,
pursuant to which it offered to exchange cash and securities for all of the
outstanding 11 1/2% Senior Secured Notes due 2004, Series A, or second lien
notes, and 11 1/2% Senior Notes due 2004, Series D, or old notes, issued by
Abraxas and Canadian Abraxas. In exchange for each $1,000 principal amount of
notes tendered in the exchange offer, tendering noteholders received

                                       49
-  cash in the amount of $264;

       -  an 11 1/2% Secured Note due 2007, Series A, with a principal amount
          equal to $610; and

       -  31.36 shares of Abraxas common stock.

     At the time the exchange offer was made, there were approximately $190.1
million of the second lien notes and $800,000 of the old notes outstanding.
Holders of approximately 94% of the aggregate outstanding principal amount of
the second lien notes and old notes tendered their notes for exchange in the
offer. Pursuant to the procedures for redemption under the applicable indenture
provisions, the remaining 6% of the aggregate outstanding principal amount of
the second lien notes and old notes were redeemed at 100% of the principal
amount plus accrued and unpaid interest, for approximately $11.8 million. The
indentures for the second lien notes and old notes have been duly discharged. In
connection with the exchange offer, Abraxas made cash payments of approximately
$47.4 million and issued approximately $109.5 million in principal amount of
notes and 5,633,291 shares of Abraxas common stock, each of which are being
offered for resale under this prospectus. Fees and expenses incurred in
connection with the exchange offer were approximately $3.8 million.

     SALE OF STOCK OF CANADIAN ABRAXAS AND OLD GREY WOLF. Contemporaneously with
the closing of the exchange offer, on January 23, 2003, Abraxas completed the
sale to a wholly-owned subsidiary of PrimeWest Energy Inc. of all of the
outstanding capital stock of two of Abraxas' former wholly-owned subsidiaries,
Canadian Abraxas and Old Grey Wolf for approximately $138 million before net
adjustments of $3.4 million. The aggregate purchase price was allocated to the
shares of capital stock of Canadian Abraxas and Old Grey Wolf as follows:
NUMBER OF SHARES               PURCHASE PRICE
                        -----------------------        ---------------
Canadian Abraxas        5,751 common shares           $ 68 million
Old Grey Wolf           12,804,628 common shares      $ 70 million

                                TOTAL PURCHASE PRICE: $ 138  MILLION
                                                       -------------
After purchase price adjustments and related costs and expenses of
approximately $5.9 million were made, the purchase price realized for the sale
of Canadian Abraxas and Old Grey Wolf was $132.1 million. Upon consummation of
the sale, Old Grey Wolf repaid the outstanding indebtedness under its credit
agreement with Mirant Canada Energy Capital, Ltd. in the amount of $46.3
million, which reduced the net proceeds from the sale by a corresponding amount.
The net cash proceeds from the sale were $85.8 million, all of which has been
utilized in connection with the financial restructuring.

     The properties transferred in conjunction with the sale of Canadian Abraxas
and Old Grey Wolf amounted to approximately 35% of our total proved reserves at
June 30, 2002 and approximately 60% of our production for the quarter ended
September 30, 2002. Under the terms of the agreement with PrimeWest, Abraxas has
retained certain assets formerly held by Canadian Abraxas and Old Grey Wolf,
including all of Canadian Abraxas' and Old Grey Wolf's undeveloped acreage
existing at the time of the sale, which includes all of our interests in the
Ladyfern area. These assets have been contributed to New Grey Wolf, a new
wholly-owned Canadian subsidiary of Abraxas. Portions of this undeveloped
acreage will be developed by PrimeWest and New Grey Wolf under a farmout
arrangement. Under the farmout arrangements, PrimeWest has agreed to participate
in the development of certain lands of New Grey Wolf in the Caroline and Pouce
Coupe areas of Alberta. PrimeWest has the right to obtain a 60% interest in
certain wells if it bears 100% of the expense of drilling such wells. In
addition, New Grey Wolf and PrimeWest will have an area of mutual interest in
respect of the lands surrounding the Caroline area where each party will be
entitled to participate in the acquisition of the other, with New Grey Wolf
participating with a 40% interest and PrimeWest participating with a 60%
interest.

     REDEMPTION OF FIRST LIEN NOTES. On January 24, 2003, we completed the
redemption of 100% of our outstanding 12?% Senior Secured Notes, Series A, or
first lien notes, with approximately $66.4 million of the proceeds from the sale
of Canadian Abraxas and Old Grey Wolf. Prior to the redemption, we had $63.5
million of our first lien notes outstanding. Under the terms of the indenture
for the first lien notes, as of March 15, 2002, we had the right to redeem the
first lien notes at 100% of the outstanding principal amount of the notes, plus
accrued and unpaid interest to the date of redemption, and to discharge the
indenture upon call of the first lien notes for

                                       50
redemption and deposit of the redemption funds with the trustee. We exercised
these rights on January 23, and upon the discharge of the indenture, the trustee
released the collateral securing our obligations under the first lien notes.

     NEW SENIOR CREDIT AGREEMENT. Contemporaneously with the closing of the
exchange offer and the sale of Canadian Abraxas and Old Grey Wolf, on January
23, 2003, Abraxas entered into a new senior credit agreement providing a term
loan facility of $4.2 million and a revolving credit facility with a maximum
borrowing base of up to $50 million. For a detailed description of the credit
facilities under the new senior credit agreement, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Indebtedness" beginning on page 43.

     SOURCES AND USES OF FUNDS IN FINANCIAL RESTRUCTURING

     The following table illustrates the sources and uses of funds for the
financial restructuring.
SOURCES OF FUNDS                                         USES OF FUNDS
                       ----------------                                         -------------
                                              (US DOLLARS IN MILLIONS)
Sale of Canadian Abraxas and
Old Grey Wolf (1)......................          $132.1    Redemption of First Lien Notes (3).....      $ 66.4
New Senior Credit Agreement (2)........            46.7    Exchange Offer Cash Payments (4).......        59.2
                                                           Repayment of Old Grey Wolf

                                                           Credit Facility (5)....................        46.3
                                                           Fees and Expenses......................         6.9
                                                                                                        ------
Total Sources..........................          $178.8    Total Uses.............................      $178.8
                                                 ======                                                 ======
----------

(1)  Represents CDN $205.9 million converted to US $134.6 million at an exchange
     rate of US $0.6538 per CDN $1.00, less fees and expenses of $2.5 million.

(2)  Includes term loan facility of $4.2 million and outstanding amounts under
     the revolving credit facility of $42.5 million at the time of the financial
     restructuring.

(3)  Represents $63.5 million in principal amount of the first lien notes and
     accrued interest of $2.9 million.

(4)  Represents payments of $47.4 million for the cash portion of the exchange
     offer consideration and payments of $11.8 million for the redemption of the
     second lien notes and old notes remaining outstanding upon closing of the
     exchange offer.

(5)  Represents CDN $70.8 million converted to US $46.3 million at an exchange
     rate of US $0.6538 per CDN $1.00.

     RECENT ASSET SALES - 2002

     In May of 2002, our former wholly-owned Canadian subsidiaries, Old Grey
Wolf and Canadian Abraxas, sold their interest in a natural gas processing plant
and associated crude oil and natural gas reserves in the Quirk Creek and Mahaska
fields in Alberta, Canada for approximately $22.9 million.

     In June 2002, Abraxas sold its interest in the East White Point field Texas
for approximately $9.8 million.

     In July 2002, Canadian Abraxas and Old Grey Wolf sold their interest in the
Milarville field in Alberta, Canada for approximately $1.1 million.

     DRILLING RESULTS

     We have successfully completed two new 100% working interest wells in the
Peace River Arch area of Canada which were not included in the closed sale of
producing properties. Also, in the Ladyfern area of Northeastern British
Columbia we are participating for an approximate 17% working interest in two
wells actively drilling. Two additional Ladyfern wells, with approximately 17%
and 50% working interest ownership are expected to commence during this winters
drilling season.

                                       51
IMPROVED COMMODITY PRICES

     Since December 31, 2001, commodity prices have improved significantly. As a
point of reference, on January 28, 2003, the NYMEX natural gas price was $5.44
per Mcf, and the NYMEX crude oil price was $32.67 per Bbl as compared to
December 31, 2001 natural gas price of $2.57 per Mcf and crude oil price of
$19.84 per Bbl. The improvement in prices since December 31, 2001, has limited
our potential impairment write down of crude oil and natural gas properties at
year end 2001 and if such prices are sustained, should improve our liquidity and
cash flows. For a more detailed description of commodity prices, you should read
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations."

MARKETS AND CUSTOMERS

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

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

     Substantially all of our crude oil and natural gas is sold at current
market prices under short-term contracts, as is customary in the industry.
During the year ended December 31, 2001, three purchasers accounted for
approximately 41% of our crude oil and natural gas sales. We believe that there
are numerous other companies available to purchase our crude oil and natural gas
and that the loss of one or more of these purchasers would not materially affect
our ability to sell crude oil and natural gas. The prices we receive for the
sale of our crude oil and natural gas are subject to our hedging activities. You
should read the discussion under "Management's Discussion and Analysis of
Financial Condition And Results of Operations -- Liquidity and Capital
Resources" and "Quantitative and Qualitative Disclosures about Market Risk;
Commodity Price Risk" for more information regarding our hedging activities.

PRIMARY OPERATING AREAS

     TEXAS

     Our U.S. operations are concentrated in South and West Texas with over 99%
of the PV-10 of our U.S. crude oil and natural gas properties at December 31,
2001, located in those two regions. We operate 91% of our wells in Texas.
Operations in South Texas are concentrated along the Edwards trend in Live Oak
and Dewitt Counties and in the Frio/Vicksburg trend in San Patricio County. We
own an average 78% working interest in 57

                                       52
wells with average daily production of 444 net Bbls of crude oil and NGLs and
14,057 net Mcf of natural gas per day for the year ended December 31, 2001. As
of December 31, 2001 we had estimated net proved reserves in South Texas of
46,521 Mmcfe (78% natural gas) with a PV-10 of $35.6 million, 80% of which was
attributable to proved developed reserves. Our West Texas operations are
concentrated along the deep Devonian/Ellenburger formations and shallow Cherry
Canyon sandstones in Ward County, the Spraberry trend in Midland County and in
the Sharon Ridge Clearfork Field in Scurry County. We own an average 76% working
interest in 154 wells with average daily production of 621 net Bbls of crude oil
and NGLs and 7,351 net Mcf of natural gas per day for the year ended December
31, 2001. As of December 31, 2001, we had estimated net proved reserves in West
Texas of 88,039 Mmcfe (82% natural gas) with a PV 10 of $41.6 million, 47% of
which was attributable to proved developed reserves. During 2001, we drilled a
total of 4 new wells (4 net) in Texas with a 100% success rate. For a
description of properties sold in 2002, see "--Recent Asset Sales - 2002" and
"--Recent Developments--Financial Restructuring--Sale of Stock of Canadian
Abraxas and Grey Wolf" on pages 51 and 49, respectively, of this prospectus

     WESTERN CANADA

     Prior to our property sales in 2002 and the financial restructuring in
which a large portion of our Canadian operations were sold, we owned producing
properties in western Canada, consisting primarily of natural gas reserves and
interests ranging from 10% to 100% in approximately 200 miles of natural gas
gathering systems and 12 natural gas processing plants. As of December 31, 2001,
Canadian Abraxas and Old Grey Wolf had estimated net proved reserves of 94,664
Mmcfe (85% natural gas) with a PV-10 of $132.5 million, 93% of which was
attributable to proved developed reserves. For the year ended December 31, 2001,
the Canadian properties produced an average of approximately 866 net Bbls of
crude oil and NGLs per day and 26,500 net Mcf of natural gas per day. The
natural gas processing plants had aggregate capacity of approximately 211 MMcf
of natural gas per day (107 net MMcf). During 2001, we drilled a total of 12 new
wells (9.3 net) in Canada with a 92% success rate.

EXPLORATORY AND DEVELOPMENTAL ACREAGE

     Our principal crude oil and natural gas properties consist of non-producing
and producing crude oil and natural gas leases, including reserves of crude oil
and natural gas in place. The following table indicates our interest in
developed and undeveloped acreage as of September 30, 2002, on a pro forma
basis:
Developed and Undeveloped Acreage
                                                     Pro Forma As of September 30, 2002
                             ------------------------------------------------------------------------------------
                                         Developed Acreage                         Undeveloped Acreage
                             ------------------------------------------ -----------------------------------------
                                  Gross Acres            Net Acres        Gross Acres          Net Acres
                             ----------------------- ------------------ ------------------ -----------------------
Canada                                9,698                   4,902          358,864            278,911
Texas                                25,257                  20,264           10,624              9,825
Wyoming                               3,200                   3,200           59,591             55,758
                             ----------------------- ------------------ ------------------ -----------------------
         Total                       38,155                  28,366          429,079            344,494
                             ======================= ================== ================== =======================
PRODUCTIVE WELLS

     The following table sets forth our total gross and net productive wells,
expressed separately for crude oil and natural gas, as of September 30, 2002 on
a pro forma basis:
Productive Wells
                                          Pro Forma As of September 30, 2002
                           ---------------------------------------------------------------------
  State/Country                       Crude Oil                          Natural Gas
                           --------------------------------   ----------------------------------
                               Gross              Net             Gross               Net
                           ---------------   --------------   ---------------   ----------------
Canada                          22.0               3.1             30.0              14.2
  Texas                          137.0             109.3             55.0              42.9
  Wyoming                          5.0               5.0              0.0               0.0
                           ---------------   --------------   ---------------   ----------------
           Total                 164.0             117.4             85.0              57.1
                           ===============   ==============   ===============   ================
53
Substantially all of our existing crude oil and natural gas properties are
pledged to secure our indebtedness under the first lien notes and second lien
notes and Old Grey Wolf's credit facility. On a pro forma basis, substantially
all of our crude oil and natural gas properties will be pledged to secure our
indebtedness under the new senior credit agreement and the notes.

RESERVES INFORMATION

     The crude oil and natural gas reserves in the U.S. have been estimated as
of June 30, 2002 by DeGolyer and MacNaughton of Dallas, Texas and in Canada by
McDaniel and Associates Consultants Ltd. of Calgary, Alberta. Crude oil and
natural gas reserves, and the estimates of the present value of future net
revenues therefrom, were determined based on then current prices and costs.
Reserve calculations involve the estimate of future net recoverable reserves of
crude oil and natural gas and the timing and amount of future net revenues to be
received therefrom. Such estimates are not precise and are based on assumptions
regarding a variety of factors, many of which are variable and uncertain.

     The following table sets forth certain information regarding estimates of
our crude oil, natural gas liquids and natural gas reserves on both a historical
and pro forma basis:
Estimated Proved Reserves
                                                     ------------------------------------------------------------------
                                                          Proved                 Proved                    Total
                                                         Developed             Undeveloped                Proved
                                                     --------------------    -------------------    -------------------
As of January 1, 1998(1)
       Crude oil (MBbls)                                        7,075                1,873                    8,948
       NGLs (MBbls)                                             7,178                1,651                    8,829
       Natural gas (MMcf)                                     186,490               34,824                  221,314

     As of January 1, 1999(1)(2)(3)
       Crude oil (MBbls)                                        3,985                1,628                    5,613
       NGLs (MBbls)                                             1,834                  248                    2,082
       Natural gas (MMcf)                                     144,588               52,890                  197,478

     As of January 1, 2000(1)(2)(3)(4)
       Crude oil (MBbls)                                        5,513                1,606                    7,119
       NGLs (MBbls)                                             4,961                  562                    5,523
       Natural gas (MMcf)                                     154,221               35,894                  190,115

     As of January 1, 2001 (1)(2)(3)
       Crude oil (MBbls)                                        3,866                1,407                    5,273
       NGLs (MBbls)                                             3,135                  436                    3,571
       Natural gas (MMcf)                                     119,737               71,590                  191,327

     As of January 1, 2002
       Crude oil (MBbls)                                        1,980                1,170                    3,150
       NGLs (MBbls)                                             3,067                  585                    3,652
       Natural gas (MMcf)                                     111,243               77,514                  188,757

     As of January 1, 2002 Pro Forma

       Crude oil (MBbls)                                        1,514                1,078                    2,592
       NGLs (MBbls)                                               755                  208                      963
       Natural gas (MMcf)                                      41,073               64,892                  105,965

     As of June 30, 2002
       Crude oil (MBbls)                                        1,687                1,282                    2,969
       NGLs (MBbls)                                             1,879                  245                    2,124
       Natural gas (MMcf)                                      90,565               51,398                  141,963

     As of June 30, 2002 Pro Forma

       Crude oil (MBbls)                                        1,557                1,282                    2,839
       NGLs (MBbls)                                               764                  209                      973
       Natural gas (MMcf)                                      41,041               47,734                   88,775
54
----------
(1)  Includes 128,900, 31,900, 33,000 and 40,000 barrels of crude oil reserves
     owned by Old Grey Wolf of which 69,500, 16,400, 16,900 and 20,525 barrels
     are applicable to the minority interests share of these reserves as of
     January 1, 1998, 1999, 2000 and 2001 respectively.

(2)  Includes 131,300, 443,500, 236,000 and 692,000 barrels of natural gas
     liquids reserves owned by Old Grey Wolf of which 70,889, 227,600, 121,098
     and 355,083 barrels are applicable to the minority interests share of these
     reserves as of January 1, 1998, 1999, 2000 and 2001 respectively.

(3)  Includes 7,446, 28,610, 21,710 and 21,389 Mmcf of natural gas reserves
     owned by Old Grey Wolf of which 4,020, 14,700, 11,140 and 10,975 Mmcf are
     applicable to the minority interests share of these reserves as of January
     1, 1998, 1999, 2000 and 2001 respectively.

(4)  Includes 343,941 Bbls of crude oil reserves; 2,448.6 Mbbls of natural gas
     liquids reserves and 25,810 Mmcf of natural gas reserves, attributable to
     the Wyoming properties which were sold in March 2000. These reserves were
     estimated internally.

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

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

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

     The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of crude oil, NGL and natural gas reserves,
future net revenue from proved reserves and the PV-10 thereof for the crude oil,
NGL and natural gas properties described in this report are based on the
assumption that future crude oil, NGL and natural gas prices remain the same as
crude oil, NGL and natural gas prices at June 30, 2002. The average sales prices
as of such date used for purposes of such estimates were $26.15 per Bbl of crude
oil, $13.08 per Bbl of NGLs and $2.58 per Mcf of natural gas. These estimates
also assume that we will make future capital expenditures of approximately $48.1
million in the aggregate, which are necessary to develop and realize the value
of proved undeveloped reserves on our properties. Any significant variance in
actual results from these assumptions could also materially affect the estimated
quantity and value of reserves set forth herein.

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

                                       55
CRUDE OIL, NATURAL GAS LIQUIDS, AND NATURAL GAS PRODUCTION AND SALES PRICES

     The following table presents our net crude oil, net natural gas liquids and
net natural gas production, the average sales price per Bbl of crude oil and
natural gas liquids and per Mcf of natural gas produced and the average cost of
production per BOE of production sold, for the three years ended December 31,
2001:
NINE MONTHS
                                                    YEAR ENDED DECEMBER 31,                         ENDED SEPTEMBER 30,
                                   ----------------------------------------------------     ----------------------------------
                                                                                   PRO                                    PRO
                                                                                  FORMA                                  FORMA
                                       1999           2000          2001          2001           2001        2002         2002
                                   ----------     ----------    ----------    ---------      ----------   ----------  --------
                                                            (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
PRODUCTION:
Crude oil (MBbls)...............      778            637           454           329            373          216         180
   NGLs (MBbls)....................      376            315           278            44            203          182           7
   Natural gas (MMcf)..............   25,698         19,962        17,496         7,006         13,420       11,692       4,080
     Mmcfe.........................   32,624         25,675        21,888         9,244         16,876       14,080       5,202
AVERAGE SALES PRICE:(1)

   Crude oil (per Bbl).............$   14.57      $   18.69     $   24.63     $   25.01      $   25.91    $   22.27   $   22.66
   NGLs (per Bbl)..................    13.40          22.42         21.51         16.02          24.03        16.53       13.52
   Natural gas (per Mcf)...........     1.66           3.71          3.20          2.94           3.54         2.25        2.33
     Per Mcfe......................     1.81           2.84          3.35          3.19           3.68         2.43        2.63
LOE (PER MCFE).....................$    0.55      $    0.73     $    0.85     $    0.93      $    0.81         0.80        1.07
----------
(1)  Average sales prices are net of hedging activity.

(2)  Crude oil and natural gas were combined by converting crude oil and natural
     gas liquids to a MCF equivalent ("MCF") on the basis of 1 Bbl of crude oil
     = 6 Mcf of natural gas.. Production costs include direct operating costs,
     ad valorem taxes and gross production taxes.

DRILLING ACTIVITIES

         The following table sets forth our gross and net working interests in
exploratory, development, and service wells drilled during the periods
indicated:
Years ended December 31,                        Nine Months Ended September 30,
                      ------------------------------------------------------------------- ----------------------------------
                                                                              2001                               2002
                           1999             2000            2001            Pro Forma          2002           Pro Forma
                      ---------------- --------------- ---------------- ----------------- ---------------- -----------------

                      Gross     Net     Gross    Net   Gross     Net     Gross     Net    Gross     Net     Gross     Net
                       (1)      (2)      (1)     (2)    (1)      (2)      (1)      (2)     (1)      (2)      (1)      (2)
                      ------- -------- -------- ------ ------- -------- -------- -------- ------- -------- -------- --------
Exploratory (3)
  Productive (4)
   Crude Oil             2.0      2.0        -      -       -        -        -        -     1.0      1.0        -        -
   Natural gas           8.0      5.3      3.0    2.5     2.0      1.0        -        -     3.0      0.5      3.0      0.5
   Dry holes(5)         11.0      6.2      9.0    5.6     1.0       .5        -        -     3.0      1.5      3.0      1.5
                      ------- -------- -------- ------ ------- -------- -------- -------- ------- -------- -------- --------
               Total    21.0     13.5     12.0    8.1     3.0      1.5        -        -     7.0      3.0      6.0      2.0
                      ======= ======== ======== ====== ======= ======== ======== ======== ======= ======== ======== ========
Development(6)
  Productive (4)

     Crude oil           8.0      1.6      9.0    9.0     2.0      2.0      1.0      1.0       -        -        -        -
     Natural gas        20.0     13.1     16.0   12.2    13.0     11.0      5.0      4.3    14.0     11.8      3.0      1.1
     Dry holes (5)       9.0      4.5      3.0    3.0       -        -        -        -     1.0      1.0        -        -
                      ------- -------- -------- ------ ------- -------- -------- -------- ------- -------- -------- --------
               Total    37.0     19.2     28.0   24.2    15.0     13.0      6.0      5.3    15.0     12.8      3.0      1.1
                      ======= ======== ======== ====== ======= ======== ======== ======== ======= ======== ======== ========
56
----------

(1)  A gross well is a well in which we own an interest.

(2)  The number of net wells represents the total percentage of working
     interests held in all wells (e.g., total working interest of 50% is
     equivalent to 0.5 net well. A total working interest of 100% is equivalent
     to 1.0 net well).

(3)  An exploratory well is a well drilled to find and produce crude oil or
     natural gas in an unproved area, to find a new reservoir in a field
     previously found to be producing crude oil or natural gas in another
     reservoir, or to extend a known reservoir.

(4)  A productive well is an exploratory or a development well that is not a dry
     hole.

(5)  A dry hole is an exploratory or development well found to be incapable of
     producing either crude oil or natural gas in sufficient quantities to
     justify completion as a crude oil or natural gas well.

(6)  A development well is a well drilled within the proved area of a crude oil
     or natural gas reservoir to the depth of stratigraphic horizon (rock layer
     or formation) noted to be productive for the purpose of extracting proved
     crude oil or natural gas reserves.

     As of January 28, 2003, we had 3 wells in process of drilling, 2 in the
Canada and 1 in the U.S. The two wells in Canada, in which we own an
approximately 17% interest are in the Ladyfern area of Northeastern British
Columbia. The U.S. well, in which we own a 25% carried interest is in west
Texas.

COMPETITION

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

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

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

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

REGULATION OF CRUDE OIL AND NATURAL GAS ACTIVITIES

     The exploration, production and transportation of all types of hydrocarbons
are subject to significant governmental regulations. Our operations are affected
from time to time in varying degrees by political developments and federal,
state, provincial and local laws and regulations. In particular, crude oil and
natural gas

                                       57
production operations and economics are, or in the past have been, affected by
industry specific price controls, taxes, conservation, safety, environmental,
and other laws relating to the petroleum industry, by changes in such laws and
by constantly changing administrative regulations.

     PRICE REGULATIONS

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

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

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

     THE NORTH AMERICAN FREE TRADE AGREEMENT

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

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

     UNITED STATES NATURAL GAS REGULATION

     Historically, the natural gas industry as a whole has been more heavily
regulated than the crude oil or other liquid hydrocarbons market. Most
regulations focused on transportation practices. In the recent past interstate
pipeline companies in the United States generally acted as wholesale merchants
by purchasing natural gas from producers and reselling the natural gas to local
distribution companies and large end users. Commencing in late 1985, the Federal
Energy Regulatory Commission (the "FERC") issued a series of orders that have
had a major impact on interstate natural gas pipeline operations, services, and
rates, and thus have significantly altered the marketing and price of natural
gas. The FERC's key rule making action, Order No. 636 ("Order 636"), issued in
April 1992, required each interstate pipeline to, among other things, "unbundle"
its traditional bundled sales services and create and make available on an open
and nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and natural gas balancing services), and to adopt a new ratemaking
methodology to determine appropriate rates for those services. To the extent the
pipeline company or its sales affiliate markets natural gas as a merchant, it
does so pursuant to private contracts in direct competition with all of the
sellers, such as us; however, pipeline companies and their affiliates were not
required to remain "merchants" of natural gas, and most of the interstate
pipeline companies have

                                       58
become "transporters only," although many have affiliated marketers. Order 636
and related FERC orders have resulted in increased competition within all phases
of the natural gas industry. We do not believe that Order 636 and the related
restructuring proceedings affect us any differently than other natural gas
producers and marketers with which we compete.

     Transportation pipeline availability and cost are major factors affecting
the production and sale of natural gas. Our physical sales of natural gas are
affected by the actual availability, terms and cost of pipeline transportation.
The price and terms for access onto the pipeline transportation systems remain
subject to extensive Federal regulation. Although Order 636 does not directly
regulate our production and marketing activities, it does affect how buyers and
sellers gain access to and use of the necessary transportation facilities and
how we and our competitors sell natural gas in the marketplace. The courts have
largely affirmed the significant features of Order No. 636 and the numerous
related orders pertaining to individual pipelines, although some appeals remain
pending and the FERC continues to review and modify its regulations regarding
the transportation of natural gas. For example, the FERC has recently begun a
broad review of its natural gas transportation regulations, including how its
regulations operate in conjunction with state proposals for natural gas
marketing restructuring and in the increasingly competitive marketplace for all
post-wellhead services related to natural gas.

     In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural gas
in the United States. Some of the more notable of these regulatory initiatives
include:

 (1) a series of orders in individual pipeline proceedings articulating a policy
     of generally approving the voluntary divestiture of interstate pipeline
     owned gathering facilities by interstate pipelines to their affiliates (the
     so-called "spin down" of previously regulated gathering facilities to the
     pipeline's nonregulated affiliates).

 (2) Order No. 497 involving the regulation of pipelines with marketing
     affiliates.

 (3) various FERC orders adopting rules proposed by the Gas Industry Standards
     Board which are designed to further standardize pipeline transportation
     tariffs and business practices.

 (4) a notice of proposed rulemaking that, among other things, proposes (a) to
     eliminate the cost-based price cap currently imposed on natural gas
     transactions of less than one year in duration, (b) to establish mandatory
     "transparent" capacity auctions of short-term capacity on a daily basis,
     and (c) to permit interstate pipelines to negotiate terms and conditions of
     service with individual customers.

 (5) issuance of Policy Statements regarding Alternate Rates and Negotiated
     Terms and Conditions of Service covering (a)the pricing of long-term
     pipeline transportation services by alternative rate mechanism options,
     including the pricing of interstate pipeline capacity utilizing
     market-based rates, incentive rates, or indexed rates, and (b)
     investigating of whether FERC should permit pipelines to negotiate the
     terms and conditions of service, in addition to rates of service.

 (6) a notice of proposed rulemaking that proposes generic procedures to
     expedite the FERC's handling of complaints against interstate pipelines
     with the goals of encouraging and supporting consensual resolutions of
     complaints and organizing the complaint procedures so that all complaints
     are handled in a timely and fair manner.

     Several of these initiatives are intended to enhance competition in natural
gas markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry, including us, as
a result of the geographic monopolization of those facilities by their new,
unregulated owners. As to all of these FERC initiatives, the ongoing, or, in
some instances, preliminary and evolving nature of these regulatory initiatives
makes it impossible at this time to predict their ultimate impact on our
business. However, we do not believe that these FERC initiatives will affect us
any differently than other natural gas producers and marketers with which we
compete.

     Since Order 636, FERC decisions involving onshore facilities have been more
liberal in their reliance upon traditional tests for determining what facilities
are "gathering" and therefore exempt from federal regulatory control. In many
instances, what was once classified as "transmission" may now be classified as
"gathering." We ship certain of our natural gas through gathering facilities
owned by others, including interstate pipelines, under existing

                                       59
long term contractual arrangements. Although these FERC decisions have created
the potential for increasing the cost of shipping our natural gas on third party
gathering facilities, our shipping activities have not been materially affected
by these decisions.

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

     STATE AND OTHER REGULATION

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

     State and provincial regulation of gathering facilities generally includes
various safety, environmental, and in some circumstances, non-discriminatory
take requirements, but does not generally entail rate regulation. In the United
States, natural gas gathering has received greater regulatory scrutiny at both
the state and federal levels in the wake of the interstate pipeline
restructuring under Order 636. For example, the Texas Railroad Commission
enacted a Natural Gas Transportation Standards and Code of Conduct to provide
regulatory support for the State's more active review of rates, services and
practices associated with the gathering and transportation of natural gas by an
entity that provides such services to others for a fee, in order to prohibit
such entities from unduly discriminating in favor of their affiliates.

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

     CANADIAN ROYALTY MATTERS

     In addition to Canadian federal regulation, each province has legislation
and regulations that govern land tenure, royalties, production rates,
environmental protection and other matters. The royalty regime is a significant

                                       60
factor in the profitability of crude oil and natural gas production. Royalties
payable on production from lands other than Crown lands are determined by
negotiations between the mineral owner and the lessee. Crown royalties are
determined by governmental regulation and are generally calculated as a
percentage of the value of the gross production, and the rate of royalties
payable generally depends in part on prescribed preference prices, well
productivity, geographical location, field discovery date and the type and
quality of the petroleum product produced.

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

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

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

     Effective January 1, 1994, the calculation and payment of natural gas
royalties became subject to a simplified process. The royalty reserved to the
Crown, subject to various incentives, is between 15% or 30%, in the case of new
natural gas, and between 15% and 35%, in the case of old natural gas, depending
upon a prescribed or corporate average reference price. Natural gas produced
from qualifying exploratory gas wells spudded or deepened after July 1, 1985 and
before June 1, 1988 are eligible for a royalty exemption for a period of 12
months, or such later time that the value of the exempted royalty quantity
equals a prescribed maximum amount. Natural gas produced from qualifying
intervals in eligible natural gas wells spudded or deepened to a depth below
2,500 meters is also subject to a royalty exemption, the amount of which depends
on the depth of the well.

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

     Producers of crude oil and natural gas in British Columbia are also
required to pay annual rental payments in respect of Crown leases and royalties
and freehold production taxes in respect of crude oil and natural gas produced
from Crown and freehold lands respectively. British Columbia also classifies
conventional crude oil into the three categories of Old Oil, New Oil and Third
Tier Oil. The amount payable as a royalty in respect of crude oil depends on the
vintage of the crude oil (whether it was produced from a pool discovered before
or after October 31, 1975) or a pool in which no well was completed on June 1,
1998), the quantity of crude oil produced in a month and the value of the crude
oil. Crude oil produced from a discovery well may be exempt from the payment of
a royalty for the first 36 months of production to a maximum production of
11,450 m3. The royalty payable on natural gas is determined by a sliding scale
based on a classification of the gas based on whether it is conservation gas
(gas associated with marketed oil production) and by drilling and land lease
date and on a reference price which is the

                                       61
greater of the amount obtained by the producer and at prescribed minimum price.
Conservation gas has a minimum royalty of 8%. The royalty rate ranges from
between 9% and 27% for wells drilled on lands issued after May 31, 1998 and
before January 1, 2003 and completed within 5 years of the date the lands were
issued and between 12% and 27% for wells spudded after May 31, 1998 on lands
where rights had been issued as of May 31, 1998.

     ENVIRONMENTAL MATTERS

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

     In the United States, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as "Superfund," and
comparable state statutes impose strict, joint, and several liability on certain
classes of persons who are considered to have contributed to the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of a disposal site or sites where a release occurred and companies that
generated, disposed or arranged for the disposal of the hazardous substances
released at the site. Under CERCLA such persons or companies may be
retroactively liable for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is common for neighboring land owners and other third parties to file
claims for personal injury, property damage, and recovery of response costs
allegedly caused by the hazardous substances released into the environment. The
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes
govern the disposal of "solid waste" and "hazardous waste" and authorize
imposition of substantial civil and criminal penalties for failing to prevent
surface and subsurface pollution, as well as to control the generation,
transportation, treatment, storage and disposal of hazardous waste generated by
crude oil and natural gas operations. Although CERCLA currently contains a
"petroleum exclusion" from the definition of "hazardous substance," state laws
affecting our operations impose cleanup liability relating to petroleum and
petroleum related products, including crude oil cleanups. In addition, although
RCRA regulations currently classify certain oilfield wastes which are uniquely
associated with field operations as "non-hazardous," such exploration,
development and production wastes could be reclassified by regulation as
hazardous wastes thereby administratively making such wastes subject to more
stringent handling and disposal requirements.

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

                                       62
adjoining property owners. Such claims are predicated on the damage to or
contamination of land resources occasioned by drilling and production operations
and the products derived therefrom, and are usually causes of action based on
negligence, trespass, nuisance, strict liability and fraud.

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

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

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

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

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

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

TITLE TO PROPERTIES

     As is customary in the crude oil and natural gas industry, we make only a
cursory review of title to undeveloped crude oil and natural gas leases at the
time we acquire them. However, before drilling commences, we require a thorough
title search to be conducted, and any material defects in title are remedied
prior to the time actual

                                       63
drilling of a well begins. To the extent title opinions or other investigations
reflect title defects, we, rather than the seller of the undeveloped property,
are typically obligated to cure any title defect at our expense. If we were
unable to remedy or cure any title defect of a nature such that it would not be
prudent to commence drilling operations on the property, we could suffer a loss
of our entire investment in the property. We believe that we have good title to
our crude oil and natural gas properties, some of which are subject to
immaterial encumbrances, easements and restrictions. The crude oil and natural
gas properties we own are also typically subject to royalty and other similar
non-cost bearing interests customary in the industry. We do not believe that any
of these encumbrances or burdens will materially affect our ownership or use of
our properties.

EMPLOYEES

     As of January 28, 2003, we had 48 full-time employees in the United States,
including 3 executive officers, 3 non-executive officers, 1 petroleum engineer,
1 geologist, 6 managers, 1 landman, 12 secretarial and clerical personnel and 21
field personnel. Additionally, we retain contract pumpers on a month-to-month
basis. We retain independent geological and engineering consultants from time to
time on a limited basis and expect to continue to do so in the future.

     As of January 31, 2003, New Grey Wolf in Canada had 13 full-time employees,
including 3 executive officers, 1 non-executive officers, 2 petroleum engineers,
2 geologists, 1 geophysicist and, 4 technical and clerical personnel.

OFFICE FACILITIES

     Our executive and administrative offices are located at 500 North Loop 1604
East, Suite 100, San Antonio, Texas 78232. We also have an office in Midland,
Texas. These offices, consisting of approximately 12,650 square feet in San
Antonio and 960 square feet in Midland, are leased until April 2006 at an
aggregate rate of $20,000 per month.

     New Grey Wolf leases 17,000 square feet of office space in Calgary pursuant
to a lease which expires in April 2003.

OTHER PROPERTIES

     We own 10 acres of land, an office building, workshop, warehouse and house
in Sinton, Texas, 160 acres of land in Coke County, Texas and a 50% interest in
approximately two acres of land in Bexar County, Texas. All three properties are
used for the storage of tubulars and production equipment. We also own 23
vehicles which are used in the field by employees.

LITIGATION

     In 2001, Abraxas and Abraxas Wamsutter L.P. were named as defendants in a
lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by Abraxas and
Abraxas Wamsutter, L.P. related to the responsibility for year 2000 ad valorem
taxes on crude oil and natural gas properties sold by Abraxas and Abraxas
Wamsutter, L.P. In February 2002, a summary judgment was granted to the
plaintiff in this matter and a final judgment in the amount of $1.3 million was
entered. Abraxas has filed an appeal. We believe these charges are without
merit. We have established a reserve in the amount of $845,000, which represents
our estimated share of the judgment.

     In late 2000, Abraxas received a Final De Minimis Settlement Offer from the
United States Environmental Protection Agency concerning the Casmalia Disposal
Site, Santa Barbara County, California. Abraxas' liability for the cleanup at
the Superfund site is based on its acquisition of Bennett Petroleum Corporation,
which is alleged to have transported or arranged for the transportation of oil
field waste and drilling muds to the Superfund site. Abraxas has engaged
California counsel to evaluate the notice of proposed de minimis settlement and
its notice of potential strict liability under the Comprehensive Environmental
Response, Compensation and Liability Act. Defense of the action is handled
through a joint group of crude oil companies, all of which are claiming a
petroleum exclusion that limits Abraxas' liability. The potential financial
exposure and any settlement posture has yet not been developed, but is
considered by Abraxas to be immaterial.

                                       64
Additionally, from time to time, we are involved in litigation relating to
claims arising out of its operations in the normal course of business. At
December 31, 2001, we were not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on
our operations.

ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS

     New Grey Wolf is an Alberta corporation, certain of its officers and
directors may be residents of various jurisdictions outside the United States
and its Canadian counsel, Osler, Hoskin & Harcourt, LLP, are residents of
Canada. All or a substantial portion of the assets of New Grey Wolf and of such
persons may be located outside the United States. As a result, it may be
difficult for investors to effect service of process within the United States
upon such persons or to enforce judgments obtained against such persons in
United States courts and predicated upon the civil liability provisions of the
Securities Act. Notwithstanding the foregoing, New Grey Wolf has irrevocably
agreed that it may be served with process with respect to actions based on
offers and sales of securities made hereby in the United States by serving Chris
E. Williford, c/o Abraxas Petroleum Corporation, 500 North Loop 1604 East, Suite
100, San Antonio, Texas 78232, Canadian Abraxas' United States agent appointed
for that purpose. Canadian Abraxas has been advised by its Canadian counsel,
Osler, Hoskin & Harcourt, LLP, that there is doubt as to the enforceability in
Canada against Canadian Abraxas or against any of its directors, controlling
persons, officers or experts who are not residents of the United States, in
original actions for enforcement of judgments of United States courts, of
liabilities predicated solely upon United States federal securities laws.

                                       65
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

     Set forth below are the names, ages, years of service and positions of the
executive officers and directors of Abraxas, as well as certain executive
officers of New Grey Wolf. The term of the Class I directors of Abraxas expires
in 2003, the term of the Class II directors expires in 2005 and the term of the
Class III directors expires in 2004.
NAME AND MUNICIPALITY OF RESIDENCE                   AGE  OFFICE                                        CLASS
Robert L. G. Watson,                                      Chairman of the Board, President and Chief
 San Antonio, Texas.................................  52   Executive Officer                              III
 Chris E. Williford,                                       Executive Vice President, Chief Financial
 San Antonio, Texas.................................  51   Officer and Treasurer                          --
 Robert W. Carington, Jr.,
 San Antonio, Texas.................................  41   Executive Vice President                       --
 Craig S. Bartlett, Jr.,
 Montclair, New Jersey..............................  69   Director                                        II
 Franklin A. Burke,
 Doyleston, Pennsylvania............................  69   Director                                        I
 Ralph F. Cox,
 Ft. Worth, Texas...................................  70   Director                                        II
 Frederick M. Pevow, Jr.,
 Houston, Texas.....................................  40   Director                                        II
 James C. Phelps,
 San Antonio, Texas.................................  80   Director                                       III
 Joseph A. Wagda,
 Danville, California...............................  59   Director                                        II
ROBERT L. G. WATSON has served as Chairman of the Board, President, Chief
Executive Officer and a director of Abraxas since 1977. From May 1996 to January
2003, Mr. Watson has also served as Chairman of the Board and a director of Old
Grey Wolf. Since January 2003, he has served as Chairman of the Board and a
director of New Grey Wolf. In November 1996, Mr. Watson was elected Chairman of
the Board, President and as a director of Canadian Abraxas, a former wholly
owned Canadian subsidiary of Abraxas. Prior to joining Abraxas, Mr. Watson was
employed in various petroleum engineering positions with Tesoro Petroleum
Corporation, a crude oil and natural gas exploration and production company,
from 1972 through 1977, and DeGolyer and MacNaughton, an independent petroleum
engineering firm, from 1970 to 1972. Mr. Watson received a Bachelor of Science
degree in Mechanical Engineering from Southern Methodist University in 1972 and
a Master of Business Administration degree from the University of Texas at San
Antonio in 1974.

     CHRIS E. WILLIFORD was elected Vice President, Treasurer and Chief
Financial Officer of Abraxas in January 1993, and as Executive Vice President
and a director of Abraxas in May 1993. In November 1996, Mr. Williford was
elected Vice President and Assistant Secretary of Canadian Abraxas. In December
1999, Mr. Williford resigned as a director of Abraxas. Prior to joining Abraxas,
Mr. Williford was Chief Financial Officer of American Natural Energy
Corporation, a crude oil and natural gas exploration and production company,
from July 1989 to December 1992 and President of Clark Resources Corp., a crude
oil and natural gas exploration and production company, from January 1987 to May
1989. Mr. Williford received a Bachelor of Science degree in Business
Administration from Pittsburgh State University in 1973.

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

                                       66
CRAIG S. BARTLETT JR., a director of Abraxas since December 1999, has over
forty years of commercial banking experience, the most recent being with
National Westminster Bank USA, rising to the position of Executive Vice
President, Senior Lending Officer and Chairman of the Credit Policy Committee.
Mr. Bartlett currently serves on the boards of NVR, Inc. and Janus Hotels and
Resorts, Inc. and is active in securities arbitration. Mr. Bartlett attended
Princeton University, and has a certificate in Advanced Management from
Pennsylvania State University.

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

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

     FREDERICK M. PEVOW, JR., a director of Abraxas since December 1999, has
almost fifteen years of investment banking experience with firms such as Smith
Barney, Dillon Read, Salomon Smith Barney, and most recently CIBC World Markets
where he was Managing Director and headed the worldwide Investment Banking
practice covering the oilfield services and equipment industries. Mr. Pevow
currently pursues capital market transactions through Pevow & Associates, a
boutique investment and merchant banking firm. Mr. Pevow holds an undergraduate
degree from the University of Texas with further studies at Rice University.

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

     JOSEPH A. WAGDA, a director of Abraxas since December 1999, has had a
varied twenty-five year career involving the financial and legal aspects of
private and corporate business transactions. Currently Mr. Wagda is Chairman,
Chief Executive Officer and a director of BrightStar Information Technology
Group, Inc., and is also an attorney and president of Altamont Capital
Management, Inc. Mr. Wagda's business expertise emphasizes special situation
consulting and investing, including involvement in distressed investments and
venture capital opportunities. Previously, Mr. Wagda was a senior managing
director and co-founder of the Price Waterhouse corporate finance practice. He
also served with the finance staff of Chevron Corporation and in the general
counsel's office at Ford Motor Company. Mr. Wagda received an undergraduate
degree from Fordham College, a Masters of Business Administration, with
distinction, from the Johnson Graduate School of Management, Cornell University,
and a JD, with honors, from Rutgers University.

                                       67
EXECUTIVE COMPENSATION

COMPENSATION SUMMARY

     The following table sets forth a summary of compensation for the fiscal
years ended December 31, 1999, 2000, and 2001 paid by Abraxas to Robert L.G.
Watson, Abraxas' Chairman of the Board, President and Chief Executive Officer,
Chris E. Williford, Abraxas' Executive Vice President, Chief Financial Officer
and Treasurer, Robert W. Carington, Jr., Abraxas' Executive Vice President, Lee
T. Billingsley, Abraxas' Vice President--Exploration, and to William H. Wallace,
Abraxas' Vice President--Operations.

                           SUMMARY COMPENSATION TABLE
LONG TERM
                                                                                                    COMPENSATION
                                                                                                      AWARDS -
                                                                                                     SECURITIES
                                                                                                     UNDERLYING
        NAME AND PRINCIPAL POSITION                   YEAR             SALARY($)        BONUS($)     OPTIONS(#)
                                                      ----             ---------        --------     ----------
                                                                ANNUAL COMPENSATION
        -------------------------------------------------------------------------------------------------------------
Robert  L. G. Watson,                         1999              $259,615         $43,750            4,688(1)
        Chairman of the Board,                        2000              $259,615         $29,175          962,562(2)
        President and Chief                           2001              $259,615         $27,388           60,000
        Executive Officer
        -------------------------------------------------------------------------------------------------------------
        Chris E. Williford,                           1999              $155,769         $26,250                0
        Executive Vice President,                     2000              $155,769         $17,505          392,701(2)
        Chief Financial Officer                       2001              $155,769         $16,433           20,000
        and Treasurer
        -------------------------------------------------------------------------------------------------------------
        Robert  W. Carington, Jr.,                    1999              $207,629         $35,000                0
        Executive Vice President                      2000              $207,629         $23,340          549,456(2)
                                                      2001              $207,629         $21,910           20,000
        -------------------------------------------------------------------------------------------------------------
        Lee T. Billingsley                            1999              $124,615         $22,500           30,000
        Vice President--                              2000              $134,077         $22,004           97,972(2)
        Exploration                                   2001              $147,327         $10,331           15,000
        -------------------------------------------------------------------------------------------------------------
        William H. Wallace,                           1999              $109,440         $13,750           30,000
        Vice President--                              2000              $131,577          $9,425           97,972(2)
        Operations                                    2001              $147,327         $10,331           15,000
        -------------------------------------------------------------------------------------------------------------
----------
(1)  On January 7, 1999, Mr. Watson was granted options to purchase 4,688 Old
     Grey Wolf common shares at an exercise price of C$3.20 per share. Pursuant
     to the Old Grey Wolf exchange offer consummated in September 2001, such
     options were exchanged for options to purchase 2,812 shares of Abraxas
     common stock at an exercise price of $3.39 per share.

(2)  In March 2002, each of the named officers voluntarily forfeited a
     substantial number of options to purchase Abraxas common stock which were
     issued in 2000. The exercise price for the forfeited options was $5.02 per
     share, and the named officers each forfeited the following number of
     options: Mr. Watson - 842,562; Mr. Williford - 352,701; Mr. Carington -
     509,456; Mr. Billingsley - 97,972; Mr. Wallace - 97,972. See note (1) to
     the Option Exercises table on page 69.

GRANTS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS DURING THE FISCAL YEAR
ENDED DECEMBER 31, 2001

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

                                       68
The table below contains certain information concerning stock options
granted to Messrs. Watson, Williford, Carington and Wallace and Dr. Billingsley
during 2001:

                          OPTION GRANTS IN FISCAL YEAR
POTENTIAL REALIZABLE
                                      NUMBER OF                                                VALUE AT ASSUMED
                                      SECURITIES                     EXERCISE                ANNUAL RATES OF STOCK
                                      UNDERLYING     % OF TOTAL      PRICE PER                PRICE APPRECIATION
                                       OPTIONS         OPTIONS         SHARE                          FOR
                                       GRANTED       GRANTED TO      (PRICE AT   EXPIRATION       OPTION TERM
NAME                                     (1)          EMPLOYEES       GRANT)        DATE            5% 10%
Robert L.G. Watson.........             60,000          14.79          $4.83       3/23/11    $182,400   $462,000
Chris E. Williford.........             20,000           4.93          $4.83       3/23/11    $ 60,800   $154,000
Robert W. Carington, Jr........         20,000           4.93          $4.83       3/23/11    $ 60,800   $154,000
Lee T. Billingsley.........             15,000            3.7          $4.83       3/23/11    $ 45,600   $115,000
William H. Wallace.........             15,000            3.7          $4.83       3/23/11    $ 45,600   $115,000
----------
(1)  One-fourth of the options become exercisable on each of the first four
     anniversaries of the date of grant.

AGGREGATED OPTION EXERCISES IN FISCAL 2001 AND FISCAL YEAR END OPTION VALUES

     The table below contains certain information concerning exercises of stock
options during the fiscal year ended December 31, 2001, by Messrs. Watson,
Williford, Carington and Wallace and Dr. Billingsley and the fiscal year end
value of unexercised options held by Messrs. Watson, Williford, Carington and
Wallace and Dr. Billingsley.

                         OPTION EXERCISES IN FISCAL YEAR
NUMBER OF UNEXERCISED
                                                            OPTIONS ON DECEMBER 31,    VALUE OF UNEXERCISABLE
                                       SHARES     VALUE             2001(#)            IN-THE-MONEY OPTIONS ON
                                    ACQUIRED BY  REALIZED  EXERCISABLE/UNEXERCISABLE    DECEMBER 31, 2001 ($)
NAME                                EXERCISE(#)    ($)                (1)             EXERCISABLE/UNEXERCISABLE
Robert L. G. Watson..........            0          0         675,075 / 1,483,125                0/0
Chris E. Williford...........            0          0          248,175 / 567,701                 0/0
Robert W. Carington, Jr......            0          0          377,364 / 889,456                 0/0
Lee T. Billingsley...........            0          0          82,993 / 200,972                  0/0
William H. Wallace...........            0          0          56,868 / 163,472                  0/0
----------
(1)  In March 2002 a significant number of stock options granted in 2000 were
     voluntarily forfeited by the named officers. All forfeited options had an
     exercise price in excess of the market price on the date of forfeiture.
     Such forfeitures reduce the total number of exercisable / unexercisable
     options held by each named officer as follows: Mr. Watson--464,435/851,203;
     Mr. Williford - 160,000/303,175; Mr. Carington - 250,000/507,364; Mr.
     Billingsley - 58,500/127,493; Mr. Wallace - 32,375/89,993.

EMPLOYMENT AGREEMENTS

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

     The employment agreements for Messrs. Watson, Williford, and Carington are
scheduled to terminate on December 21, 2002, and shall be automatically extended
for additional one-year terms unless Abraxas gives the officer 120 days notice
prior to the expiration of the original term or any extension thereof of its
intention not to renew the employment agreement. If, during the term of the
employment agreements for each of such

                                       69
officers, the officer's employment is terminated by Abraxas other than for cause
or disability, by the officer other than by reason of such officer's death or
retirement, or by the officer, for "good reason" (as defined in each officer's
respective employment agreement), then such officer will be entitled to receive
a lump sum payment equal to the greater of (a) his annual base salary for the
last full year during which he was employed by Abraxas or (b) his annual base
salary for the remainder of the term of each of their respective employment
agreements.

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

     MR. WATSON:

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

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

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

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

     MR. WILLIFORD OR MR. CARINGTON:

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

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

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

     Abraxas has entered into employment agreements with Mr. Wallace and Dr.
Billingsley pursuant to which each of Mr. Wallace and Dr. Billingsley will
receive compensation as determined from time to time by the board in its sole
discretion. The employment agreements, originally scheduled to terminate on
December 31, 1998 for Dr. Billingsley and December 31, 2000 for Mr. Wallace,
were automatically extended and will terminate on December 31, 2002, and may be
automatically extended for an additional year if by December 1 of the prior year
neither Abraxas nor Mr. Wallace or Dr. Billingsley, as the case may be, has
given notice to the contrary. Except in the event of a change in control, at all
times during the term of the employment agreements, each of Mr. Wallace's and
Dr. Billingsley's employment is at will and may be terminated by Abraxas for any
reason without notice or cause. If a change in control occurs during the term of
the employment agreement or any extension thereof, the expiration date of Mr.
Wallace's and Dr. Billingsley's employment agreement is automatically extended
to a date no earlier than three years following the effective date of such
change in control. If, following a change in control, either Mr. Wallace's or
Dr. Billingsley's employment is terminated other than for Cause (as defined in
each of the employment agreements) or Disability (as defined in each of the
Employment Agreements), by reason of Mr. Wallace's or Dr. Billingsley's death or
retirement or by Mr. Wallace or Dr. Billingsley, as the case may be, for Good
Reason (as defined in each of the employment agreements), then the terminated
officer will be entitled to receive a lump sum payment equal to three times his
annual base salary.

     If any lump sum payment to Messrs. Watson, Williford, Carington, Wallace or
Dr. Billingsley would individually or together with any other amounts paid or
payable constitute an "excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended, and

                                       70
applicable regulations there under, the amounts to be paid will be increased so
that Messrs. Watson, Williford, Carington, Wallace or Dr. Billingsley, as the
case may be, will be entitled to receive the amount of compensation provided in
his contract after payment of the tax imposed by Section 280G.

COMPENSATION OF DIRECTORS

     NON-QUALIFIED STOCK OPTION PLAN. Messrs. Burke and Phelps have previously
been granted options to purchase 8,900 shares of common stock under the Abraxas
1984 Non-Qualified Stock Option Plan (the "Non-Qualified Plan"). There are
currently outstanding options to purchase 8,900 shares of Abraxas common stock
under the Non-Qualified Plan. Mr. Burke holds an option to purchase 8,900
Abraxas shares of common stock at an exercise price of $2.06 per share.

     STOCK OPTIONS. In 1999, each of Messrs. Bartlett, Cox, Pevow and Wagda were
each granted options to purchase 75,000 shares of common stock at an exercise
price of $0.98 per share.

     OTHER COMPENSATION. During 2001, each director who was not an employee of
Abraxas or its affiliates, received an annual fee of $8,000 plus $1,000 for each
board meeting attended and $500 for each committee meeting attended. Aggregate
fees paid to directors in 2001 were $122,000. Except for the foregoing, the
directors of Abraxas received no other compensation for services as directors,
except for reimbursement of travel expenses to attend board meetings.

                              CERTAIN TRANSACTIONS

     Wind River Resources Corporation ("Wind River"), all of the capital stock
of which is owned by Mr. Watson, owns a twin-engine airplane. The airplane is
available for business use by our employees from time to time at Wind River's
cost. We paid Wind River a total of $344,737 for use of the plane during 2002.

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

                                       71
PRINCIPAL STOCKHOLDERS

     Based upon information received from the persons concerned, each person
known to Abraxas to be the beneficial owner of more than five percent of the
outstanding shares of common stock of Abraxas, each director and nominee for
director, each of the named executive officers and all directors and officers of
Abraxas as a group, owned beneficially as of January 31, 2003, the number and
percentage of outstanding shares of common stock of Abraxas indicated in the
following table:
NAME AND ADDRESS OF BENEFICIAL OWNER        NUMBER OF SHARES (1)         PERCENTAGE (%)
Venture Securities Corp.
    P.O. Box 950 E
    516 N. Bethlehem Pike
    Spring House, PA 19477.....................           2,274,740 (2)                 6.4
    Longwood Investment Advisors, Inc.
    Three Radnor Corp. Center
    1000 Matsonford Road, Suite 300............           2,045,700                     5.7
    Peter S. Lynch
    82 Devonshire St. 58 A

    Boston, MA 02109...........................           1,840,000                     5.2
    Robert L. G. Watson........................             935,551 (3)                 2.6
    Franklin A. Burke..........................           2,583,261 (4)                 7.2
    James C. Phelps............................             456,512 (5)                 1.3
    Chris E. Williford.........................             203,003 (6)                   *
    Lee T. Billingsley.........................             154,425 (7)                   *
    Robert W. Carington, Jr....................             443,340 (8)                 1.2
    William H. Wallace.........................              51,725 (9)                   *
    Craig S. Bartlett, Jr......................              87,000 (10)                  *
    Ralph F. Cox...............................             335,000 (10)                1.0
    Joseph A. Wagda ...........................              75,000 (10)                  *
    Frederick M. Pevow, Jr.....................              75,000 (11)                  *
    All  Officers  and  Directors  as a Group  (11
    persons) (3)(4)(5)(6)(7)(8)(9)(10)(11).....           5,399,723
----------
     *  Less than 1%

(1)  Unless otherwise indicated, all shares are held directly with sole voting
     and investment power.

(2)  Includes 1,188,154 shares with sole voting power held by Venture Securities
     and Franklin A. Burke, a director of Abraxas, the sole owner of Venture
     Securities, and 1,038,536 shares managed by Venture Securities on behalf of
     third parties.

(3)  Includes 41,353 shares issuable upon exercise of options granted pursuant
     to Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan,
     483,222 shares issuable upon exercise of options granted pursuant to the
     Abraxas Petroleum Corporation 1994 Long Term Incentive Plan and 300 shares
     in a retirement account. Does not include a total of 75,880 shares owned
     by the Robert L. G. Watson, Jr. Trust and the Carey B. Watson Trust, the
     trustees of which are Mr. Watson's brothers and the beneficiaries of which
     are Mr. Watson's children. Mr. Watson disclaims beneficial ownership of
     the shares owned by these trusts.

(4)  Includes 132,243 shares owned by Mr. Burke personally and 2,274,740 shares
     held by Venture Securities, a financial investment firm wholly owned by
     Mr. Burke. In addition, the number of shares includes 25,750 shares
     issuable upon exercise of options granted pursuant to the Amended and
     Restated Director Stock Option Plan (the "Director Option Plan"), and
     150,528 shares issued related to the exchange offer.

(5)  Includes 340,000 shares owned by Marie Phelps, Mr. Phelps' wife, 88,762
     shares owned by JMRR LP, 2,000 shares issuable upon exercise of options
     granted pursuant to an option agreement, 25,750 shares issuable upon
     exercise of options granted pursuant to the Director Option Plan

(6)  Includes 1,786 shares issuable upon exercise of options granted pursuant to
     the Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, 18,214
     shares issuable upon exercise of options granted pursuant to the Abraxas
     Petroleum Corporation 1993 Key Contributor Stock Option Plan and 160,000
     shares issuable upon exercise of options granted pursuant to the Abraxas
     Petroleum Corporation 1994 Long Term Incentive Plan.

                                       72
(7)  Includes 84,250 shares issuable upon exercise of options granted pursuant
     to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan and
     5,000 shares in a retirement account.

(8)  Includes 345,000 shares issuable upon exercise of options granted pursuant
     to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.

(9)  Includes 46,750 shares issuable upon exercise of options granted pursuant
     to the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan.

(10) Includes 75,000 shares issuable upon exercise of certain options
     agreements.

(11) Includes 75,000 shares issuable upon exercise of options granted pursuant
     to the New Director Option Plan.

                                       73
SELLING SECURITY HOLDERS

     The notes and shares of common stock are being offered by the selling
security holders listed in the table below or referred to in an a prospectus
supplement. The notes and 5,633,291 shares of common stock being offered were
issued in connection with an overall financial restructuring through a private
exchange offer exempt from, or not subject to, the registration requirements
of the Securities Act. The remaining 950,000 shares of common stock represent
shares issuable upon the exercise of outstanding warrants. The selling
security holders may offer and sell, from time to time, any or all of their
notes or common stock.

     No offer or sale under this prospectus may be made by a holder of the
securities unless that holder is listed in the table in this prospectus or until
that holder has notified us and a supplement to this prospectus has been filed
or an amendment to the related registration statement has become effective. We
will supplement or amend this prospectus to include additional selling security
holders upon request and upon provision of all required information to us.

     The following table sets forth the name, principal amount of notes, and
number of shares beneficially owned by the selling security holders intending to
sell the notes or common stock. Based on information provided to us by the
selling security holders, the table also discloses whether any selling security
holder selling in connection with the prospectus or prospectus supplement has
held any position or office with, been employed by, or otherwise has had a
material relationship with us or any of our affiliates during the three years
prior to the date of the prospectus or prospectus supplement.
PRINCIPAL AMOUNT OF
                                              NOTES THAT MAY BE      COMMON STOCK THAT        MATERIAL
                   NAME                           SOLD HEREBY       MAY BE SOLD HEREBY      RELATIONSHIP
                   ----                     --------------------    ------------------      ------------
ABN Amro Inc...............................      2,890,000              148,605                 None
Ahab International Ltd.....................        244,000               12,544                 None
Ahab Partners LP...........................        366,000               18,816                 None
Basil Street Company.......................              0              950,000                 None
BBH Broad Market Fixed Fund................        268,000               13,798                 None
BBH High Yield Fixed Income Fund...........        835,000               42,963                 None
Cathy A. Wichert Trustee...................         60,000                3,136                 None
Cebron Family Trust........................         27,000                1,411                 None
Charles Schwab & Co. Inc...................         21,000                1,097                 None
Concordian Partners........................      1,830,000               94,080                 None
Credit Suisse First Boston.................     11,586,000              595,651                 None
David Hilty................................         55,000                2,871                 None
David Stein IRA Bear Stearns Fee Corp Cust.          4,000                  219                 None
Dean Witter Reynolds.......................         30,000                1,568                 None
Deborah Z. Corson Family Trust.............         15,000                  784                 None
Delaware Charter Guar & Trust..............          7,000                  376                 None
Deutsche Bank Securities...................        305,000               15,680                 None
Embassy & Co...............................      1,387,000               71,344                 None
EV Emerald US High Yield Fund..............        771,000               39,670                 None
First Clearing Corporation.................      3,131,000              161,540                 (1)
Fishingboat & Co...........................        305,000               15,680                 None
Goldman Sachs..............................      1,169,000               60,117                 None
Hare & Co..................................     15,304,000              786,885                 None
Harriett L. Manning........................          6,000                  313                 None
Harry John Cornbleet.......................         15,000                  784                 None
Houlihan Lokey.............................        523,000               26,938                 None
74
PRINCIPAL AMOUNT OF
                                              NOTES THAT MAY BE      COMMON STOCK THAT        MATERIAL
                   NAME                           SOLD HEREBY       MAY BE SOLD HEREBY      RELATIONSHIP
                   ----                     --------------------    ------------------      ------------
Ingalls & Snyder LLC.......................      7,137,000              366,912                 None
Irenc S. Zorensky Family Trust.............         15,000                  784                 None
Irwin Gold.................................        156,000                8,022                 None
Jeff Werbalowsky...........................        156,000                8,022                 None
Jesup & Lamont Holdings TNC. Inc. and
Charles K. Butler..........................              0              200,000                 None
JMB Capital Partners LP....................      3,050,000              156,800                 None
John S. Ingrilli And Janc Ann Ingrilli Jt
Wros.......................................         12,000                  627                 None
Jone Baker Macpherson Trustee Carington
2503 (C) Childrens.........................         40,000                2,068                 None
Joseph Manning Jr..........................          9,000                  470                 None
JP Morgan..................................      1,067,000               54,880                 None
Lami Trading Company.......................      3,050,000              156,800                 None
Lonestar Partners LP.......................      1,662,000               85,456                 None
Martin H. Orliner Trustee,.................         30,000                1,568                 None
Mary E Edwards.............................         30,000                1,568                 None
Maryjo Simjian Garre Trustee...............         15,000                  784                 None
Merrill Lynch Professional CC..............     23,954,000            1,232,038                 None
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................      2,154,000              110,855                 None
Milton L. Zorensky Insurance Trust #1......         12,000                  627                 None
Morgan Stanley & Co. Inc...................      2,962,000              152,715                 None
Morgan Stanley D W Inc.....................          3,000                  156                 None
Mr. Harold D. Carter Irra..................         21,000                1,097                 None
Mulberry Ltd...............................        410,000               21,109                 None
Murphy & Durien............................          5,000                  344                 None
Ned K. Ryder & Ann K. Ryder, Trustees......         42,000                2,195                 None
NFS/FMTC IRA FBO Herbert L Eisen...........         15,000                  784                 None
NFS/FMTC IRA FBO R. Scott Williams.........         61,000                3,136                 None
NFS/FMTC IRA FBO Samuel Garre III..........         15,000                  784                 None
Philip Lebovitz Marilyn Lebovitz...........         15,000                  784                 None
Recap International (Bvi) Ltd..............        796,000               40,972                 None
Recap Partners LP..........................        396,000               20,394                 None
Regiment Capital Ltd.......................      1,958,000              100,665                 None
Rosemary Jung..............................         15,000                  784                 None
Salomon Smith Barney.......................     15,702,000              807,360                 None
Saltship & Co..............................        115,000                5,958                 None
Sis Segainterse TTLE AG....................        152,000                7,840                 None
South Lake & Co............................      1,342,000               68,992                 None
Spindrift Investors (Bermuda), LP..........        405,000               20,854                 None
Spindrift Partners, LP.....................        406,000               20,885                 None
Stanley H. Shatz Geraloine A. Shatz........         30,000                1,568                 None
Sterneck Value & Opportunity LP............         97,000                5,017                 None
Venezuela Recovery FD NY...................        610,000               31,360                 None
Zurich Institutional Benchmark.............        240,000               12,387                 None
(1) $2,928,000 in principal amount of the notes and 150,528 shares of common
stock held by First Clearing Corporation are held on behalf of Franklin A.
Burke, a current director of Abraxas.

                                       75
We prepared this table based on the information supplied to us by the
selling security holders named in the table, and we have not sought to verify
such information.

     The selling security holders listed in the above table may have sold or
transferred, in transactions exempt from the registration requirements of the
Securities Act, some or all of their notes or shares of common stock since the
date on which the information in the above table was provided to us. Information
about selling security holders may change over time.

     Because the selling security holders may offer all or some of their notes
or shares of common stock from time to time, we cannot estimate the amount of
notes or the number of shares of common stock that will be held by the selling
security holders upon the termination of any particular offering by such selling
security holder. Please refer to "Plan of Distribution" beginning on page 77 of
this prospectus.

                                       76
PLAN OF DISTRIBUTION

     This prospectus covers the resale of the notes and the shares of Abraxas
common stock by the selling security holders and their donees, pledgees,
transferees or other successors in interest. The selling security holders may
sell their notes and shares of Abraxas common stock under this prospectus:

       -  through one or more broker-dealers acting as either principal or
          agent;

       -  through underwriters;

       -  directly to investors; or

       -  any combination of these methods.

     The selling security holders will fix a price or prices, and may change the
price, of the notes and shares of Abraxas common stock offered based upon:

       -  market prices prevailing at the time of sale;

       -  prices related to those market prices; or

       -  negotiated prices.

     These sales may be effected in one or more of the following transactions
(which may involve crosses and block transactions):

       -  on any securities exchange or U.S. inter-dealer system of a registered
          national securities association on which the common stock may be
          listed or quoted at the time of sale;

       -  in the over-the-counter market;

       -  in private transactions;

       -  through the writing of options, whether the options are listed on an
          option exchange or otherwise; or

       -  through the settlement of short sales.

     Broker-dealers, underwriters or agents may receive compensation in the form
of discounts or concessions from the selling security holders or the purchasers.
These discounts, concessions or commissions may be more than those customary for
the transaction involved. If any broker-dealer purchases the notes or shares of
common stock as principal, it may effect resales of the shares through other
broker-dealers, and other broker-dealers may receive compensation from the
purchasers for whom they act as agents.

     To comply with the securities laws of some states, if applicable, the
securities may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the securities may not
be sold unless they have been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.

     The selling security holders and any underwriters, broker-dealers or agents
that participate in the sale of the securities may be "underwriters" within the
meaning of the Securities Act. Any discounts, commissions, concessions or profit
they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Any selling security holders who are
"underwriters" within the meaning of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act.

     Any securities covered by this prospectus which qualify for sale under Rule
144 or Rule 144A of the Securities Act may be sold under Rule 144 rather than
under this prospectus. The selling security holders may not sell any securities
described in this prospectus and may not transfer, devise or gift these
securities by other means not described in this prospectus.

                                       77
To the extent required, the specific securities to be sold, the names of
the selling security holders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement of which this prospectus is a part.

     Under Abraxas' registration rights agreement with the selling security
holders, we have agreed to indemnify the selling security holders and each
underwriter, if any, against certain liabilities, including certain liabilities
under the Securities Act, or will contribute to payments the selling security
holders or underwriters may be required to make in respect of those liabilities.

     We have agreed to pay substantially all of the expenses in connection with
the registration, offering and sale of the securities covered by this
prospectus, other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.

     We have agreed to keep the registration statement, of which this prospectus
is a part, effective for two years from the time this registration statement
becomes effective, subject to extension for any suspension or blackout periods
during which securities covered by this prospectus can not be sold.

                                       78
DESCRIPTION OF THE NOTES

     Abraxas issued an aggregate principal amount of $109,523,000 of notes on
January 23, 2003 under an indenture entered into on that date among Abraxas, the
subsidiary guarantors and U.S. Bank, N.A., as trustee. The indenture is governed
by certain provisions contained in the Trust Indenture Act of 1939, as amended.
The terms of the notes include those stated in the indenture and those made part
of the indenture by reference to the Trust Indenture Act.

     The indenture provides for original issuance of up to $118,250,000.00 of
notes, plus such additional principal amounts as may be necessary for the
issuance of additional notes in lieu of cash interest payments. The indenture
also provides for issuance of registered exchange notes to be issued only in
exchange for a like principal amount of outstanding notes issued on January 23,
2003 and any additional notes issued in lieu of cash interest payments on such
outstanding notes. All of the currently outstanding notes and the exchange notes
are referred to in this description as the "notes" and are deemed to be a single
class of securities under the indenture for purposes of any waiver, consent or
amendment.

     The following description is a summary of the material provisions of the
notes, the indenture and the documents providing for the security interests of
the holders of the notes. It does not restate those agreements in their
entirety. You can find definitions of certain terms used in this description
under the subheading "Certain Definitions" beginning on page 107 of this
prospectus.

BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES

     THE NOTES

     The notes:

       -  provide that the Issuer will make current payments of interest in cash
          to the extent not prohibited by the terms of the Senior Credit
          Agreement or the Intercreditor Agreement;

       -  provide for interest not paid in cash to be paid in the form of
          additional notes;

       -  are general obligations of the Issuer;

       -  are secured by a second Lien on all of the current and future Oil and
          Gas Assets of the Issuer and its Subsidiaries, and substantially all
          other current and future assets of the Issuer and its Subsidiaries;

       -  are subordinate to Indebtedness of Issuer under the Senior Credit
          Agreement and Qualified Senior Affiliate Indebtedness (as described
          under the discussion below entitled "Intercreditor Agreement"), and
          rank equally with all of the Issuer's other current and future senior
          Indebtedness, if any;

       -  rank senior to all of the Issuer's current and future Subordinated
          Indebtedness, if any; and

       -  are unconditionally guaranteed by the Subsidiary Guarantors.

     THE GUARANTEES

     The notes are jointly and severally guaranteed (the "Guarantees") by all
current and future Subsidiaries of the Issuer, including (but not limited to)
the following:

       -  Sandia;

       -  Wamsutter;

       -  Sandia Operating;

       -  Eastside Coal;

                                       79
-  Western Associated; and

       -  New Grey Wolf.

     The Guarantees of the notes are:

       -  general obligations of each current and future Subsidiary Guarantor;

       -  senior in right of payment to all existing and future Subordinated
          Indebtedness, if any, of each Subsidiary Guarantor;

       -  subordinate to Indebtedness of each Subsidiary Guarantor under the
          Senior Credit Agreement and Qualified Senior Affiliate Indebtedness
          (as described under the discussion below entitled "Intercreditor
          Agreement"), and rank equally with all other existing and future
          senior Indebtedness of each Subsidiary Guarantor, if any;

       -  secured by a second lien on all of the current and future Oil and Gas
          Assets of each Subsidiary Guarantor, and on substantially all other
          current and future assets of each Subsidiary Guarantor; and

       -  limited for each Subsidiary Guarantor to the maximum amount which will
          result in each Guarantee not being a fraudulent conveyance or
          fraudulent transfer.

     Each Subsidiary Guarantor that makes a payment or distribution under its
Guarantee will be entitled to a contribution from each other Subsidiary
Guarantor in a prorata amount based on the net assets of each Subsidiary
Guarantor.

     Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Issuer or another Subsidiary Guarantor that is a Wholly Owned
Subsidiary without limitation, or with or to other Persons upon the terms and
conditions set forth in the indenture. See the description of the covenant in
"Merger, Consolidation and Sale of Assets" below. In the event all of the
Capital Stock of a Subsidiary Guarantor is sold by the Issuer and/or one or more
of its Subsidiaries and the sale complies with the provisions set forth in
"Limitation on Asset Sales," such Subsidiary Guarantor's Guarantee and any
related Collateral owned by such Subsidiary Guarantor will be released.

PRINCIPAL, MATURITY AND INTEREST

     The indenture provides for original issuance of up to $118,250,000.00 of
notes, plus such additional principal amounts as may be necessary for the
issuance of additional notes in lieu of cash interest payments. The notes will
be issued in full registered form only, without coupons. The notes will mature
on May 1, 2007. The indenture also provides for issuance of exchange notes.

     Interest on the notes will accrue at the rate of 11.5% per annum and, to
the extent not prohibited by the terms of the Senior Credit Agreement or the
Intercreditor Agreement, is payable in cash semi-annually on each May 1 and
November 1, commencing on May 1, 2003, to the Persons who are registered holders
at the close of business on the April 15 and October 15 immediately preceding
the applicable interest payment date. If the payment of such interest in cash is
prohibited by the terms of the Senior Credit Agreement or the Intercreditor
Agreement, that interest will be paid in the form of notes (the "PIK notes") in
a principal amount equal to the amount of accrued and unpaid interest on the
notes plus an additional 1% per annum accrued interest for the applicable
period, on each May 1 and November 1, commencing on May 1, 2003, to the Persons
who are registered holders at the close of business on the April 15 and October
15 immediately preceding the applicable interest payment date.

     Additional interest is payable on the notes, pursuant to a registration
rights agreement, under the circumstances described in "Registration Rights;
Liquidated Damages." All references to interest in this description include such
additional interest, unless the context otherwise requires.

     Upon and during the continuation of an Event of Default, interest on the
notes will accrue at the rate of 16.5% per annum, unless the terms of the
registration rights agreement apply and provide for a

                                       80
higher rate of interest. See "Registration Rights; Liquidated Damages" for a
summary of the registration rights agreement.

     Unpaid interest shall be due and payable at stated maturity or, to the
extent the notes are earlier redeemed or repurchased, on the date of such early
redemption or repurchase. Interest due and payable at the maturity of the notes
shall be paid to the Persons to whom principal is paid. Interest shall accrue
and be payable both before and after the filing of any bankruptcy petition at
the rates stated above.

     Interest on the notes will accrue from and including the issue date of the
notes. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.

PAYING AGENT AND REGISTRAR; TRANSFER AND EXCHANGE

     Initially, the Trustee will act as registrar for the notes and as paying
agent. The notes may be presented for registration of transfer and exchange at
the office of the registrar, which currently is the Trustee's corporate trust
office at 180 East Fifth Street, Saint Paul, Minnesota 55101. The Issuer will
pay principal (and premium, if any) and interest on the notes upon surrender of
the notes at the office of the paying agent in the Borough of Manhattan in the
City of New York, State of New York. The Issuer may change the paying agent,
registrar, and the agent for service of demands and notices in connection with
the notes and the guarantees without notice to the holders of the notes.

REDEMPTION

     OPTIONAL REDEMPTION

     The Issuer may redeem the notes, at its option, in whole at any time or in
part from time to time, at redemption prices expressed as percentages of the
principal amount set forth below. If the Issuer redeems all or any notes, the
Issuer must also pay all interest accrued and unpaid to the applicable
redemption date. The redemption prices for the notes during the indicated time
periods are as follows:
PERIOD                                                                                   PERCENTAGE
  ------                                                                                   ----------
From January 24, 2003 to June 23, 2003........................................             80.0429%
  From June 24, 2003 to January 23, 2004........................................             91.4592%
  From January 24, 2004 to June 23, 2004........................................             97.1674%
  From June 24, 2004 to January 23, 2005........................................             98.5837%
  Thereafter....................................................................            100.0000%
Notwithstanding the foregoing, the redemption price for notes to be
redeemed will in no event be less than the then current Adjusted Issued Price.

     The Issuer can call notes for redemption on the Issue Date without giving
any notice of redemption to the holders, and notes called for redemption on the
Issue Date will be deemed not to have accrued interest.

     If the Issuer redeems less than all of the notes, selection of notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the notes are
listed or, if the notes are not then listed on a national securities exchange,
on a pro rata basis, by lot or by such other method as the Trustee deems fair
and appropriate. The Issuer will not redeem in part notes in principal amounts
of less than $1,000. Except as provided above, the Issuer will mail notice of
redemption at least 30 and not more than 60 days before the redemption date. The
notice will describe the amount of notes being redeemed, if less than the entire
principal amount. Interest will cease to accrue on notes which are redeemed on
the redemption date.

                                       81
SECURITY

     All of the Obligations of the Issuer under the notes and the indenture and
the Guarantees are secured by a second priority Lien, but subject to certain
Permitted Liens, on all of the current and future Oil and Gas Assets of the
Issuer and its Subsidiaries, and substantially all other current and future
assets of the Issuer and the Subsidiary Guarantors (other than assets securing
Acquired Indebtedness to the extent granting additional Liens would be
prohibited by the terms of the instruments relating to such Acquired
Indebtedness). The Oil and Gas Assets included in the assets that initially
secure such Obligations represent approximately 100% of the PV-10 value at June
30, 2002 attributable to Oil and Gas Assets that remain Property of the Issuer
and its Subsidiaries after the sale of stock described under the discussion
above entitled "Business--Recent Developments--Financial Restructuring--Sale of
Stock of Canadian Abraxas and Old Grey Wolf."

     If the notes become due and payable prior to maturity or are not paid in
full at maturity, the Trustee may take all actions it deems necessary or
appropriate, including, but not limited to, foreclosing upon the Collateral in
accordance with the security documents and applicable law. The right to
foreclose on the Collateral is, however, subject to certain limitations for the
benefit of the Senior Credit Facility Lenders described below under the
discussion entitled "Intercreditor Agreement." Subject to the rights of the
Senior Credit Facility Lenders and the holder of any Qualified Senior Affiliate
Indebtedness, the proceeds received from the sale of any Collateral that is the
subject of a foreclosure or collection suit will be applied first to pay the
expenses of such foreclosure or suit and amounts then payable to the Trustee,
then to pay the principal of and interest on the notes. Subject to the rights of
the Senior Credit Facility Lenders, the Trustee has the power to institute and
maintain such suits and proceedings as it may deem expedient to prevent
impairment of, or to preserve or protect its and the holders' interest in, the
Collateral.

     We cannot assure you that the Trustee will be able to sell the Collateral
without substantial delays or compromises in addition to delays resulting from
limitations on the right to foreclose on the Collateral described below under
the discussion entitled "Intercreditor Agreement," or that the proceeds obtained
will be sufficient to pay all amounts owing to holders of the notes or. You
should read the discussion under the heading "Risk Factors --The security for
the notes may be inadequate to satisfy all amounts due and owing under the
Senior Credit Agreement and the notes" for a further discussion regarding the
adequacy of the collateral securing the notes. Third parties that have Permitted
Liens (including, without limitation, the Senior Credit Facility Lenders) may
have rights and remedies with respect to the property subject to such Liens
that, if exercised, could adversely affect the value of the Collateral. In
addition, the ability of the holders to realize upon the Collateral may be
subject to certain bankruptcy law limitations in the event of a bankruptcy. You
should read the discussion under the heading "Risk Factors" for more information
regarding these bankruptcy law limitations.

     The collateral release provisions of the indenture permit the release of
Collateral without substitution of collateral of equal value under certain
circumstances. See "Possession, Use and Release of Collateral." As described
under the summary of the covenant "Limitation on Asset Sales," the Net Cash
Proceeds of Asset Sales will be required to be utilized to Pay Down Debt.

CHANGE OF CONTROL

     If a Change of Control occurs, each holder will have the right to require
that the Issuer purchase all or a portion of such holder's notes pursuant to the
offer described below (the "Change of Control Offer"), at a purchase price equal
to the percentage of the principal amount thereof then applicable to optional
redemptions by the Issuer, plus all accrued and unpaid interest to the date of
purchase.

     The Issuer must mail a notice of any Change of Control to each holder and
the Trustee no later than 30 days after the Change of Control occurs. The notice
will state, among other things, the purchase date, which must be no earlier than
30 days nor later than 45 days from the date such notice is mailed, other than
as may be required by law (the "Change of Control Payment Date"). A Change of
Control Offer must remain open for a period of 20 Business Days or such longer
period as may be required by law. Holders electing to have a new secured note
purchased pursuant to a Change of Control Offer will be required to surrender
the new secured note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse

                                       82
of the new secured note completed, to the paying agent for the notes at the
address specified in the notice prior to the close of business on the third
Business Day prior to the Change of Control Payment Date.

     The Issuer will not be required to make a Change of Control Offer if a
third party makes the Change of Control Offer at the Change of Control purchase
price, at the same times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Issuer and purchases the
notes validly tendered and not withdrawn under such Change of Control Offer.

     If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay the Change of Control
purchase price for all the notes that might be delivered by holders seeking to
accept the Change of Control Offer. In addition, the Senior Credit Agreement may
have similar change of control provisions as the indenture, which may further
restrict the ability of the Issuer to purchase the notes. Also, the terms of the
Intercreditor Agreement will limit the Issuer's ability to make a Change of
Control Offer under certain circumstances. See the discussion below entitled
"Intercreditor Agreement." In the event the Issuer is required to purchase notes
pursuant to a Change of Control Offer, the Issuer expects that it would seek
third party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Issuer would
be able to obtain such financing.

     Neither the Board of Directors of the Issuer nor the Trustee may waive the
covenant relating to the Issuer's obligation to make a Change of Control Offer.
Restrictions in the indenture described in this Description of the notes on the
ability of the Issuer and its Subsidiaries to incur additional Indebtedness, to
grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Issuer,
whether favored or opposed by the management of the Issuer. Consummation of any
such transaction in certain circumstances may require repurchase of the notes,
and there can be no assurance that the Issuer or the acquiring party will have
sufficient financial resources to effect such repurchase. Such restrictions and
the restrictions on transactions with Affiliates may, in certain circumstances,
make more difficult or discourage any leveraged buyout of the Issuer by the
management of the Issuer. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the indenture may not afford the holders of notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.

     The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Change of Control Offer. These rules require
that the Issuer keep the offer open for 20 Business Days. They also require that
the Issuer notify holders of notes of changes in the offer and extend the offer
for specified time periods if the Issuer amends the offer. If the provisions of
any securities laws or regulations conflict with the "Change of Control"
provisions in the indenture, the Issuer will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the "Change of Control" provisions of the indenture.

INTERCREDITOR AGREEMENT

     The notes are subject to an intercreditor and subordination agreement. In
general, the Junior Indebtedness will be subordinated to the Senior
Indebtedness. The liens securing the Junior Indebtedness will also be
subordinated to the liens securing the Senior Indebtedness. The following
description is a summary of the material provisions of the intercreditor and
subordination agreement. It does not restate that agreement in its entirety. The
description is qualified in its entirety by the terms of the intercreditor and
subordination agreement.

     The intercreditor and subordination agreement has the following material
terms:

       -  Upon a payment default under the Senior Credit Agreement, the holders
          of the notes will not be entitled to be paid until all Senior
          Indebtedness is paid in full in cash.

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-  Upon a default (other than a payment default) under the Senior Credit
          Agreement, for a period of 180 days commencing upon receipt by the
          Trustee of written notice of such non-payment default (each a "Payment
          Blockage Period"), the holders of the notes will not be entitled to be
          paid. There will be at least 180 consecutive days during which no
          Payment Blockage Period is in effect during any period of 365
          consecutive days.

       -  Upon any acceleration of the Junior Indebtedness or any payment or
          distribution of assets of the Issuer or any of its Subsidiaries
          following a bankruptcy or insolvency proceeding, all amounts due or to
          become due upon the Senior Indebtedness shall be first paid in full in
          cash before any payment is made on account of any of the Junior
          Indebtedness. Following the commencement of a bankruptcy or insolvency
          proceeding, any payment or distribution of assets of the Issuer or any
          of its Subsidiaries to which the holders of the notes would be
          entitled (excluding securities that are subordinated to the Senior
          Indebtedness to the same extent as, or more deeply than, the Junior
          Indebtedness is subordinated to the Senior Indebtedness pursuant to
          the intercreditor and subordination agreement), will be paid by the
          Issuer or its Subsidiaries, or by the holders of the notes or the
          Trustee if received by them or it, directly to the Senior Credit
          Facility Lenders until the Senior Indebtedness is paid in full in
          cash.

       -  During a bankruptcy or insolvency proceeding, (a) the Senior Credit
          Facility Lenders will be permitted to file claims and proofs of claims
          in respect of the Junior Indebtedness if there shall remain not more
          than 30 days before such action is barred, prohibited or otherwise
          cannot be taken and (b) the holders of the notes and the Trustee will
          use commercially reasonable best efforts to take such actions as the
          Senior Credit Facility Lenders may reasonably request (at the Senior
          Credit Facility Lenders' expense) to collect the Junior Indebtedness
          for the account of the Senior Credit Facility Lenders and file claims
          or proof of claims with respect thereto, to execute such documents or
          instruments to enable the Senior Credit Facility Lenders to enforce
          any and all claims and the liens and security interests securing
          payment of the Junior Indebtedness and to collect and receive for the
          account of the Senior Credit Facility Lenders any and all payments or
          distributions which may be payable or deliverable upon or with respect
          to the Junior Indebtedness.

       -  Any payment or other distribution of assets of the Issuer or any of
          its Subsidiaries received by the holders of the notes or the Trustee
          prior to the payment in full of the Senior Indebtedness will be held
          by the holders of the notes or the Trustee, as the case may be, in
          trust and paid over to the Senior Credit Facility Lenders.

       -  As between the Senior Credit Facility Lenders and the holders of the
          notes, the liens and security interests of the Senior Credit Facility
          Lenders securing the Senior Indebtedness will be a first priority lien
          on and security interest in all of the property and assets on the
          Issuer and its Subsidiaries (the "Collateral") and the liens and
          security interests of the holders of the notes securing the Junior
          Indebtedness will be a second priority lien on and security interest
          in the Collateral. Neither the holders of the notes nor the Trustee
          will challenge or contest the validity, legality, perfection,
          priority, availability or enforceability of the security interests and
          liens of the Senior Credit Facility Lenders upon the Collateral or
          seek to have the same avoided, disallowed, set aside, or otherwise
          invalidated in any judicial proceeding or otherwise.

       -  Until the payment in full in cash of the Senior Indebtedness, the
          Senior Credit Facility Lenders shall have the exclusive right to
          exercise and enforce all privileges and rights to the Collateral and
          to manage the disposition of the Collateral and neither the holders of
          the notes nor the Trustee will exercise any Secured Creditor Remedies
          or commence a bankruptcy, insolvency or other proceeding against the
          Issuer or any of its Subsidiaries; provided, however, that, upon the
          occurrence and during an event of default with respect to the Junior
          Indebtedness, commencing 180 days after receipt by the Senior Credit
          Facility Lenders of written notice of such default and intention to
          exercise remedies, the holders of the notes or the Trustee may
          commence a bankruptcy, insolvency or other

                                       84
proceeding against the Issuer or any of its Subsidiaries or exercise
          any Secured Creditor Remedies unless, in the case of any exercise of
          Secured Creditor Remedies, only so long as the Senior Credit Facility
          Lenders are not diligently pursuing in good faith the exercise of
          their Secured Creditor Remedies, or attempting to vacate any stay of
          enforcement of their liens on a material portion of the Collateral.
          The holders of the notes and the Trustee will waive any and all rights
          to affect the method or challenge the appropriateness of any action by
          the Senior Credit Facility Lenders with respect to the Collateral.
          Upon an event of default with respect to the Senior Indebtedness, the
          holders of the notes and the Trustees will, immediately upon the
          request of the Senior Credit Facility Lenders, release or otherwise
          terminate their liens and security interests upon the Collateral, to
          permit the Senior Credit Facility Lenders or the Issuer or its
          Subsidiaries (with the consent of the Senior Credit Facility Lenders)
          to sell or otherwise dispose of the Collateral to the extent the
          proceeds of such sale or other disposition is used to repay in full
          and in cash the Senior Indebtedness. If such sale or other disposition
          of the Collateral by the Senior Credit Facility Lenders or the Issuer
          or its Subsidiaries (with the consent of the Senior Credit Facility
          Lenders) result in a surplus after the payment in full of the Senior
          Indebtedness, such surplus will be paid to the holders of the notes or
          the Trustee.

       -  The intercreditor and subordination agreement will remain applicable
          if the Issuer or any of its Subsidiaries is subject to a bankruptcy or
          insolvency proceeding.

       -  If, during a bankruptcy or insolvency proceeding of the Issuer or any
          of its Subsidiaries, the Senior Credit Facility Lenders decide to
          permit the use of cash collateral or provide post-petition financing
          to the Issuer or any of its Subsidiaries, the holders of the notes and
          the Trustee will not object to the use of such cash collateral or
          post-petition financing by the Senior Credit Facility Lenders (or
          their agent), provided that (i) the holders of the notes or the
          Trustee are granted the same liens and security interests on the
          post-petition Collateral that may be granted to or for the benefit of
          the Senior Credit Facility Lenders (or their agent), junior only to
          the liens and security interests of the Senior Credit Facility Lenders
          (or their agent) and (ii) the aggregate principal amount of
          pre-petition secured indebtedness together with the aggregate
          principal amount of financing in such bankruptcy or insolvency
          proceeding will not exceed, at the time of determination, the sum of
          (a) $50 million less the aggregate amount applied from time to time to
          repay the principal amount of the Senior Indebtedness which is
          accompanied by a corresponding permanent reduction of the Revolver
          Commitment under the Senior Credit Agreement plus (b) (x) $15 million,
          if the then applicable Revolver Commitment under the Senior Credit
          Agreement is $25 million or greater, (y) $10 million, if the then
          applicable Revolver Commitment under the Senior Credit Agreement is
          less than $25 million and greater than or equal to $15 million or (z)
          $5 million, if the then applicable Revolver Commitment under the
          Senior Credit Agreement is less than $15 million (the sum of the
          immediately preceding clauses (a) and (b), the "Maximum Senior
          Indebtedness"); provided, however, that in no event shall Indebtedness
          constituting Bank Product Obligations or Related Senior Indebtedness
          (as such terms are defined in the Intercreditor Agreement) be included
          in the calculation of Maximum Senior Indebtedness. Neither the holders
          of the notes nor the Trustee will object to a motion for relief from
          the automatic stay in any proceeding to foreclose on and sell the
          Collateral.

       -  The Senior Credit Facility Lenders will have absolute power and
          discretion, without notice to the holders of the notes or the Trustee,
          to deal in any manner with the Senior Indebtedness including, without
          limitation, amendments, modifications, supplements, refinancings,
          renewals, refundings, extensions or terminations of the documents
          related to the Senior Indebtedness, provided that the Senior Credit
          Facility Lenders may not (i) increase the principal amount of the
          Senior Indebtedness to a principal amount in excess of the Maximum
          Senior Indebtedness, less the outstanding Term Loan under the Senior
          Credit Agreement or (ii) extend the final maturity of the Senior
          Indebtedness beyond January 23, 2008. Neither the holders of the notes
          nor the Trustee will amend, modify or

                                       85
supplement any terms of the documents related to such notes in a
          manner adverse to the Senior Credit Facility Lenders without the prior
          written consent of the Senior Credit Facility Lenders.

       -  Until the payment in full of the Senior Secured Obligations, neither
          the holders of the notes nor the Trustee will cancel or otherwise
          discharge any of the indebtedness evidenced by the notes or
          subordinate such indebtedness to any other indebtedness of the Issuer
          or any of its Subsidiaries, other than the Senior Indebtedness.

     CERTAIN DEFINITIONS WITH RESPECT TO THE INTERCREDITOR AGREEMENT

     "BANK PRODUCT AGREEMENT" means any agreement for any service or facility
extended to the Issuer or any of its Subsidiaries by the Senior Credit Facility
Representative or any Senior Credit Facility Lender or any Affiliate of the
Senior Credit Facility Representative or any such lender including: (a) credit
cards, (b) credit card processing services, (c) debit cards, (d) purchase cards,
(e) cash management or related services (including the Automated Clearing House
processing of electronic funds transfers through the direct Federal Reserve
Fedline system), (f) cash management, including controlled disbursement,
accounts or services, or (g) Hedging Agreements.

     "HEDGING AGREEMENT" means any Currency Protection Agreement (a currency
swap, cap or collar agreement or similar arrangement entered into with the
intent of protecting against fluctuations in currency values, either generally
or under specific contingencies), any Interest Rate Protection Agreement (an
interest rate swap, cap or collar agreement or similar arrangement entered into
with the intent of protecting against fluctuations in interest rates or the
exchange of notional interest obligations, either generally or under specific
contingencies), or Commodity Hedging Agreement (a commodity hedging or purchase
agreement or similar arrangement entered into with the intent of protecting
against fluctuations in commodity prices or the exchange of notional commodity
obligations, either generally or under specific contingencies).

     "JUNIOR INDEBTEDNESS" means any and all presently existing or hereafter
arising Indebtedness, claims, debts, liabilities, obligations (including,
without limitation, any prepayment premium), fees, expenses or indemnities of
the Issuer or any of its Subsidiaries owing to the holders of the notes (or
their agents or trustees) under the indenture, the notes and any other
agreement, instrument or document related thereto, whether direct or indirect,
whether contingent (including in respect of any guaranty or the registration
rights agreement) or of any other nature, character, or description (including
all interest and other amounts accruing after commencement of any bankruptcy or
insolvency proceeding, and any interest and other amounts that, but for the
provisions of the bankruptcy code, would have accrued and become due or
otherwise would have been allowed), and any refinancings, renewals, refundings,
or extensions of such amounts to the extent permitted under the Intercreditor
Agreement.

     "SECURED CREDITOR REMEDIES" means any action by the Senior Credit Facility
Representative, the Senior Credit Facility Lenders, the holders of the notes or
their trustee (each a "Secured Creditor") in furtherance of the sale,
foreclosure, realization upon, or the repossession or liquidation of any of the
Collateral, including, without limitation: (i) the exercise of any remedies or
rights of a "Secured Creditor" under Article 9 of the applicable Uniform
Commercial Code, such as, without limitation, the notification of account
debtors; (ii) the exercise of any remedies or rights as a mortgagee or
beneficiary (or by the trustee on behalf of the beneficiary), including, without
limitation, the appointment of a receiver, or the commencement of any
foreclosure proceedings or the exercise of any power of sale, including, without
limitation, the placing of any advertisement for the sale of any Collateral;
(iii) the exercise of any remedies available to a judgment creditor; (iv) the
exercise of any rights of forfeiture, recession or repossession of any assets,
or (v) any other remedy available in respect of the Collateral available to such
Secured Creditor under any agreement, instrument or other document to which it
is a party or under applicable law, provided that Secured Creditor Remedies
shall not include any action taken by a Secured Creditor solely to (A) correct
any mistake or ambiguity in any agreement, instrument or other document or (B)
remedy or cure any defect in or lapse of perfection of the lien of a Secured
Creditor in the Collateral.

                                       86
"SENIOR INDEBTEDNESS" means any and all presently existing or hereafter
arising indebtedness, reimbursement obligations, claims, debts, liabilities,
obligations (including, without limitation, any prepayment premium), expenses,
fees or indemnities of the Issuer or any of its Subsidiaries owing to the Senior
Credit Facility Lenders (or their agents) under the Senior Credit Agreement or
any other agreement, instrument or document related thereto (including under any
Bank Product Agreement), whether direct or indirect, whether contingent
(including in respect of any guaranty) or of any other nature, character, or
description (including all interest and other amounts accruing after
commencement of any bankruptcy or insolvency proceeding, and all interest and
other amounts that, but for the provisions of the bankruptcy code, would have
accrued and become due or otherwise would have been allowed), and any
refinancings, renewals, refundings, or, to the extent permitted in the
intercreditor and subordination agreement, extensions of such amounts.

CERTAIN COVENANTS

     The indenture contains, among others, the following covenants:

     LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS

     Other than Permitted Indebtedness, the Issuer may not, and may not cause or
permit any of its Subsidiaries to, directly or indirectly, create, incur,
assume, guarantee, acquire, become liable, contingently or otherwise, with
respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness.

     Indebtedness of a Person existing at the time such Person becomes a
Subsidiary (whether by merger, consolidation, acquisition of Capital Stock or
otherwise) or is merged with or into the Issuer or any Subsidiary or which is
secured by a Lien on an asset acquired by the Issuer or a Subsidiary (whether or
not such Indebtedness is assumed by the acquiring Person) shall be deemed
incurred at the time the Person becomes a Subsidiary or at the time of the asset
acquisition.

     The Issuer will not, and will not permit any Subsidiary Guarantor, to incur
any Indebtedness which by its terms (or by the terms of any agreement governing
such Indebtedness) is subordinated in right of payment to any other Indebtedness
(other than to senior Indebtedness under the Senior Credit Agreement and
Qualified Senior Affiliate Indebtedness) of the Issuer or such Subsidiary
Guarantor unless such Indebtedness is also by its terms (or by the terms of any
agreement governing such Indebtedness) made expressly subordinate in right of
payment to the notes or the Guarantee of such Subsidiary Guarantor, as the case
may be, pursuant to subordination provisions that are substantively identical to
the subordination provisions of such Indebtedness (or such agreement) that are
most favorable to the holders of any other Indebtedness (other than to senior
Indebtedness under the Senior Credit Agreement and Qualified Senior Affiliate
Indebtedness) of the Issuer or such Subsidiary Guarantor, as the case may be.
Notwithstanding the foregoing, the provisions of this paragraph do not prohibit
tranches of Indebtedness under the Senior Credit Agreement being subordinated to
other tranches of Indebtedness under the Senior Credit Agreement. The Issuer
will not, and will not permit any Subsidiary to, incur or suffer to exist
Indebtedness that is senior in right of payment to the notes or any Guarantee,
as the case may be, and expressly contractually subordinate in right of payment
to any other Indebtedness of the Issuer or such Subsidiary, as the case may be.

     LIMITATION ON RESTRICTED PAYMENTS

     The indenture defines the following as Restricted Payments if done by the
Issuer or any of its Subsidiaries:

       -  declare or pay any dividend or make any distribution (other than
          dividends or distributions payable solely in Qualified Capital Stock
          of the Issuer) on or in respect of shares of the Issuer's Capital
          Stock to holders of such Capital Stock;

       -  purchase, redeem or otherwise acquire or retire for value any Capital
          Stock of the Issuer or any warrants, rights or options to purchase or
          acquire shares of any class of such Capital Stock other than through
          the exchange therefore solely of Qualified Capital Stock

                                       87
of the Issuer or warrants, rights or options to purchase or
          acquire shares of Qualified Capital Stock of the Issuer;

       -  make any principal payment on, purchase, defease, redeem, prepay,
          decrease or otherwise acquire or retire for value, prior to any
          scheduled final maturity, scheduled repayment or scheduled sinking
          fund payment, any Subordinated Indebtedness of the Issuer or a
          Subsidiary Guarantor; or

       -  make any Investment (other than a Permitted Investment).

     However, the Issuer may take the following actions:

       -  if no Default or Event of Default shall have occurred and be
          continuing, the acquisition of any shares of Capital Stock of the
          Issuer solely in exchange for shares of Qualified Capital Stock of the
          Issuer, and

       -  if no Default or Event of Default shall have occurred and be
          continuing, the acquisition of any Indebtedness of the Issuer or a
          Subsidiary Guarantor that is subordinate or junior in right of payment
          to the notes or such Subsidiary Guarantor's Guarantee, as the case may
          be, the incurrence of which was not in violation of the indenture,
          solely in exchange for shares of Qualified Capital Stock of the
          Issuer.

     LIMITATION ON ASSET SALES

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
consummate an Asset Sale unless the consideration received is at least equal to
the fair market value of the assets sold or otherwise disposed of, as determined
in good faith by the Issuer's Board of Directors or senior management of the
Issuer, and at least 95% of the consideration received is cash or Cash
Equivalents and is received at the time of such disposition.

     The Issuer will be required to apply Net Cash Proceeds received from any
Asset Sale to Pay Down Debt.

     If at any time any consideration (other than cash or Cash Equivalents)
received in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash, then such conversion or disposition shall be
treated like an Asset Sale and the Net Cash Proceeds will be applied as
described above.

     The Issuer may defer the action to Pay Down Debt until there is an
aggregate Available Proceeds Amount equal to or in excess of $500,000.00
resulting from one or more Asset Sales (at which time the entire unutilized
Available Proceeds Amount, and not just the amount in excess of $500,000.00,
will be applied as required pursuant to this paragraph).

     All Collateral Proceeds delivered to the Trustee will constitute Trust
Moneys, and all Collateral Proceeds will be delivered by the Issuer:

       -  so long as any Indebtedness under the Senior Credit Agreement or any
          Qualified Senior Affiliate Indebtedness remains outstanding, to the
          Senior Credit Facility Representative; and

       -  otherwise to the Trustee and all Collateral Proceeds delivered to the
          Trustee will be deposited in the Collateral Account in accordance with
          the indenture. These Collateral Proceeds may be withdrawn from the
          Collateral Account for application by the Issuer as set forth above or
          otherwise pursuant to the indenture as summarized in "Deposit; Use and
          Release of Trust MONEYS."

     In the event of the transfer of substantially all (but not all) of the
consolidated assets of the Issuer as an entirety to a Person in a transaction
permitted under the covenant described in "Merger, Consolidation and Sale of
Assets," the successor corporation will be deemed to have sold the consolidated
assets of the Issuer not so transferred and must comply with the provisions of
this covenant as if it were an Asset Sale.

                                       88
In addition, the fair market value of the consolidated assets of the Issuer
deemed to be sold will be deemed to be Net Cash Proceeds.

     The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes as a result of an action to Pay Down Debt.

     LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or permit to exist or become
effective any encumbrance or restriction (each, a "Payment Restriction") on the
ability of any Subsidiary to:

       -  pay dividends or make any other distributions on or in respect of its
          Capital Stock;

       -  make loans or advances, or to pay any Indebtedness or other obligation
          owed, to the Issuer or any other Subsidiary;

       -  guarantee any Indebtedness or any other obligation of the Issuer or
          any Subsidiary; or

       -  transfer any of its property or assets to the Issuer or any other
          Subsidiary.

     The preceding will not apply, however, to encumbrances or restrictions
existing under or by reason of the following (which are excluded from the term
"Payment Restriction"):

     (1) applicable law;

     (2) the indenture, the Senior Credit Agreement, any security document or
any of the security documents entered into in connection with the Senior Credit
Agreement, and any document or instrument evidencing, governing or securing any
of the Qualified Senior Affiliate Indebtedness;

     (3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Subsidiary;

     (4) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to such Subsidiary, or the properties or assets of
such Subsidiary, other than the Person or the properties or assets of the Person
so acquired;

     (5) agreements existing on the Issue Date to the extent and in the manner
such agreements were in effect on the Issue Date;

     (6) customary restrictions with respect to a Subsidiary pursuant to an
agreement that has been entered into for the sale or disposition of Capital
Stock or assets of such Subsidiary to be consummated in accordance with the
terms of the indenture solely in respect of the assets or Capital Stock to be
sold or disposed of;

     (7) any instrument governing a Permitted Lien, to the extent and only to
the extent such instrument restricts the transfer or other disposition of assets
subject to such Permitted Lien; or

     (8) an agreement governing Refinancing Indebtedness incurred to Refinance
the Indebtedness issued, assumed or incurred pursuant to an agreement referred
to in clause (2), (4) or (5) above; provided, however, that the provisions
relating to such encumbrance or restriction contained in any such Refinancing
Indebtedness are no less favorable to the holders in any material respect as
determined by the Board of Directors of the Issuer in its reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in the applicable agreement referred to in such clause (2), (4) or
(5).

                                       89
LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES

     The Subsidiaries may not issue any Preferred Stock (other than to the
Issuer or to a Wholly Owned Subsidiary) or permit any Person (other than the
Issuer or a Wholly Owned Subsidiary) to own any Preferred Stock of any
Subsidiary.

     LIMITATION ON LIENS

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume or permit or suffer to exist or
remain in effect any Liens upon any properties or assets of the Issuer or of any
of its Subsidiaries, whether owned on the Issue Date or acquired after the Issue
Date, or on any income or profits therefrom, or assign or otherwise convey any
right to receive income or profits thereon, other than Permitted Liens.

     MERGER, CONSOLIDATION AND SALE OF ASSETS

     The Issuer shall not, in a single transaction or series of related
transactions;

       -  consolidate or merge with or into any Person,

       -  or sell, assign, transfer, lease, convey or otherwise dispose of (or
          cause or permit any Subsidiary to sell, assign, transfer, lease,
          convey or otherwise dispose of) all or substantially all of the assets
          owned directly or indirectly by the Issuer (determined on a
          consolidated basis for the Issuer and its Subsidiaries), whether as an
          entirety or substantially as an entirety to any Person,

          unless:

       -  either

          (A) the Issuer shall be the surviving or continuing corporation, or

          (B) the Person (if other than the Issuer) formed by such consolidation
     or into which the Issuer is merged or the Person which acquires by sale,
     assignment, transfer, lease, conveyance or other disposition the assets of
     the Issuer and its Subsidiaries substantially as an entirety (the
     "Surviving Entity")

               (i) shall be a corporation organized and validly existing under
     the laws of the United States or any state thereof or the District of
     Columbia; and

               (ii) shall expressly assume, by supplemental indenture (in form
     and substance satisfactory to the Trustee), executed and delivered to the
     Trustee, the due and punctual payment of the principal of, premium, if any,
     and interest on all of the notes and the performance of every covenant of
     the notes, the indenture, and the security documents on the part of the
     Issuer to be performed or observed;

     -    immediately after giving effect to such transaction and the assumption
          contemplated above (including giving effect to any Indebtedness
          incurred or anticipated to be incurred and any Lien granted in
          connection with or in respect of such transaction), the Issuer or such
          Surviving Entity, as the case may be,

               (A) shall have a Consolidated Net Worth equal to or greater than
     the Consolidated Net Worth of the Issuer immediately prior to such
     transaction, and

               (B) both (i) the Issuer's or such Surviving Entity's (calculated
     as if such Surviving Entity was the Issuer), as the case may be,
     Consolidated EBITDA Coverage Ratio is at least equal to 2.5 to 1.0; and
     (ii) the Issuer's or such Surviving Entity's (calculated as if such
     Surviving Entity was the Issuer), as the case may be, Adjusted Consolidated
     Net Tangible Assets are equal to or greater than 150% of the aggregate
     consolidated Indebtedness of the Issuer and its Subsidiaries;

                                       90
-  immediately before and immediately after giving effect to such
          transaction and the assumption contemplated above (including, without
          limitation, giving effect to any Indebtedness incurred or anticipated
          to be incurred and any Lien granted in connection with or in respect
          of the transaction), no Default or Event of Default shall have
          occurred or be continuing; and

       -  the Issuer or the Surviving Entity, as the case may be, shall have
          delivered to the Trustee an officer's certificate and an opinion of
          counsel, each stating that such consolidation, merger, sale,
          assignment, transfer, lease, conveyance or other disposition and, if a
          supplemental indenture is required in connection with such
          transaction, such supplemental indenture comply with the applicable
          provisions of the indenture and that all conditions precedent in the
          indenture relating to such transaction have been satisfied.

     For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the assets of one or more Subsidiaries the Capital Stock of
which constitutes all or substantially all of the assets of the Issuer, shall be
deemed to be the transfer of all or substantially all of the assets of the
Issuer.

     Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Issuer in accordance with the foregoing, in which the
Issuer is not the continuing corporation, the successor Person formed by such
consolidation or into which the Issuer is merged or to which such transfer is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Issuer under the indenture and the notes and thereafter (except in
the case of a lease), the Issuer will be relieved of all further obligations and
covenants under the indenture and the notes.

     Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the indenture in connection with any transaction complying with the provisions
of the indenture described under "Merger, Consolidation and Sale of Assets") may
not, and the Issuer may not cause or permit any Subsidiary Guarantor to,
consolidate with or merge with or into any Person other than the Issuer or
another Subsidiary Guarantor that is a Wholly Owned Subsidiary unless:

       -  the entity formed by or surviving any such consolidation or merger (if
          other than the Subsidiary Guarantor) is a Person organized and
          existing under the laws of the United States or any state thereof or
          the District of Columbia (or if such Subsidiary Guarantor was formed
          under the laws of Canada or any province or territory thereof, such
          Surviving Entity shall be a Person organized and validly existing
          under the laws of Canada or any province or territory thereof);

       -  such entity assumes by execution of a supplemental indenture all of
          the obligations of the Subsidiary Guarantor under its Guarantee;

       -  immediately after giving effect to such transaction, no Default or
          Event of Default shall have occurred and be continuing; and

       -  immediately after giving effect to such transaction and the use of any
          net proceeds therefrom on a pro forma basis, the Issuer could satisfy
          the Consolidated Net Worth and Consolidated EBITDA Coverage Ratio and
          Adjusted Consolidated Net Tangible Assets tests set forth above.

     Any merger or consolidation of a Subsidiary Guarantor with and into the
Issuer (with the Issuer being the Surviving Entity) need only comply with the
officer's certificate and opinion of counsel provisions set forth above.

     LIMITATIONS ON TRANSACTIONS WITH AFFILIATES

     The Issuer may not, and may not cause or permit any of its Subsidiaries to,
directly or indirectly, engage in any transaction or series of related
transactions (including, without limitation, the purchase, sale,

                                       91
lease or exchange of any property, the guaranteeing of any Indebtedness or the
rendering of any service) with any of its Affiliates unless:

       -  such transaction or series of related transactions is not otherwise
          prohibited by the terms of the indenture and is on terms that are fair
          and reasonable to the Issuer or the applicable Subsidiary and are no
          less favorable to the Issuer or the applicable Subsidiary than would
          have been obtained in a comparable transaction at such time on an
          arm's-length basis from a Person that is not an Affiliate; and

       -  with respect to a transaction or series of related transactions
          involving aggregate payments or other property with a fair market
          value in excess of $250,000.00, the Issuer obtains Board approval
          which is evidenced by a resolution stating that the Board has
          determined that such transaction complies with the foregoing
          provisions.

     In addition, if the transaction or series of related transactions involves
an aggregate fair market value of more than $2,000,000.00, the Issuer must,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such transaction or series of related transactions to the Issuer or the
relevant Subsidiary, as the case may be, from a financial point of view, from an
Independent Advisor and file the same with the Trustee.

     The foregoing shall not apply to:

       -  reasonable fees and compensation paid to and indemnity provided on
          behalf of, officers, directors, employees or consultants of the Issuer
          or any Subsidiary as determined in good faith by the Board of
          Directors or senior management of the Issuer or such Subsidiary, as
          the case may be;

       -  transactions exclusively between or among the Issuer and any of its
          Subsidiaries or exclusively between or among such Subsidiaries if such
          transactions are not otherwise prohibited by the indenture; and

       -  Restricted Payments permitted by the indenture, or any guarantee or
          assumption by the Issuer or any of its Subsidiaries of Indebtedness of
          the Issuer or any of its Subsidiaries if the incurrence of such
          Indebtedness was not prohibited by the indenture.

     ADDITIONAL SUBSIDIARY GUARANTEES

     All Subsidiaries of the Issuer shall be Subsidiary Guarantors. If any
Subsidiary of the Issuer is formed after the Issue Date, or if a Person
otherwise becomes a Subsidiary of the Issuer after the Issue Date, the Issuer
shall cause such Subsidiary to:

       -  execute and deliver to the Trustee a supplemental indenture in form
          reasonably satisfactory to the Trustee pursuant to which such
          Subsidiary shall unconditionally guarantee all of the Issuer's
          obligations under the notes and the indenture on the terms set forth
          in the indenture;

       -  grant to the Trustee a second priority Lien (subject to certain
          Permitted Liens) on all of the current and future Oil and Gas Assets
          of such Subsidiary, and substantially all of its other current and
          future assets using applicable security documents substantially in the
          same form as those executed and delivered on January 23, 2003; and

       -  deliver to the Trustee an opinion of counsel and an officers'
          certificate, stating that no event of default shall occur as a result
          of such supplemental indenture or security documents, that each such
          instrument complies with the terms of the indenture and that each such
          instrument has been duly authorized, executed and delivered by such
          Subsidiary and constitutes a legal, valid, binding and enforceable
          obligation of such Subsidiary.

     Thereafter, such Subsidiary shall be a Subsidiary Guarantor for all
purposes of the indenture.

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LIMITATION ON IMPAIRMENT OF SECURITY INTEREST

     Neither the Issuer nor any of its Subsidiaries may take or omit to take any
action which would have the result of adversely affecting or impairing the
security interest in favor of the Trustee, on behalf of itself and the holders,
with respect to the Collateral, and neither the Issuer nor any of its
Subsidiaries may grant to any Person, or suffer any Person (other than the
Issuer and its Subsidiaries) to have (other than to the Trustee on behalf of the
Trustee and the holders) any interest whatsoever in the Collateral other than
Permitted Liens. Neither the Issuer nor any of its Subsidiaries may enter into
any agreement or instrument that by its terms requires the proceeds received
from any sale of Collateral to be applied to repay, redeem, defease or otherwise
acquire or retire any Indebtedness, other than Indebtedness under the Senior
Credit Agreement, Qualified Senior Affiliate Indebtedness, and the security
documents entered into in connection therewith, and other than pursuant to the
indenture and the security documents.

     LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF SUBSIDIARIES

     The Issuer may not, and may not permit any Subsidiary to, sell or otherwise
dispose of any shares of Capital Stock of any Subsidiary, and shall not permit
any of its Subsidiaries, directly or indirectly, to issue or sell or otherwise
dispose of any of its Capital Stock except:

       -  to the Issuer or a Wholly Owned Subsidiary; or

       -  if all shares of Capital Stock of such Subsidiary owned by the Issuer
          and its Subsidiary are sold or otherwise disposed of.

     In connection with any sale or disposition of Capital Stock of any
Subsidiary, the Issuer will be required to comply with the covenant described
under the caption "Limitation on Asset Sales."

     LIMITATION ON CONDUCT OF BUSINESS

     The Issuer will not, and will not permit any of its Subsidiaries to, engage
in the conduct of any business other than the Crude Oil and Natural Gas
Business.

     REPORTS TO HOLDERS

     The Issuer will deliver to the Trustee within 15 days after the filing of
the same with the SEC, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the Issuer is required
to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that the Issuer may not be subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act, the Issuer will file with the SEC,
to the extent permitted, and provide the Trustee and Holders with such annual
reports and such information, documents and other reports specified in Sections
13 and 15(d) of the Exchange Act. The Issuer will also comply with the other
provisions of Section 314(a) of the Trust Indenture Act.

     The reports and information delivered pursuant to the preceding paragraph
shall include quarterly financials, including details regarding sources and uses
of cash or of any assets of the Issuer and its Subsidiaries. Such financials
will provide details on both a consolidated and unconsolidated basis.

     WAIVER OF STAY, EXTENSION OR USURY LAWS

     The Issuer and each Subsidiary Guarantor will covenant (to the extent that
they may lawfully do so) that they will not at any time insist upon, plead, or
in any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law that would prohibit or forgive the
Issuer or such Subsidiary Guarantor from paying all or any portion of the
principal of or interest on the notes as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of the indenture; and (to the extent that they may lawfully do so)
the Issuer and each Subsidiary Guarantor will expressly waive in the indenture
all benefit or advantage of any such law, and covenant that they will not
hinder, delay or impede the execution of any power herein

                                       93
granted to the trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.

     LEVERAGE COVENANT

     The Issuer must not allow the Issuer's Consolidated EBITDA to Cash Interest
Expense Ratio, as of the last day of any calendar quarter after the Issue Date,
to be less than 3.0:1, except on the last day of the first calendar quarter of
2003, at which time this ratio must not be less than 2.0:1.

     EXCESS CASH FLOW AND EXCESS CASH

     Without duplication with respect to the requirement to Pay Down Debt set
forth in the next paragraph, within 30 days after the last day of each calendar
quarter ending after the Issue Date, the Issuer must apply an amount to Pay Down
Debt equal to 90% of the Excess Cash Flow of the Issuer for such calendar
quarter.

         Without duplication with respect to the requirement to Pay Down Debt
set forth in the previous paragraph, with respect to each calendar quarter
ending after the Issue Date and on the same date that the Issuer applies an
amount to Pay Down Debt pursuant to the preceding paragraph with respect to such
calendar quarter, and on a date that is 7 days after the Issue Date, the Issuer
must apply an amount to Pay Down Debt equal to all cash of the Issuer and its
Subsidiaries as of such date (each such date a "Cash Sweep Payment Date"), after
the application of an amount to Pay Down Debt pursuant to the preceding
paragraph, on that date (provided that if there is no Excess Cash Flow with
respect to such calendar quarter, the Cash Sweep Payment Date with respect to
such calendar quarter shall be the first business day that is 30 days after the
last day of such calendar quarter), minus

       -  $2.5 million,

       -  Restricted Cash as of such Cash Sweep Payment Date,

       -  the amount of Capital Expenditures the Issuer is permitted to make
          pursuant to the terms of the indenture during the next calendar
          quarter pursuant to the covenant described below under the heading
          "Limitations on Capital Expenditures," minus amounts available for
          making Capital Expenditures under any revolving credit facility under
          the Senior Credit Agreement as of such Cash Sweep Payment Date,

       -  cash of the Issuer as of such Cash Sweep Payment Date otherwise
          applied or required to be applied to Pay Down Debt, and

       -  without duplication with respect to the previous bullet point, any
          such cash of the Issuer and its Subsidiaries as of the Cash Sweep
          Payment Date constituting proceeds of any equity offering by the
          Issuer or proceeds of any Subordinated Indebtedness of the Issuer or
          any of its Subsidiaries complying with the provisions of the indenture
          described below under "Proceeds from Issuances of Equity and
          Subordinated Debt."

     The Issuer will manage the cash of the Issuer and its Subsidiaries in the
ordinary course of business consistent with past practices and in compliance
with the terms of the Senior Credit Agreement.

     LIMITATION ON EXPENDITURES FOR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     The Issuer must observe the following covenants with respect to
expenditures by the Issuer and its Subsidiaries on SG&A:

       -  The amount expended by the Issuer and its Subsidiaries on SG&A in any
          calendar quarter ending after the Issue Date shall not exceed the
          applicable SG&A Quarterly Amount, subject, however, to the following
          carryforward and carryback provisions:

          -    to the extent the SG&A in any one quarter (excluding the amount
               of SG&A due to any Rollover Increase because of a prior quarter's
               SG&A Deficit Amount) exceeds the

                                       94
applicable SG&A Quarterly Amount, the SG&A Quarterly Amount for
               the two succeeding quarters shall be reduced in the aggregate by
               an amount equal to the applicable SG&A Excess Amount, and

          -    to the extent the SG&A in any one quarter (excluding the amount
               of SG&A due to any Rollover Decrease because of a prior quarter's
               SG&A Excess Amount) is less than the applicable SG&A Quarterly
               Amount, the SG&A Quarterly Amount for the two succeeding quarters
               shall be increased in the aggregate by an amount equal to the
               applicable SG&A Deficit Amount,

       -  In no event shall the amount expended by the Issuer and its
          Subsidiaries on SG&A in any calendar year ending after the Issue Date
          exceed the SG&A Annual Amount.

     LIMITATIONS ON CAPITAL EXPENDITURES

     The Issuer must observe the following covenants with respect to Capital
Expenditures by the Issuer and its Subsidiaries:

       -  For the first calendar quarter in 2003, Capital Expenditures of the
          Issuer and its Subsidiaries shall not exceed the Q1-2003 CapEx Amount,
          and for each other calendar quarter in 2003, Capital Expenditures of
          the Issuer and its Subsidiaries shall not exceed the Q2,3,4-2003 CapEx
          Amount, subject, however, to the following carryforward and carryback
          provisions:

          -    to the extent Capital Expenditures in the first calendar quarter
               of 2003 (excluding the amount of Capital Expenditures due to any
               Rollover Increase because of a prior quarter's CapEx Deficit
               Amount) exceed the Q1-2003 CapEx Amount or to the extent Capital
               Expenditures in any other calendar quarter of 2003 (excluding the
               amount of Capital Expenditures due to any Rollover Increase
               because of a prior quarter's CapEx Deficit Amount) exceed the
               Q2,3,4-2003 CapEx Amount, as applicable, the CapEx Quarterly
               Amount for the two succeeding quarters shall be decreased in the
               aggregate by an amount equal to the applicable CapEx Excess
               Amount, and

          -    to the extent Capital Expenditures in the first calendar quarter
               of 2003 (excluding the amount of Capital Expenditures due to any
               Rollover Decrease because of a prior quarter's CapEx Excess
               Amount) fall below the Q1-2003 CapEx Amount or to the extent
               Capital Expenditures in any other calendar quarter of 2003
               (excluding the amount of Capital Expenditures due to any Rollover
               Decrease because of a prior quarter's CapEx Excess Amount) fall
               below the Q2,3,4-2003 CapEx Amount, as applicable, the CapEx
               Quarterly Amount for the two succeeding quarters shall be
               increased in the aggregate by an amount equal to the applicable
               CapEx Deficit Amount.

       -  In no event shall the Capital Expenditures of the Issuer and its
          Subsidiaries for calendar year 2003 exceed the 2003 CapEx Amount.

       -  For each calendar quarter in calendar year 2004 and each calendar
          quarter in any following calendar year, Capital Expenditures of the
          Issuer and its Subsidiaries shall not exceed the applicable 2004-Plus
          CapEx Quarterly Amount, subject, however, to the following
          carryforward and carryback provisions:

          -    to the extent Capital Expenditures in any such quarter (excluding
               the amount of Capital Expenditures due to any Rollover Increase
               because of a prior quarter's CapEx Deficit Amount) exceed the
               applicable 2004-Plus CapEx Quarterly Amount, the 2004-Plus CapEx
               Quarterly Amount for the two succeeding quarters shall be
               decreased in the aggregate by an amount equal to the applicable
               CapEx Excess Amount, and

          -    to the extent the Capital Expenditures in any such quarter
               (excluding the amount of Capital Expenditures due to any Rollover
               Decrease because of a prior quarter's CapEx Excess Amount) fall
               below the applicable 2004-Plus CapEx Quarterly Amount, the
               2004-Plus CapEx Quarterly Amount for the two succeeding quarters
               shall be increased in the aggregate by an amount equal to the
               applicable CapEx Deficit Amount.

                                       95
-    In no event shall the Capital Expenditures of the Issuer and its
               Subsidiaries for calendar year 2004 or any following calendar
               year exceed the 2004-Plus CapEx Annual Amount.

         With respect to the limitations on Capital Expenditures set forth
above, the Issuer will be allowed to reallocate capacity for making up to an
aggregate of $3 million of Capital Expenditures which are to be used for
satisfying capital calls with respect to non-operating mineral interests of the
Issuer and its Subsidiaries for development expenses with respect to such
non-operating mineral interests as follows:

          -    any such reallocation will increase the annual permissible
               Capital Expenditures by the amount of such reallocation for the
               calendar year to which such reallocation was made, and will
               decrease the annual permissible Capital Expenditures by the
               amount of such reallocation for the calendar year from which such
               reallocation was made;

          -    the amount reallocated to a calendar year must be allocated by
               the Issuer to the calendar quarters within that calendar year to
               increase the permissible Capital Expenditures for such calendar
               quarters, and the amount reallocated from a calendar year must be
               allocated by the Issuer to the calendar quarters within that
               calendar year to decrease the permissible Capital Expenditures
               for such calendar quarters.

          -    any amount reallocated to a particular period (i.e., to a
               particular calendar year or a particular calendar quarter) can be
               used only for Capital Expenditures to satisfy capital calls with
               respect to non-operating mineral interests of the Issuer and its
               Subsidiaries for development expenses with respect to such
               non-operating mineral interests

     LIMITATION ON TAX SHARING ARRANGEMENTS

     Neither the Issuer nor any of its Subsidiaries may enter into any
agreement, arrangement or understanding with respect to liability for payment or
sharing of any other Person's taxes, including any tax sharing or similar
arrangement, except to the extent of any covenant pursuant to which funds or
money actually paid or transferred to or from the Issuer or its Subsidiary, as
the case may be, are thereupon actually used to pay the applicable taxes.

     LIMITATION ON USES OF CASH

     The indenture provides that the Issuer and its Subsidiaries will make cash
expenditures only for the following and only to the extent not otherwise
prohibited by the terms of the indenture:

     -    Qualified Lease Operating Costs, SG&A costs, taxes (e.g., income,
          severance, ad valorem, franchise) in each case not prohibited by the
          terms of the indenture;

     -    cash interest requirements;

     -    Capital Expenditures not prohibited by the terms of the indenture;

     -    any oil and gas hedge settlements requiring a cash payment from the
          Issuer pursuant to oil and gas hedge agreements entered into (a)
          pursuant to approval by the Board of Directors of the Issuer, (b) in
          the ordinary course of business, and (c) to provide protection against
          oil and gas price fluctuations with respect to reasonably anticipated
          oil and gas production of the Issuer and its Subsidiaries and not for
          the purpose of speculating;

     -    any payment to reduce debt to the extent such payment is not
          prohibited by the terms of the indenture, provided that the average
          days outstanding for payables paid shall not be less than the greater
          of (a) 45 days and (b) the industry standard therefor, subject to
          adjustment by the Board of Directors of the Issuer;

     -    payments due to the settling of a natural gas balancing deficiency not
          to exceed $45,000 in the aggregate in any calendar year unless a
          higher amount is approved by the Board of Directors of the Issuer;

     -    payment of judgments rendered by a court of law;

                                       96
-    assessments issued by any governmental entity;

     -    additional cash expenditures not to exceed $2 million in the aggregate
          in any calendar year; provided, however, that the Issuer and its
          Subsidiaries may make aggregate cash expenditures in excess of $2
          million in any calendar year under this provision if the Board of
          Directors of the Issuer approves such expenditures;

     -    obligations under the Senior Credit Agreement and Qualified Senior
          Affiliate Indebtedness including, but not limited to, fees and
          expenses incurred in connection therewith and fees related to any
          amendment, waiver, consent or similar actions taken by the agent and
          lenders related thereto (the payment of which obligations will not be
          prohibited by the terms of the indenture); and

     -    payment of any Stark Fees.

     PROCEEDS FROM ISSUANCES OF EQUITY AND SUBORDINATED DEBT

               The Issuer may issue common equity, or preferred equity with no
maturity or required or allowed cash dividend, at any time and may use the net
proceeds from any such issuance in any manner consistent with other provisions
of the indenture. Such net proceeds will not be included in the calculation of
Excess Cash Flow.

               The Issuer may also issue preferred equity with a maturity or
required or allowed cash dividends if such issuance complies with the following
requirements:

          -    no portion of any such equity may be redeemed or repurchased or,
               except as permitted pursuant to the third bullet point, have any
               other cash distribution or dividend until the notes are
               completely repaid,

          -    at least 50% of the proceeds of such issuance must immediately be
               used to Pay Down Debt, and

          -    no cash dividends can be paid on such equity unless:

               -    at least 75% of such proceeds are used to Pay Down Debt,

               -    the cash dividend payable to the holders of such equity does
                    not exceed the Cash Coupon on the notes, and

               -    the holders of the notes receive in cash (in full) current
                    interest payments due and payable.

     The Issuer and its Subsidiaries may also incur Subordinated Indebtedness
that complies with the following requirements (such Indebtedness is referred to
as "Permitted Subordinated Indebtedness"):

          -    no portion of any principal of any such Subordinated Indebtedness
               may be repaid, or refinanced if such refinancing results in a
               shorter Weighted Average Life to Maturity or in the terms of such
               Subordinated Indebtedness being less favorable to the holders of
               the notes, until the notes are completely repaid,

          -    at least 50% of the proceeds of such issuance must immediately be
               used to Pay Down Debt, and

          -    no cash interest can be paid on such Subordinated Indebtedness
               unless:

               -    at least 75% of such proceeds are used to Pay Down Debt,

               -    the cash portion of any interest payable to the holders of
                    such Subordinated Indebtedness does not exceed the Cash
                    Coupon on the notes, and

               -    the holders of the notes receive in cash (in full) current
                    interest payments due and payable.

                                       97
ACCOUNTING

     The Issuer will keep its financial accounts in accordance with GAAP and,
except as GAAP may require, consistent with past practices.

     FARMOUTS

     The indenture provides that the Issuer and its Subsidiaries will be able to
enter into and perform with respect to farmouts covering any of their
undeveloped wells and properties, provided that the Issuer must, prior to any
properties being transferred pursuant to such farmout, obtain written
confirmation from F. John Stark, III stating that such farmout is in the best
interests of the holders of the notes, and file the same with the Trustee,
further provided that such written confirmation will not be required for any
farmout with a farmout value (as determined as provided below) of less than
$100,000, but the total aggregate farmout value of farmouts so exempted from the
written confirmation requirement cannot exceed $500,000 in any twelve calendar
month period. For the purposes of this provision, the value of a farmout will be
the portion of the capital commitments made by the farmee(s) under the farmout
relating to the interests of the Issuer or its Subsidiaries being farmed out.
The Issuer anticipates entering into a retainer arrangement with F. John Stark,
III in connection with his services with respect to such written confirmations,
with such retainer arrangement calling for the payment to him of fees for his
services with respect to such written confirmations (the "Stark Fees"), with the
Stark Fees being excluded from the calculation of SG&A.

     In addition, the indenture provides that the Issuer and its Subsidiaries
will be able to enter into and perform farmouts not complying with the preceding
paragraph if consent to such farmout is obtained from the holders of not less
than a majority of the principal amount of the then outstanding notes issued
under the indenture.

     Furthermore, the indenture provides that the farmout referenced in the
Purchase and Sale Agreement dated November 21, 2002 between the Issuer, as
seller, and PrimeWest Gas Inc., as purchaser, as the Farmout Agreement and
included as Schedule P in such agreement, are permitted farmouts under the
indenture.

     Farmouts permitted by the preceding three paragraphs are referred to as
"Permitted Farmout Agreements." The following shall apply to each Permitted
Farmout Agreement:

     -    the applicable portions of Liens of the security documents securing
          the notes will be released with respect to the undeveloped wells
          and/or properties that are subject to such Permitted Farmout
          Agreement, provided that all retained interests of the Issuer and the
          Subsidiaries in such wells and/or properties will remain subject to
          such Liens;

     -    such Permitted Farmout Agreement will be deemed not to be an Asset
          Sale, including, but not limited to, the purchase options in the
          farmout agreements referenced above in connection with the November
          21, 2002 Purchase and Sale Agreement with PrimeWest Gas Inc.;

     -    obligations of the Issuer and its Subsidiaries under such Permitted
          Farmout Agreement that constitute Indebtedness will be Permitted
          Indebtedness so long as any such Indebtedness is non-recourse with
          respect to the Issuer and its Subsidiaries and their properties and
          assets other than the wells and/or properties that are the subject of
          such Permitted Farmout Agreement; and

     -    to the extent such Permitted Farmout Agreement would constitute an
          Investment by the Issuer or any of its Subsidiaries, such Investment
          will be a Permitted Investment.

     CEO NOTE OPTIONS

     The Issuer may issue to its Chief Executive Officer (the "Issuer's CEO")
options to purchase notes ("CEO Note Options") as follows:

  -  Issuance to the Issuer's CEO on the Issue Date of options to purchase
     $750,000 principal amount of notes for the market price therefor at the
     Issue Date;

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-  Issuance to the Issuer's CEO of options to purchase $250,000 principal
     amount of notes for the market price therefor at the Issue Date if the
     notes trade for greater than 70% of the face amount thereof for 60
     consecutive trading days, with the first of such consecutive 60 days being
     in January of 2003;

  -  Issuance to the Issuer's CEO of options to purchase $500,000 principal
     amount of notes for the market price therefor at the Issue Date if the
     notes trade for greater than 70% of the face amount thereof for any 60
     consecutive trading days during the first 365 calendar days after the Issue
     Date; and

  -  Issuance to the Issuer's CEO of options to purchase $250,000 principal
     amount of notes for the market price therefor at the Issue Date if the
     notes trade for greater than 90% of the face amount thereof for any 60
     consecutive trading days during the 365 calendar day period commencing on
     the 366th day after the Issue Date, provided that if the condition set
     forth in the previous bullet point is not achieved, the amount applicable
     for this bulletin point shall be increased from $250,000 to $750,000.

     For determining consecutive trading days with respect to the notes, a
trading day will be a day on which there are at least $500,000 in aggregate
principal amount of notes traded and either Jefferies & Company, Inc., or its
successor, or Imperial Capital, LLC, or its successor, (as long as they did not
execute the trade) confirms to the Issuer that the trade was in the context of
the market.

     LIMITATION ON ABRAXAS WAMSUTTER, LTD.

     So long as the Issuer continues to have a partnership interest in Abraxas
Wamsutter, Ltd., the Issuer will not permit Abraxas Wamsutter, Ltd. to be an
operating entity.

     CONDUCT OF BUSINESS IN THE INTERIM PERIOD

     The Issuer shall have, and shall have caused its Subsidiaries to conduct
business consistent with past practices during the interim period between the
date that the Offer to Exchange was made and the Issue Date.

     CALCULATION OF ORIGINAL ISSUE DISCOUNT

     The Issuer will file with the Trustee promptly at the end of each calendar
year (a) a written notice specifying the amount of original issue discount
accrued on the outstanding notes as of the end of such year and (b) such other
specific information relating to such original issue discount as may then be
relevant under the Internal Revenue Code or applicable U.S. Treasury regulation.

EVENTS OF DEFAULT

     Each of the following is an "Event of Default":

     -    the failure to pay interest on any notes when the same becomes due and
          payable;

     -    the failure to pay the principal on any notes, when such principal
          becomes due and payable, at maturity, upon redemption or otherwise
          (including the failure to make a payment to purchase notes tendered
          pursuant to a Change of Control Offer or to Pay Down Debt in
          connection with an Asset Sale);

     -    a default in the observance or performance of any other covenant or
          agreement contained in the indenture which default continues for a
          period of 30 days after the Issuer or any Subsidiary Guarantor
          receives written notice specifying the default (and demanding that
          such default be remedied) from the Trustee or the holders of at least
          25% of the outstanding principal amount of the notes (except in the
          case of a default with respect to observance or performance of any of
          the terms or provisions of the covenants described above under "Change
          of Control" or "Merger, Consolidation and Sale of Assets" or
          "Limitation on Asset

                                       99
Sales" which will constitute an Event of Default with such notice
          requirement but without such passage of time requirement);

     -    a default under any mortgage, indenture or instrument under which
          there may be issued or by which there may be secured or evidenced any
          Indebtedness of the Issuer or of any Subsidiary (or the payment of
          which is guaranteed by the Issuer or any Subsidiary), whether such
          Indebtedness now exists or is created after the Issue Date, which
          default:

               (A)  is caused by a failure to pay principal of or premium, if
                    any, or interest on such Indebtedness after any applicable
                    grace period provided in such Indebtedness (a "payment
                    default"), or

               (B)  results in the acceleration of such Indebtedness prior to
                    its express maturity,

                and, in each case, the principal amount of any such
           Indebtedness, together with the principal amount of any other such
           Indebtedness under which there has been a payment default or the
           maturity of which has been so accelerated, aggregates at least
           $2,000,000.00;

     -    one or more judgments in an aggregate amount in excess of
          $2,000,000.00 (unless covered by insurance by a reputable insurer as
          to which the insurer has acknowledged coverage) are rendered against
          the Issuer or any of its Subsidiaries and such judgments remain
          undischarged, unvacated, unpaid or unstayed for a period of 60 days
          after such judgment or judgments become final and non-appealable;

     -    certain events of bankruptcy; or

     -    any of the Guarantees or any of the security documents ceases to be in
          full force and effect or any of the Guarantees or any of the security
          documents is declared to be null and void or invalid and unenforceable
          or any of the Subsidiary Guarantors denies or disaffirms its liability
          under its Guarantees (other than by reason of release of a Subsidiary
          Guarantor in accordance with the terms of the indenture) or any
          obligor or any Related Person denies or disaffirms its liability under
          any security document to which it is a party.

     If any Event of Default (other than the Event of Default relating to
certain events of bankruptcy) occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of outstanding notes may declare the
principal of, premium, if any, and accrued and unpaid interest on all the notes
to be due and payable by notice in writing to the Issuer and the Trustee
specifying the Event of Default and that it is a "notice of acceleration", and
the same shall become immediately due and payable. If an Event of Default
relating to certain events of bankruptcy occurs and is continuing, then all
unpaid principal of, and premium, if any, and accrued and unpaid interest on all
of the outstanding notes will be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.

     After a declaration of acceleration with respect to the notes as described
in the preceding paragraph, the holders of a majority in principal amount of the
notes may rescind and cancel such declaration if:

     -    the rescission would not conflict with any judgment or decree;

     -    all existing Events of Default have been cured or waived except
          nonpayment of principal or interest that has become due solely because
          of such acceleration;

     -    to the extent the payment of such interest is lawful, interest on
          overdue installments of interest and overdue principal, which has
          become due otherwise than by such declaration of acceleration, has
          been paid;

     -    the Issuer has paid the Trustee its reasonable compensation and
          reimbursed the Trustee for its expenses, disbursements and advances;
          and

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-    the Trustee shall have received an officer's certificate and an
          opinion of counsel that such Event of Default has been cured or waived
          in the event of the cure or waiver of an Event of Default relating to
          certain events of bankruptcy.

     No such rescission shall affect any subsequent Default or impair any right
consequent thereto.

     Prior to the declaration of acceleration of the notes, the holders of a
majority in principal amount of the notes may waive any existing Default or
Event of Default under the indenture, and its consequences, except a default in
the payment of the principal of or interest on any notes.

     Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture and under the Trust Indenture Act. During the
existence of an Event of Default, the Trustee is required to exercise such
rights and powers vested in it under the indenture and use the same degree of
care and skill in its exercise thereof as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs. Subject to the
provisions of the indenture relating to the duties of the Trustee, whether or
not an Event of Default shall occur and be continuing, the Trustee is under no
obligation to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless such holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
indenture, the Intercreditor Agreement and applicable law, the holders of a
majority in aggregate principal amount of the then outstanding notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee.

     The Issuer is required to provide an officer's certificate to the Trustee
promptly upon any such officer obtaining knowledge of any Default or Event of
Default (provided that such officers shall provide such certification at least
annually whether or not they know of any Default or Event of Default) that has
occurred and, if applicable, describe such Default or Event of Default and the
status thereof.

POSSESSION, USE AND RELEASE OF COLLATERAL

     Unless an Event of Default shall have occurred and be continuing, the
Issuer and the Subsidiary Guarantors will have the right to remain in possession
and retain exclusive control of the Collateral securing the notes (other than
any cash, securities, obligations and Cash Equivalents constituting part of the
Collateral and deposited with the Trustee in the Collateral Account or with the
Senior Credit Facility Representative and other than as set forth in the
security documents), to freely operate the Collateral and to collect, invest and
dispose of any income thereon.

     RELEASE OF COLLATERAL

     Upon compliance by the Issuer with the conditions set forth below in
respect of any sale, transfer or other disposition, the Trustee will release the
Released Interests (as defined below) from the Lien of the indenture and the
security documents and reconvey the Released Interests to the Issuer or the
grantor of the Lien on such property. The Issuer will have the right to obtain a
release of items of Collateral (the "Released Interests") subject to any sale,
transfer or other disposition, or owned by a Subsidiary the Capital Stock of
which is sold in compliance with the indenture such that it ceases to be a
Subsidiary, or that is the subject of a farmout allowed by the terms of the
indenture, upon compliance with the condition that the Issuer deliver to the
Trustee the following:

     -    a notice from the Issuer requesting the release of Released Interests:

               (A) describing the proposed Released Interests,

               (B) specifying the value of such Released Interests or such
          Capital Stock, as the case may be, on a date within 60 days of the
          Issuer notice (the "Valuation Date"),

               (C) stating that the consideration to be received is at least
          equal to the fair market value of the Released Interests, provided
          that this clause (C) is not applicable with

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respect to a release to be given in connection with a farmout
          permitted pursuant to the indenture,

               (D) stating that the release of such Released Interests will not
          interfere with the Trustee's ability to realize the value of the
          remaining Collateral and will not impair the maintenance and operation
          of the remaining Collateral,

               (E) confirming the sale or exchange of, or an agreement to sell
          or exchange, such Released Interests or such Capital Stock, as the
          case may be, is a bona fide sale to or exchange with a Person that is
          not an Affiliate of the Issuer or, in the event that such sale or
          exchange is to or with a Person that is an Affiliate, confirming that
          such sale or exchange is made in compliance with the provisions
          summarized in the description of certain covenants under "Limitation
          on Transactions with Affiliates," provided that this clause (E) is not
          applicable with respect to a release to be given in connection with a
          farmout permitted pursuant to the indenture,

               (F) in the event there is to be a contemporaneous substitution of
          property for the Collateral subject to the sale, transfer or other
          disposition, specifying the property intended to be substituted for
          the Collateral to be disposed of; and

               (G) with respect to a release to be given in connection with a
          farmout permitted pursuant to the indenture stating that the farmout
          to which the released interests are (or are to be) subject complies
          with the indenture;

-    an officer's certificate of the Issuer stating that:

               (A) such sale, transfer or other disposition complies with the
          terms and conditions of the indenture, including the provisions
          summarized in the description of certain covenants under " Limitation
          on Asset Sales," "Limitation on Transactions with Affiliates,"
          "Farmouts" and "Limitation on Restricted Payments" above, to the
          extent any of the foregoing are applicable,

               (B) all Net Cash Proceeds from the sale, transfer or other
          disposition of any of the Released Interests or such Capital Stock, as
          the case may be, will be applied pursuant to the provisions of the
          indenture in respect of the deposit of proceeds into the Collateral
          Account or with the Senior Credit Facility Representative as
          contemplated by the indenture and in respect of Asset Sales, to the
          extent applicable, provided that this clause (B) is not applicable
          with respect to a release to be given in connection with a farmout
          permitted pursuant to the indenture,

               (C) there is no Default or Event of Default in effect or
          continuing on the date thereof or the date of such sale, transfer or
          other disposition,

               (D) the release of the Collateral will not result in a Default or
          Event of Default under the indenture,

               (E) upon delivery of such officer's certificate, all conditions
          precedent in the indenture relating to the release in question will
          have been complied with,

               (F) such sale, transfer or other disposition is not between the
          Issuer or any Subsidiary or between Subsidiaries, provided that this
          clause (F) is not applicable with respect to a release to be given in
          connection with a farmout permitted pursuant to the indenture, and

               (G) such sale, transfer or other disposition is not a sale,
          transfer or other disposition that is excluded from the definition of
          "Asset Sale" because it was a sale, lease, conveyance, disposition or
          other transfer of all or substantially all of the assets of the Issuer
          in a transaction which was made in compliance with the provisions of
          the

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covenants described under "Merger, Consolidation and Sale of Assets,"
          provided that this clause (G) is not applicable with respect to a
          release to be given in connection with a farmout permitted pursuant to
          the indenture; and

     -  all documentation required by the Trust Indenture Act, if any, prior
        to the release of Collateral by the Trustee and, in the event there is
        to be a contemporaneous substitution of property for the Collateral
        subject to such sale, transfer or other disposition, all documentation
        necessary to effect the substitution of such new Collateral.

     Notwithstanding the provisions described above, so long as no Event of
Default shall have occurred and be continuing, the Issuer may, without
satisfaction of the conditions described above, dispose of Hydrocarbons or other
mineral products for value in the ordinary course and engage in any number of
ordinary course activities in respect of the Collateral, in limited dollar
amounts specified by the Trust Indenture Act, upon satisfaction of certain
conditions. For example, among other things, subject to certain dollar
limitations and conditions, the Issuer would be permitted to:

     -    sell or otherwise dispose of any property subject to the Lien of the
          indenture and the security documents, which may have become worn out
          or obsolete;

     -    abandon, terminate, cancel, release or make alterations in or
          substitutions of any leases or contracts subject to the Lien of the
          indenture or any of the security documents;

     -    surrender or modify any franchise, license or permit subject to the
          Lien of the indenture or any of the security documents which it may
          own or under which it may be operating;

     -    alter, repair, replace, change the location or position of and add to
          its structures, machinery, systems, equipment, fixtures and
          appurtenances;

     -    demolish, dismantle, tear down or scrap any obsolete Collateral or
          abandon any portion thereof; and

     -    grant leases or sub-leases in respect of real property to the extent
          the foregoing does not constitute an Asset Sale.

DEPOSIT; USE AND RELEASE OF TRUST MONEYS

     The Net Cash Proceeds associated with any Asset Sale and any Net Cash
Proceeds associated with any sale, transfer or other disposition of Collateral,
to the extent such sale, transfer or other disposition is not an Asset Sale by
virtue of clause (F) of the definition thereof, insurance proceeds with respect
to any Collateral and condemnation (or similar) proceeds with respect to any
Collateral shall be deposited so long as any Indebtedness under the Senior
Credit Agreement or any Qualified Senior Affiliate Indebtedness remains
outstanding, with the Senior Credit Facility Representative and otherwise into a
securities account maintained by the Trustee at its corporate trust offices or
at any securities intermediary selected by the Trustee having a combined capital
and surplus of at least $250,000,000 and having a long-term debt rating of at
least "A3" by Moody's and at least "A--" by S&P styled the "Abraxas Collateral
Account" (such account being the "COLLATERAL ACCOUNT") which shall be under the
exclusive dominion and control of the Trustee. All amounts on deposit in the
Collateral Account shall be treated as financial assets and cash funds on
deposit in the Collateral Account may be invested by the Trustee, at the
direction of the Issuer, in Cash Equivalents. The Issuer will not have the right
to withdraw funds or assets from the Collateral Account except in compliance
with the terms of the indenture and all assets credited to the Collateral
Account shall be subject to a Lien in favor of the Trustee and the holders.

     Any funds deposited with the Trustee may be released to the Issuer by its
delivering to the Trustee an officer's certificate stating:

     -    no Event of Default has occurred and is continuing as of the date of
          the proposed release;

                    (A) if such Trust Moneys represent Collateral Proceeds in
               respect of an Asset Sale, that such funds are otherwise being
               applied in accordance with the covenant "Limitation on Asset
               Sales" above, or

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(B) if such Trust Moneys represent proceeds in respect of a
               casualty, expropriation or taking, such funds will be applied to
               repair or replace property subject of a casualty or condemnation
               or reimburse the Issuer for amounts spent to repair or replace
               such property and that attached thereto are invoices or other
               evidence reflecting the amounts spent or to be spent, or

                    (C) if such Trust Moneys represent proceeds derived from any
               other manner, that such amounts are being utilized in connection
               with business of the Issuer and its Subsidiaries in compliance
               with the terms of the indenture; and

     -    all conditions precedent in the indenture relating to the release in
          question have been complied with; and

     -    all documentation required by the Trust Indenture Act, if any, prior
          to the release of such Trust Moneys by the Trustee has been delivered
          to the Trustee.

     Notwithstanding the foregoing,

     -    if the maturity of the notes has been accelerated, and the
          acceleration has not been rescinded as permitted by the indenture, the
          Trustee shall apply the Trust Moneys credited to the Collateral
          Account, subject to the rights of the Senior Credit Facility Lenders
          under the Intercreditor Agreement, to pay the principal of, premium,
          if any and accrued and unpaid interest on the notes to the extent of
          such Trust Moneys;

     -    if the Issuer so elects, by giving written notice to the Trustee, the
          Trustee shall apply Trust Moneys credited to the Collateral Account
          to the payment of interest due on any interest payment date; and

     -    if the Issuer so elects, by giving written notice to the Trustee,
          the Trustee shall apply Trust Moneys credited to the Collateral
          Account to Pay Down Debt.

LEGAL DEFEASANCE AND COVENANT DEFEASANCE

     As long as the Issuer takes steps to make sure that holders will
receive all of their payments under the notes and are able to transfer the
notes, the Issuer can elect to legally release itself and any of the Subsidiary
Guarantors for any Obligations on the notes (called "LEGAL DEFEASANCE") other
than:

     -    the rights of holders to receive payments from the trust described
          below in respect of the principal of, premium, if any, and interest
          on the notes when such payments are due;

     -    the Issuer's obligations with respect to the notes to issue temporary
          notes, register notes, replace mutilated, destroyed, lost or stolen
          notes and the maintenance of an office or agency for payments;

     -    the rights, powers, trust, duties and immunities of the Trustee; and

     -    the Legal Defeasance provisions of the indenture.

     In addition, the Issuer may, at its option and at any time, elect to have
the obligations of the Issuer and the Subsidiary Guarantors, if any, released
with respect to certain covenants that are described in the indenture ("COVENANT
DEFEASANCE"). In the event Covenant Defeasance occurs, certain events (other
than non-payment, bankruptcy, receivership, reorganization and insolvency events
and maintenance of the Guarantees) described under "Events of Default" will no
longer constitute an Event of Default with respect to the notes. The occurrence
of either Legal Defeasance or Covenant Defeasance would result in a release of
all Collateral from the Lien of the indenture and the security documents.

     In order to exercise either Legal Defeasance or Covenant Defeasance:

     -    the Issuer must irrevocably deposit with the Trustee, in trust, for
          the benefit of the holders cash in U.S. dollars and/or non-callable
          U.S. government obligations in such amounts as will

                                       104
be sufficient, in the opinion of a nationally recognized firm of
          independent public accountants, to pay the principal of, premium, if
          any, and interest on the notes at maturity or redemption, as the case
          may be:

       -  in the case of Legal Defeasance, the Issuer must deliver to the
          Trustee an opinion of counsel in the United States reasonably
          acceptable to the Trustee confirming that:

                    (A) the Issuer has received from, or there has been
             published by, the Internal Revenue Service a ruling, or

                    (B) since the Issue Date, there has been a change in the
             applicable federal income tax law,

               in either case to the effect that the holders will not recognize
          income, gain or loss for federal income tax purposes as a result of
          such Legal Defeasance and will be subject to federal income tax on the
          same amounts, in the same manner and at the same times as would have
          been the case if such Legal Defeasance had not occurred;

       -  in the case of Covenant Defeasance, the Issuer must deliver to the
          Trustee an opinion of counsel in the United States reasonably
          acceptable to the Trustee confirming that the holders will not
          recognize income, gain or loss for federal income tax purposes as a
          result of such Covenant Defeasance and will be subject to federal
          income tax on the same amounts, in the same manner and at the same
          times as would have been the case if such Covenant Defeasance had not
          occurred;

       -  no Default or Event of Default shall have occurred and be continuing
          on the date of such deposit or insofar as Events of Default from
          bankruptcy or insolvency events are concerned, at any time in the
          period ending on the 91st day after the date of deposit;

       -  such Legal Defeasance or Covenant Defeasance shall not result in a
          breach or violation of, or constitute a default under the indenture or
          any other agreement or instrument to which the Issuer or any of its
          Subsidiaries is a party or by which the Issuer or any of its
          Subsidiaries is bound;

       -  the Issuer must deliver an officer's certificate to the Trustee
          stating that the deposit was not made by the Issuer with the intent of
          preferring the holders over any other creditors of the Issuer or with
          the intent of defeating, hindering, delaying or defrauding any other
          creditors of the Issuer or others;

       -  the Issuer must deliver an officer's certificate and an opinion of
          counsel to the Trustee, each stating that all conditions precedent
          provided for or relating to the Legal Defeasance or the Covenant
          Defeasance, as the case may be, have been complied with; and

       -  the Issuer must deliver an opinion of counsel to the Trustee to the
          effect that after the 91st day following the deposit, the trust funds
          will not be subject to the effect of any applicable bankruptcy,
          insolvency, reorganization or similar laws affecting creditors' rights
          generally.

SATISFACTION AND DISCHARGE

     The Issuer and the Subsidiary Guarantors will have no further obligations
under the indenture, the security documents and the Guarantees as to all
outstanding notes, other than surviving rights of registration of transfer or
exchange of the notes, when:

       -  either

                    (A) all the notes have been delivered to the Trustee for
            cancellation except for (i) lost, stolen or destroyed notes which
            have been replaced or paid, and (ii) notes for whose payment money
            has been deposited in trust by the Issuer or segregated and held in
            trust by the Issuer and thereafter repaid to the Issuer or
            discharged from such trust, or

                                       105
(B) all notes not theretofore delivered to the Trustee for
            cancellation have become due and payable, or are to become due and
            payable within 180 days, and the Issuer has deposited with the
            Trustee funds sufficient to pay and discharge the entire
            Indebtedness on such notes at maturity or redemption, as the case
            may be;

       -  the Issuer has paid all other sums payable under the indenture by the
          Issuer; and

       -  the Issuer has delivered to the Trustee an officer's certificate and
          an opinion of counsel stating that the Issuer has complied with all
          conditions precedent under the indenture relating to the satisfaction
          and discharge of the indenture.

MODIFICATION OF THE INDENTURE

     From time to time, the Issuer, the Subsidiary Guarantors and the Trustee,
without the consent of the holders, may amend the indenture, the notes, the
Guarantees, the Intercreditor Agreement or any security document for certain
specified purposes, including curing ambiguities, defects or inconsistencies, to
comply with any requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act or to make any
change that would provide any additional benefit or rights to the holders or
that does not adversely affect the rights of any holder. In formulating its
opinion on such matters, the Trustee will be entitled to rely on such evidence
as it deems appropriate, including, without limitation, solely on an opinion of
counsel.

     Other modifications and amendments of the indenture, the notes, the
Guarantees, the Intercreditor Agreement or any security document may be made
with the consent of the holders of not less than a majority of the principal
amount of the then outstanding notes issued under the indenture, except that,
without the consent of each holder affected thereby, no amendment may:

       -  reduce the amount of notes whose holders must consent to an amendment;

       -  reduce the rate of or change or have the effect of changing the time
          for payment of interest, including defaulted interest, on any notes or
          reduce the amount of liquidated damages payable under the registration
          rights agreement;

       -  reduce the principal of or change or have the effect of changing the
          fixed maturity of any notes, or change the date on which any notes may
          be subject to redemption or repurchase, or reduce the redemption or
          repurchase price therefor;

       -  make any notes payable in a currency other than that stated in the
          notes;

       -  make any change in provisions of the indenture, the notes, the
          Guarantees, the Intercreditor Agreement or any security document
          protecting the right of each holder to receive payment of principal of
          and interest on such new secured note on or after the due date thereof
          or to bring suit to enforce such payment, or permitting holders of a
          majority in principal amount of notes to waive Defaults or Events of
          Default;

       -  amend, change or modify in any material respect the obligation of the
          Issuer to make and consummate a Change of Control Offer in the event
          of a Change of Control or to Pay Down Debt with respect to any Asset
          Sale that has been consummated or modify any of the provisions or
          definitions with respect thereto;

       -  modify or change any provision of the indenture, the notes, the
          Guarantees, the Intercreditor Agreement, any security document or the
          related definitions affecting ranking of the notes or any Guarantee in
          a manner which adversely affects the holders; or

       -  release any Subsidiary Guarantor from any of its obligations under its
          Guarantee, in any case otherwise than in accordance with the terms of
          the indenture.

     Notwithstanding the foregoing, the indenture will provide that a farmout
not otherwise qualifying as a Permitted Farmout Agreement is a Permitted Farmout
Agreement if consent to such farmout is obtained from the holders of not less
than a majority of the principal amount of the then outstanding notes issued
under the indenture, as described in the discussion above entitled "Farmouts."

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The provisions of the Intercreditor Agreement may not be amended without
the consent of the Senior Credit Facility Representative.

GOVERNING LAW

     The indenture, the notes, the Guarantees and the security documents are
governed by, and construed in accordance with, the laws of the State of New
York, except to the extent the laws of another jurisdiction may be mandatorily
applicable to certain matters under the security documents.

CONCERNING THE TRUSTEE

     U.S. Bank, N.A. acts as Trustee. Its address is 180 East Fifth Street,
Saint Paul, Minnesota 55101, attn: Corporate Trust Department.

     Except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the indenture. During
the existence of an Event of Default, the Trustee will exercise such rights and
powers vested in it by the indenture, and use the same degree of care and skill
in its exercise as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.

     The indenture and the provisions of the Trust Indenture Act incorporated by
reference into the indenture contain certain limitations on the rights of the
Trustee, should it become a creditor of the Issuer or any Subsidiary Guarantor,
to obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
Trust Indenture Act, the Trustee is permitted to engage in other transactions.
If the Trustee acquires any conflicting interest as described in the Trust
Indenture Act after a Default has occurred and is continuing, it must eliminate
such conflict or resign.

CERTAIN DEFINITIONS

     Set forth below is a summary of certain of the defined terms to be used in
the indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.

     "2003 CAPEX AMOUNT" equals the lesser of $15 million and the 2003 CapEx
Annual Budget.

     "2003 CAPEX ANNUAL BUDGET" equals the 2003 Closing CapEx Ratio multiplied
by Total Assets at December 31, 2003.

     "2003 CLOSING CAPEX RATIO" equals, for calendar year 2003, (a) $15 million
or such lower amount budgeted prior to the Issue Date by the Issuer for Capital
Expenditures for such calendar period, divided by (b) Total Assets at the end of
the calendar quarter in which the Issue Date occurs.

     "2004-PLUS CAPEX ANNUAL AMOUNT" equals for any annual calendar period, the
lesser of $10 million and the 2004-Plus CapEx Annual Budget.

     "2004-PLUS CAPEX ANNUAL BUDGET" equals, for any annual calendar period,
2004-Plus Closing CapEx Ratio multiplied by the Total Assets at the start of
such calendar period.

     "2004-PLUS CAPEX QUARTERLY AMOUNT" equals, the lesser of $2.5 million and
one quarter of the 2004-Plus CapEx Annual Amount.

     "2004-PLUS CLOSING CAPEX RATIO" equals, for any annual calendar period
starting January 1, 2004, (a) $10 million or such lower amount budgeted prior to
the Issue Date by the Issuer for Capital Expenditures for such calendar period,
divided by (b) the Total Assets at the end of the calendar quarter in which the
Issue Date occurs.

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"ACQUIRED INDEBTEDNESS" means Subordinated Indebtedness of a Person or any
of its Subsidiaries the incurrence of which does not violate the terms of the
indenture:

     (1) existing at the time such Person becomes a Subsidiary of the Issuer or
at the time it merges or consolidates with the Issuer or any of its
Subsidiaries, or

     (2) which becomes Indebtedness of the Issuer or any of its Subsidiaries in
connection with the acquisition of assets from such Person.

     Acquired Indebtedness does not include Indebtedness incurred in connection
with, or in anticipation or contemplation of, such Person becoming a Subsidiary
of the Issuer or such acquisition, merger or consolidation.

     "ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means (without duplication), as
of the date of determination the sum of:

     (1) Discounted future net revenues from the proved oil and gas reserves of
the Issuer and its Subsidiaries, calculated in accordance with SEC guidelines,
but before any state or federal income tax, as estimated by a nationally
recognized firm of independent petroleum engineers as of a date no earlier than
the date of the Issuer's latest annual consolidated financial statements.

     Discounted future net revenues will be increased under clauses (a) and (b)
below and decreased under clauses (c) and (d) below, as of the date of
determination, by the estimated discounted future net revenues, calculated in
accordance with SEC guidelines but before any state of federal income taxes and
utilizing the prices utilized in the Issuer's year-end reserve report, from:

          (a) estimated proved oil and gas reserves acquired since the date of
     the Issuer's year-end reserve report;

          (b) estimated oil and gas reserves attributable to upward revisions of
     estimates of proved oil and gas reserves since the date of the Issuer's
     year-end reserve report due to exploration, development or exploitation
     activities,

          (c) estimated proved oil and gas reserves produced or disposed of
     since the date of the Issuer's year-end reserve report; and

          (d) estimated oil and gas reserves attributable to downward revisions
     of estimates of proved oil and gas reserves since the date of the Issuer's
     year-end reserve report due to changes in geological conditions or other
     factors which would, in accordance with standard industry practice, cause
     such revisions.

     In the case of each of the determinations made under clauses (a) through
(d), all increases and decreases will be as estimated by the Issuer's petroleum
engineers, except that in the event that there is a Material Change as a result
of acquisitions, dispositions or revisions, then the discounted future net
revenues utilized for purposes of this clause will be confirmed by a nationally
recognized firm of independent petroleum engineers.

     (2) The capitalized costs that are attributable to the oil and gas
properties of the Issuer and its Subsidiaries to which no proved oil and gas
reserves are attributable, based on the books and records of the Issuer and its
Subsidiaries as of a date no earlier than the date of the Issuer's latest annual
or quarterly financial statements.

     (3) The Net Working Capital plus cash of the Issuer and its Subsidiaries on
a date no earlier than the date of the Issuer's latest consolidated annual or
quarterly financial statements.

     (4) The greater of

                                       108
(a) the net book value of other tangible assets of the
     Issuer and its Subsidiaries on a date no earlier than the date of the
     Issuer's latest consolidated annual or quarterly financial statements, or

                    (b) the appraised value, as estimated by independent
     appraisers, of other tangible assets of the Issuer and its Subsidiaries as
     of a date no earlier than the date of the Issuer's latest audited financial
     statements.

     Minus the sum of

          (1) Minority interests; and

          (2) Any gas balancing liabilities as reflected in the Issuer's latest
              audited financial statements.

     Calculations of "Adjusted Consolidated Net Tangible Assets" will also give
effect, on a pro forma basis, to:

     -    Any Investment in another Person that becomes Subsidiary and which is
          not prohibited by the indenture, to and including the date of the
          transaction for which the calculation is necessary.

     -    The acquisition, to and including the date of the transaction, of any
          business or assets, including Permitted Industry Investments.

     -    Any sales or other dispositions of assets permitted by the indenture
          (except for sales of Hydrocarbons or other mineral products in the
          ordinary course of business) occurring on or after the date of the
          transaction.

     "ADJUSTED ISSUE PRICE" means an amount for the most recent accrual period
equal to the initial issue price of the notes increased by the amount of
original issue discount previously includable in the gross income of a holder,
reduced by the amount of any payment previously made on the notes other than a
payment of qualified stated interest on the notes.

     "AFFILIATE" of any specified Person means,

     (1) any other Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or under common control with, such
specified Person; and

     (2) any Related Person of such Person.

     For purposes of this definition, the term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.

     "ASSET ACQUISITION" means:

     (1) an Investment by the Issuer or any Subsidiary in any other Person in
which such Person becomes a Subsidiary, or merges with the Issuer or any
Subsidiary; or

     (2) the acquisition by the Issuer or any Subsidiary of the assets of any
Person (other than a Subsidiary) which constitute all or substantially all of
the assets of such Person or comprise any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.

     "ASSET SALE" means any sale, issuance, conveyance, transfer, exchange,
lease (other than operating leases entered into in the ordinary course of
business consistent with past practices), assignment or other transfer for value
by the Issuer or any Subsidiary to any Person other than the Issuer or any
Subsidiary of:

     (1) any Capital Stock of any Subsidiary; or

                                       109
(2) any other property or assets of the Issuer or any Subsidiary and any
interests therein, including any disposition by a merger, consolidation or
similar transaction.

     For purposes of this definition, the term "Asset Sale" does not include:

     (A) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Issuer in a transaction which is made in
compliance with the provisions of the covenant described in "Merger,
Consolidation and Sale of Assets;"

     (B) disposals or replacements of obsolete equipment in the ordinary course
of business;

     (C) the sale, lease, conveyance, disposition or other transfer of assets or
property to the Issuer or one or more Wholly Owned Subsidiaries;

     (D) any disposition of Hydrocarbons or other mineral products for value in
the ordinary course of business;

     (E) the abandonment, surrender, termination, cancellation, release, lease
or sublease of undeveloped oil and gas properties in the ordinary course of
business or oil and gas properties which are not capable of production in
economic quantities;

  or

     (F) the sale, lease, conveyance, disposition or other transfer by the
Issuer or any Subsidiary of assets or property in the ordinary course of
business if the total fair market value of all the assets and property sold,
leased, conveyed, disposed or transferred since the Issue Date under this
exception does not exceed $200,000.00 in any one year.

     "AVAILABLE PROCEEDS AMOUNT" means:

     (1) The sum of all Collateral Proceeds and all Non-Collateral Proceeds
remaining after application to repay any Indebtedness secured by the assets that
are the subject of the Asset Sale giving rise to such Non-Collateral Proceeds.

     (2) For the purpose of determining whether the Issuer must Pay Down Debt in
connection with an Asset Sale and for determining the amount of such offer an
amount equal to the amount set forth under clause (1) above minus the total
amount of all of those Asset Sale proceeds previously spent in compliance with
the terms of the section described under "Deposit; Use and Release of Trust
Moneys."

     "CAPEX DEFICIT AMOUNT" equals, in any calendar quarter, the amount by which
the Capital Expenditures in any such calendar quarter (excluding the amount of
Capital Expenditures due to any Rollover Decrease because of a prior quarter's
CapEx Excess Amount) is less than the applicable CapEx Quarterly Amount.

     "CAPEX EXCESS AMOUNT" equals, in any calendar quarter, the amount by which
Capital Expenditures in any such quarter (excluding the amount of Capital
Expenditures due to any Rollover Increase because of a prior quarter's CapEx
Deficit Amount) exceed the applicable CapEx Quarterly Amount.

     "CAPEX QUARTERLY AMOUNT" means the Q1-2003 CapEx Amount, the Q2,3,4-2003
CapEx Amount or the 2004-Plus CapEx Quarterly Amount, as applicable.

     "CAPITAL EXPENDITURES" means, for any period, any direct or indirect
expenditure made in such period, in each case, whether expensed or capitalized,
in respect of the use of assets, including all Drilling Expenditures, and shall
include all investments and cash expenses and other cash outflows of the Issuer
and its Subsidiaries related to any Permitted Investments including but not
limited to those relating to joint ventures, royalty arrangements, off-balance
sheet financing, and farmout expenditures made by the Issuer or its
Subsidiaries, and expenditures made in such period in any Investment other than
Investments in cash

                                       110
equivalents or government backed securities, but excluding from the definition
of "Capital Expenditures" any expenditures by the Issuer or any of its
Subsidiaries to the extent the source of funds for which expenditures was the
proceeds of an equity offering by the Issuer consummated after the Issue Date or
the proceeds of any Subordinated Indebtedness incurred by the Issuer or any of
its Subsidiaries after the Issue Date in compliance with the terms of the
indenture, and further excluding from the definition of "Capital Expenditures"
any expenditures by the Issuer or any of its Subsidiaries to the extent such
expenditures constitute SG&A not prohibited by the terms of the indenture, and
further excluding from the definition of "Capital Expenditures" any expenditures
by the Issuer or any of its Subsidiaries for Qualified Lease Operating Costs.

     "CAPITALIZED LEASE OBLIGATION" means the discounted present value of the
rental obligations under a lease or similar agreement that is required to be
classified and accounted for as a capital lease under GAAP.

     "CAPITAL STOCK" means:

     (1) with respect to a corporation, any and all shares, interests,
participations or other equivalents of corporate stock, including each class of
common stock and Preferred Stock and including any warrants, options or rights
to acquire any of the foregoing and instruments convertible into any of the
foregoing, and

     (2) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.

     "CASH COUPON" means 11 1/2% or such higher coupon payable in cash to the
holders of the notes pursuant to the indenture.

     "CASH EQUIVALENTS" means:

     (1) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States Government or issued by one of its agencies and backed by
the full faith and credit of the United States, in each case maturing within one
year from the date of acquisition;

     (2) marketable direct obligations issued by any state of the United States
of America or any of its political subdivisions or public instrumentalities
maturing within one year from the date of acquisition and, at the time of
acquisition, having one of the two highest ratings obtainable from either S&P or
Moody's;

     (3) commercial paper maturing no more than one year from its date of
creation and, at the time of acquisition, having a rating of at least A-1 from
S&P or at least P-1 from Moody's;

     (4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition issued by any domestic bank or any United
States branch of a foreign bank having capital and surplus of at least
$250,000,000;

     (5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered into
with any bank meeting the qualifications specified in clause (4) above; and

     (6) money market mutual or similar funds having assets in excess of
$100,000,000.

     "CHANGE OF CONTROL" means the occurrence of any of the following:

     (1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Issuer to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act;

     (2) the adoption of any plan or proposal for the liquidation or dissolution
of the Issuer;

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(3) any Person or group becomes the owner, directly or indirectly,
beneficially or of record, of shares representing more than 35% of the aggregate
ordinary voting power represented by the issued and outstanding Capital Stock of
the Issuer; or

     (4) the replacement of a majority of the Board of Directors of the Issuer
over a two-year period from the directors who constituted the Board of Directors
of the Issuer at the beginning of such period with directors whose replacement
was not approved by a vote of at least a majority of the Board of Directors of
the Issuer then still in office who either were members at the beginning of such
period or whose election as a member was previously so approved.

     "CLOSING SG&A RATIO" means, for any applicable calendar period, (a) $5
million or such lower amount budgeted prior to the Issue Date by the Issuer for
SG&A for such calendar period divided by (b) the Total Assets at the end of the
calendar quarter in which the Issue Date occurs.

     "COLLATERAL" means, collectively, all of the property and assets (including
Trust Moneys) that are from time to time subject to, or purported to be subject
to, the Lien of the indenture or any of the security documents.

     "COLLATERAL PROCEEDS" means any Net Cash Proceeds received from an Asset
Sale of Collateral.

     "CONSOLIDATED EBITDA" means, for any period, the sum (without duplication),
on a consolidated basis and determined in accordance with GAAP, of:

     (1) Consolidated Net Income, and

     (2) to the extent Consolidated Net Income has been reduced thereby,

               (a) all income taxes paid or accrued by the Issuer or any
     Subsidiary in accordance with GAAP for such period except for income taxes
     attributable to extraordinary, unusual or nonrecurring gains or losses or
     taxes attributable to sales or dispositions outside the ordinary course of
     business,

               (b) Consolidated Interest Expense,

               (c) the amount of any Preferred Stock dividends paid by the
     Issuer, and

               (d) Consolidated Non-cash Charges, less any non-cash items
     increasing Consolidated Net Income for such periods.

     "CONSOLIDATED EBITDA COVERAGE RATIO" means the ratio of:

     (1) Consolidated EBITDA during the four full fiscal quarters for which
financial information is available (the "Four Quarter Period") ending on or
prior to the date of the transaction giving rise to the need to calculate the
Consolidated EBITDA Coverage Ratio (the "Transaction Date") to;

     (2) Consolidated Fixed Charges for the Four Quarter Period.

     For purposes of this definition, "Consolidated EBITDA" and "Consolidated
Fixed Charges" will be calculated after giving effect, without duplication, on a
pro forma basis for the calculation period to:

     (1) the incurrence or repayment of

               (a) Indebtedness giving rise to the need to make such
     calculation, and

               (b) other Indebtedness, other than the incurrence or repayment of
     Indebtedness in the ordinary course of business for working capital
     purposes pursuant to working capital facilities,

                                       112
occurring during the Four Quarter Period or at any time
     subsequent to the last day of the Four Quarter Period and on or prior to
     the Transaction Date, as if such incurrence or repayment, as the case may
     be, occurred on the first day of the Four Quarter Period, and

     (2) any Asset Sales or Asset Acquisitions occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
occurred on the first day of the Four Quarter Period. If the Issuer or any
Subsidiary guarantees Indebtedness of a third Person, the preceding sentence
will give effect to the incurrence of such guaranteed Indebtedness as if the
Issuer or such Subsidiary had directly incurred or otherwise assumed such
guaranteed Indebtedness.

     In addition, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of the Consolidated EBITDA
Coverage Ratio:

     (1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate equal to the rate of
interest on such Indebtedness in effect on the Transaction Date;

     (2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to have
been in effect during the Four Quarter Period;

     (3) notwithstanding clauses (1) and (2) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, will be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.

     "CONSOLIDATED EBITDA TO CASH INTEREST EXPENSE RATIO" means, with respect to
the last day of a particular fiscal quarter of the Issuer, the ratio of:

     (1) Consolidated EBITDA during such fiscal quarter to;

     (2) Consolidated Interest Expense paid in cash for such fiscal quarter.

     For purposes of this definition, "Consolidated EBITDA" and "Consolidated
Interest Expense" will be calculated after giving effect, without duplication,
on a pro forma basis for the calculation period to:

     (1) the incurrence or repayment of Indebtedness, other than the incurrence
or repayment of Indebtedness in the ordinary course of business for working
capital purposes pursuant to working capital facilities, occurring during the
relevant fiscal quarter as if such incurrence or repayment, as the case may be,
occurred on the first day of the relevant fiscal quarter, and

     (2) any Asset Sales or Asset Acquisitions occurring during the relevant
fiscal quarter as if such Asset Sale or Asset Acquisition occurred on the first
day of the relevant fiscal quarter. If the Issuer or any Subsidiary guarantees
Indebtedness of a third Person, the preceding sentence will give effect to the
incurrence of such guaranteed Indebtedness as if the Issuer or such Subsidiary
had directly incurred or otherwise assumed such guaranteed Indebtedness.

     In addition, in calculating "Consolidated Interest Expense" for purposes of
determining the denominator (but not the numerator) of the Consolidated EBITDA
to Cash Interest Expense Ratio:

     (1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the last day of the relevant fiscal quarter of the Issuer and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate equal to the rate of interest on such Indebtedness in effect on such
day;

     (2) if interest on any Indebtedness actually incurred on the last day of
the relevant fiscal quarter of the Issuer may optionally be determined at an
interest rate based upon a factor of a prime or similar rate, a

                                       113
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on such day will be deemed to have been in effect during the relevant
fiscal quarter; and

     (3) notwithstanding clauses (1) and (2) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, will be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.

     "CONSOLIDATED FIXED CHARGES" means the sum, without duplication, of:

     (1) Consolidated Interest Expense including any premium or penalty paid in
connection with redeeming or retiring Indebtedness prior to the stated maturity,
and

     (2) the product of

               (a) the amount of all dividend payments on any series of the
     Issuer's Preferred Stock (other than dividends paid in Qualified Capital
     Stock) paid, accrued or scheduled to be paid or accrued during such period,
     times

               (b) a fraction, the numerator of which is one and the denominator
     of which is one minus the then current effective consolidated federal,
     state and local income tax rate of such Person, expressed as a decimal.

     "CONSOLIDATED INTEREST EXPENSE" for a period means the sum, without
duplication, of:

     (1) the total interest expense of the Issuer and its Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP, including

     (a) any amortization of original issue discount,

     (b) the net costs under Interest Swap Obligations,

     (c) all capitalized interest, and

     (d) the interest portion of any deferred payment obligation;

     plus

     (2) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Issuer and its Subsidiaries during
such period, as determined on a consolidated basis in accordance with GAAP.

     "CONSOLIDATED NET INCOME" means, with respect to the Issuer for any period,
the aggregate net income (or loss) of the Issuer and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP. The
following will, however, be excluded from such calculation:

     (1) after-tax gains from Asset Sales or abandonments or reserves relating
thereto,

     (2) after-tax items classified in accordance with GAAP as extraordinary or
nonrecurring gains,

     (3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Subsidiary or is merged or
consolidated with the Issuer or any Subsidiary,

     (4) the net income of any Subsidiary to the extent that the declaration of
dividends or similar distributions by that Subsidiary of that income is
restricted by charter, contract, operation of law or otherwise,

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(5) the net income of any Person in which the Issuer or any Subsidiary has
an interest, other than a Subsidiary, except to the extent of cash dividends or
distributions actually paid to the Issuer or any Subsidiary by such Person,

     (6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued), and

     (7) in the case of a successor to the Issuer by consolidation or merger or
as a transferee of the Issuer's assets, any net income of the successor
corporation prior to such consolidation, merger or transfer of assets.

     "CONSOLIDATED NET WORTH" of any Person as of any date means

     (1) the consolidated stockholders' equity of such Person, determined on a
consolidated basis in accordance with GAAP, less (without duplication)

     (2) amounts attributable to Disqualified Capital Stock of such Person.

     "CONSOLIDATED NON-CASH CHARGES" means, for any period, total depreciation,
depletion, amortization and other non-cash expenses reducing Consolidated Net
Income for such period, determined on a consolidated basis in accordance with
GAAP, but excluding any such charges constituting an extraordinary item or loss
or any such charge which requires an accrual of or a reserve for cash charges
for any future period.

     "CONSOLIDATION" means, with respect to any Person, the consolidation of the
accounts of the Subsidiaries of such Person with those of such Person, all in
accordance with GAAP.

     "CRUDE OIL AND NATURAL GAS BUSINESS" means:

     (1) the acquisition, exploration, development, operation and disposition of
interests in oil, gas and other hydrocarbon properties located in North America,
and

     (2) the gathering, marketing, treating, processing, storage, selling and
transporting of any production from such interests or properties of the Issuer
or those of others.

     "CRUDE OIL AND NATURAL GAS HEDGE AGREEMENTS" means any oil and gas
agreements and other agreements or arrangements entered into by a Person in the
ordinary course of business and that is designed to provide protection against
oil and natural gas price fluctuations.

     "CRUDE OIL AND NATURAL GAS PROPERTIES" means all Properties, including
equity or other ownership interests in those Properties, owned by any Person
which have been assigned "proved oil and gas reserves" as defined in Rule 4-10
of Regulation S-X of the Securities Act as in effect on the Issue Date.

     "CRUDE OIL AND NATURAL GAS RELATED ASSETS" means any Investment or capital
expenditure (but not including additions to working capital or repayments of any
revolving credit or working capital borrowings) by the Issuer or any Subsidiary
which is related to the business of the Issuer and its Subsidiaries as it is
conducted on the date of the Asset Sale giving rise to the Net Cash Proceeds to
be reinvested.

     "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect against
fluctuations in currency values.

     "DEFAULT" means an event or condition that is, or with the lapse of time or
the giving of notice or both would be, an Event of Default.

     "DISQUALIFIED CAPITAL STOCK" means any Capital Stock which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily

                                       115
redeemable, pursuant to a sinking fund obligation or otherwise, or is
mandatorily redeemable at the sole option of the holder thereof, in whole or in
part, in either case, on or prior to the final maturity of the notes.

     "DRILLING EXPENDITURES" means any direct or indirect expenditure, in each
case, whether expensed or capitalized, in respect of drilling.

     "EASTSIDE COAL" means Eastside Coal Company, Inc., a Colorado corporation.

     "EXCESS CASH FLOW" means, for any period, Consolidated EBITDA of the Issuer
and its Subsidiaries for such period, minus any increase in the Net Working
Capital of the Issuer and its Subsidiaries from the beginning of such period to
the end of a such period or plus any decrease in the Net Working Capital of the
Issuer and its Subsidiaries from the beginning of such period to the end of a
such period (as the case may be), minus Capital Expenditures made by the Issuer
and its Subsidiaries during that period to the extent such Capital Expenditures
did not reduce Consolidated EBITDA, minus any cash interest paid by the Issuer
and its Subsidiaries during that period, minus any cash taxes paid by the Issuer
and its Subsidiaries during that period, minus any amount applied by the Issuer
and its Subsidiaries to Pay Down Debt during that period, minus (to the extent
included in Consolidated EBITDA) any proceeds received during that period from
any equity offering by the Issuer or from any Subordinated Indebtedness of the
Issuer or any of its Subsidiaries.

     "EQUITY OFFERING" means an offering of the Issuer's Qualified Capital
Stock.

     "FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Issuer acting reasonably and in good faith; PROVIDED, HOWEVER, that if the
aggregate non-cash consideration to be received by the Issuer or any Subsidiary
from any Asset Sale shall reasonably be expected to exceed $5,000,000, then fair
market value shall be determined by an Independent Advisor.

     "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.

     "HYDROCARBONS" means oil, gas, casing head gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all constituents, elements or compounds thereof and products processed
therefrom.

     "INDEBTEDNESS" means with respect to any Person, without duplication:

     (1) all Obligations for borrowed money,

     (2) all Obligations evidenced by bonds, debentures, notes or other similar
instruments,

     (3) all Capitalized Lease Obligations,

     (4) all Obligations for the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement but excluding trade accounts payable,

     (5) all Obligations for the reimbursement of any obligor on a letter of
credit, banker's acceptance or similar credit transaction,

     (6) guarantees and other contingent obligations in respect of Indebtedness
referred to in clauses (1) through (5) above and clause (8) below,

     (7) all Obligations of any other Person of the type referred to in clauses
(1) through (6) above which are secured by any Lien on any property or asset of
such Person, the amount of such

                                       116
Obligation being deemed to be the lesser of the fair market value of such
property or asset or the amount of the Obligation so secured,

     (8) all Obligations under Currency Agreements and Interest Swap
Obligations,

     (9) all Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed redemption price or repurchase price; and

     (10) all Obligations in respect of production payments and forward sales.

     For purposes of this definition:

     (1) the "maximum fixed repurchase price" of any Disqualified Capital Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if it were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
indenture, and if such price is based upon, or measured by, the fair market
value of the Disqualified Capital Stock, the fair market value shall be
determined reasonably and in good faith by the Board of Directors of the Issuer.

     (2) The "amount" or "principal amount" of Indebtedness at any time will be:

               (a) for any Indebtedness issued at a price that is less than its
     principal amount at maturity, the face amount of the liability,

               (b) for any Capitalized Lease Obligation, the amount determined
     in accordance with its definition above,

               (c) for any Interest Swap Obligations included in the definition
     of Permitted Indebtedness, zero,

               (d) for all other unconditional obligations, the amount
     determined in accordance with GAAP, and

               (e) for all other contingent obligations, the maximum liability
     at such date of such Person.

     "INDEPENDENT ADVISOR" means a reputable accounting, appraisal or nationally
recognized investment banking, engineering or consulting firm which:

     (1) does not, and whose directors, officers and employees or Affiliates do
not, have a direct or indirect material financial interest in the Issuer, and

     (2) in the judgment of the Board of Directors of the Issuer, is otherwise
disinterested, independent and qualified to perform the task for which it is to
be engaged.

     "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement to be dated on
or about the Issue Date entered into by the Senior Credit Facility
Representative and the Trustee and also acknowledged by the Issuer and certain
Subsidiaries of the Issuer, or any successor or replacement agreement, as such
agreement has been or may be amended (including any amendment and restatement
thereof), supplemented, replaced, restated or otherwise modified from time to
time.

     "INTEREST SWAP OBLIGATION" means obligations under interest rate swaps,
caps, floors, collars and similar agreements, whereby, directly or indirectly, a
Person is entitled to receive payments calculated by applying either a floating
or a fixed rate of interest on a stated notional amount in exchange for payments
made by another Person calculated by applying a fixed or a floating rate of
interest on the same notional amount.

                                       117
"INVESTMENT" by a Person means any direct or indirect:

     (1) loan, advance or other extension of credit (including a guarantee) or
capital contribution to others,

     (2) purchase or acquisition of any Capital Stock, bonds, notes, debentures
or other securities or evidences of Indebtedness issued by another Person ,

     (3) guarantee or assumption of the Indebtedness of another Person (other
than the guarantee or assumption of Indebtedness of the Person or a Subsidiary
of the Person which is made in compliance with the provisions of "Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness" above), and

     (4) other items that would be classified as investments on a balance sheet
of such Person prepared in accordance with GAAP.

     Notwithstanding the foregoing, "Investment" excludes extensions of trade
credit on commercially reasonable terms in accordance with the normal trade
practices of the Issuer and its Subsidiaries. The amount of any Investment will
not be adjusted for increases or decreases in value, or write-ups, write-downs
or write-offs with respect to that Investment. If the Issuer or its Subsidiaries
sell or otherwise dispose of any Capital Stock of any Subsidiary such that,
after giving effect to any such sale or disposition, it ceases to be a
Subsidiary of the Issuer, the Issuer will be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Capital Stock of such Subsidiary not sold or disposed of.

     "ISSUE DATE" means the date of original issuance of the notes. "ISSUER"
means Abraxas Petroleum Corporation, a Nevada corporation.

     "ISSUER PROPERTIES" means all Properties, and equity, partnership or other
ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Issuer or any of its Subsidiaries, which business activities are not
prohibited by the terms of the indenture.

     "LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
floating or other charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).

     "MATERIAL CHANGE" means an increase or decrease of more than 10% during a
fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and gas reserves of the
Issuer and its Subsidiaries (before any state or federal income tax); PROVIDED,
HOWEVER, that the following will be excluded from the calculation of Material
Change:

     (1) any acquisitions during the quarter of oil and gas reserves that have
been estimated by independent petroleum engineers and on which a report or
reports exist,

     (2) any disposition of properties existing at the beginning of such quarter
that have been disposed of as provided in "Limitation on Asset Sales," and

     (3) any reserves added during the quarter attributable to the drilling or
recompletion of wells not included in previous reserve estimates, but which will
be included in future quarters.

     "MORTGAGE" means a mortgage or deed of trust dated as of the Issue Date
granted by the Issuer or any Subsidiary for the benefit of the Trustee and the
holders, as the same may be amended, supplemented or modified from time to time
in accordance with the terms thereof and of the indenture.

     "NET CASH PROCEEDS" means the proceeds in the form of cash or Cash
Equivalents including payments in respect of deferred payment obligations when
received in the form of cash or Cash Equivalents received by the Issuer or any
Subsidiary from any Asset Sale, sale, transfer or other disposition net of:

                                       118
(1) reasonable out-of-pocket expenses and fees relating to such Asset Sale,
sale, transfer or other disposition (including, without limitation, legal,
accounting and investment banking fees and sales commissions),

     (2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements,

     (3) appropriate amounts (determined by the Chief Financial Officer of the
Issuer) to be provided by the Issuer or any Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any post closing adjustments or
liabilities associated with such Asset Sale, sale, transfer or other disposition
and retained by the Issuer or any Subsidiary, as the case may be, after such
Asset Sale, sale, transfer or other disposition, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, sale, transfer or other disposition (but excluding any payments
which, by the terms of the indemnities will not, be made during the term of the
notes), and

     (4) the aggregate amount of cash and Cash Equivalents so received which is
used to retire any then existing Indebtedness (other than Indebtedness under the
Senior Credit Agreement, Qualified Senior Affiliate Indebtedness or the notes)
which is secured by a Lien on the property subject of the Asset Sale, sale,
transfer or other disposition.

     "NET WORKING CAPITAL" means:

     (1) all current assets of the Issuer and its Subsidiaries, MINUS

     (2) all current liabilities of the Issuer and its Subsidiaries, except
current liabilities included in Indebtedness, MINUS

     (3) all cash of the Issuer and its Subsidiaries,

     in each case as set forth in the Issuer's financial statements prepared in
accordance with GAAP.

     "OBLIGATIONS" means any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.

     "OIL AND GAS ASSETS" means the Crude Oil and Natural Gas Properties and
natural gas processing facilities of the Issuer and/or any of its Subsidiaries.

     "PAY DOWN DEBT" means:

     -    first, making a payment under the Senior Credit Agreement with a
          permanent reduction of the indebtedness outstanding under the Senior
          Credit Agreement to the extent making a payment on the Senior Credit
          Agreement with a permanent reduction of the indebtedness outstanding
          under the Senior Credit Agreement is required under the terms of the
          Senior Credit Agreement and/or the Intercreditor Agreement,

     -    second, making a payment of principal and/or accrued interest on, or
          redeeming, exchanging, discharging, defeasing, or purchasing and
          retiring, notes in whole or in part, to the extent permitted by the
          Senior Credit Agreement and the Intercreditor Agreement,

     -    third, (i) first, making scheduled or mandatory paydowns on
          Indebtedness under the Senior Credit Agreement and paying down any
          term loans under the Senior Credit Agreement to the extent permitted
          by the Senior Credit Agreement, whether or not then due and payable
          ("Term Loan Paydowns"), and if all Term Loan Paydowns are made (the
          "Term Loan Amounts") so that such outstanding amounts under the Senior
          Credit Agreement have been paid down completely, then (ii) second, any
          amount remaining after payment of the Term Loan Amounts will be
          applied to outstanding amounts under any revolving credit tranche
          under the Senior

                                       119
Credit Agreement for permanent reduction of the commitment under the
          revolving credit tranche, and if no amounts are outstanding under any
          such revolving credit tranche, then at that time the Issuer will
          terminate that credit facility, and

     -    fourth, making a payment of principal and/or accrued interest on, or
          redeeming, exchanging, discharging, defeasing, or purchasing and
          retiring, notes in whole or in part.

     "PERMITTED INDEBTEDNESS" means, without duplication, each of the following:

     (1) Indebtedness under the notes, the indenture, the Guarantees and the
security documents;

     (2) Obligations under Interest Swap Obligations covering Indebtedness if
these Interest Swap Obligations are entered into to protect against fluctuations
in interest rates on Indebtedness incurred in accordance with the indenture to
the extent the notional principal amount of such Interest Swap Obligations is
not greater than the principal amount of the Indebtedness to which such Interest
Swap Obligation relates;

     (3) Indebtedness of a Subsidiary to the Issuer or to a Wholly Owned
Subsidiary for so long as such Indebtedness is held by the Issuer or a Wholly
Owned Subsidiary, in each case subject to no Lien held by a Person other than
the Issuer or a Wholly Owned Subsidiary; PROVIDED, HOWEVER, that if as of any
date any Person other than the Issuer or a Wholly Owned Subsidiary owns or holds
any such Indebtedness or holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;

     (4) Indebtedness of the Issuer to a Wholly Owned Subsidiary for so long as
such Indebtedness is held by a Wholly Owned Subsidiary, in each case subject to
no Lien; PROVIDED, HOWEVER, that

               (a) any Indebtedness of the Issuer to any Wholly Owned Subsidiary
     that is not a Subsidiary Guarantor is unsecured and subordinated, pursuant
     to a written agreement, to the Issuer's Obligations under the indenture and
     the notes, and

               (b) if as of any date any Person other than a Wholly Owned
     Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
     of such Indebtedness, such date shall be deemed the incurrence of
     Indebtedness not constituting Permitted Indebtedness by the Issuer;

     (5) Indebtedness arising from a bank or other financial institution
inadvertently honoring a check, draft or similar instrument (except in the case
of daylight overdrafts) drawn against insufficient funds in the ordinary course
of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within
two Business Days of incurrence;

     (6) Indebtedness of the Issuer or any of its Subsidiaries represented by
letters of credit for the account of the Issuer or any such Subsidiary, as the
case may be, in order to provide security for workers' compensation claims,
payment obligations in connection with self-insurance or similar requirements in
the ordinary course of business;

     (7) Capitalized Lease Obligations and Purchase Money Indebtedness not
exceeding $2,000,000 at any one time outstanding;

     (8) Permitted Operating Obligations in an aggregate amount at any time
outstanding not to exceed $750,000;

     (9) Obligations arising in connection with Crude Oil and Natural Gas Hedge
Agreements with financial institutions (excluding forward sales and production
payments);

     (10) Indebtedness under Currency Agreements with financial institutions;
PROVIDED, HOWEVER, that in the case of Currency Agreements which relate to
Indebtedness, such Currency Agreements do not increase Indebtedness of the
Issuer and its Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;

                                       120
(11) Additional Indebtedness in an aggregate principal amount at any time
outstanding not to exceed $500,000;

     (12) Indebtedness outstanding on the Issue Date except to the extent the
Indebtedness thereunder was taken up by the notes;

     (13) Indebtedness under the Senior Credit Agreement (including (i) any fees
and expenses incurred by the Issuer or any of its Subsidiaries incurred in
connection with the Senior Credit Agreement (including, but not limited to,
those owed to any Person not affiliated to the Issuer or any of its
Subsidiaries) in connection with any amendment (including any amendment and
restatement thereof), supplement, replacement, restatement or other modification
from time to time, including any agreements (and related instruments and
documents) extending the maturity of, refinancing, replacement or other
restructuring of all or any portion of the Indebtedness under such Senior Credit
Agreement (and related instruments and documents) or any successor or
replacement agreements (and related instruments and documents) and (ii) any
capitalized interest, fees, or other expenses incurred by the Issuer or any of
its Subsidiaries whether or not charged to a loan account or any similar account
created under the Senior Credit Agreement (clauses (i) and (ii), the "Related
Indebtedness")); provided, that the principal amount of the Indebtedness under
the Senior Credit Agreement (excluding the Related Indebtedness and excluding
any Qualified Senior Affiliate Indebtedness) shall not at any time exceed the
sum of (a) $50 million less the aggregate amount applied from time to time by
the Issuer or any of its Subsidiaries to repay the Senior Credit Agreement
Indebtedness which is accompanied by a corresponding permanent reduction of the
Revolver Commitment under the Senior Credit Agreement plus (b) (x) $15 million,
if the then applicable Revolver Commitment under the Senior Credit Agreement is
$25 million or greater, (y) $10 million, if the then applicable Revolver
Commitment under the Senior Credit Agreement is less than $25 million and
greater than or equal to $15 million or (z) $5 million, if the then applicable
Revolver Commitment under the Senior Credit Agreement is less than $15 million
("Indebtedness under the Senior Credit Agreement"); provided further that, the
aggregate amount that has been applied by the Issuer or any of its Subsidiaries
to repay the Indebtedness under the Senior Credit Agreement which was
accompanied by a corresponding permanent commitment reduction can be established
by the Issuer at any time by providing the Trustee with an officer's certificate
of the Issuer stating such amount;

     (14) Qualified Senior Affiliate Indebtedness; and

     (15) Permitted Subordinated Indebtedness.

     "PERMITTED INDUSTRY INVESTMENTS" means:

     (1) capital expenditures, including acquisitions of Issuer Properties and
interests therein;

     (2) (a) operating agreements, joint ventures, working interests, royalty
interests, mineral leases, unitization agreements, pooling arrangements or other
similar or customary agreements, transactions, properties, interests or
arrangements, and Investments and expenditures in connection with such
agreements, interests or arrangements, in each case made or entered into in the
ordinary course of the oil and gas business,

     and

               (b) exchanges of Issuer Properties for other Issuer Properties of
     at least equivalent value as determined in good faith by the Board of
     Directors of the Issuer; and

     (3) Investments of operating funds on behalf of co-owners of Crude Oil and
Natural Gas Properties pursuant to joint operating agreements.

                                       121
"PERMITTED INVESTMENTS" means:

     (1) Investments by the Issuer or any Subsidiary in any Person that (i) is
or will become immediately after such Investment a Subsidiary or that will merge
or consolidate into the Issuer or a Subsidiary, and (ii) is not subject to any
Payment Restriction;

     (2) Investments in the Issuer by any Subsidiary; PROVIDED, HOWEVER, that
any Indebtedness evidencing any such Investment held by a Subsidiary that is not
a Subsidiary Guarantor is unsecured and subordinated, pursuant to a written
agreement, to the Issuer's Obligations under the notes and the indenture;

     (3) Investments in cash and Cash Equivalents;

     (4) Investments made by the Issuer or its Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance with
"Certain Covenants -- Limitation on Asset Sales" above;

     (5) Permitted Industry Investments; and

     (6) Investments in any Person so long as such Investments are made on an
arm's-length basis.

     "PERMITTED LIENS" means:

     (1) Liens arising under the indenture or the security documents;

     (2) Liens securing the notes;

     (3) Liens arising under the Senior Credit Agreement or the guarantees and
security documents entered into in connection with the Senior Credit Agreement,
and Liens securing Qualified Senior Affiliate Indebtedness;

     (4) Liens securing the Guarantees;

     (5) Liens for taxes, assessments or governmental charges or claims that are
either

               (a) not delinquent or

               (b) contested in good faith by appropriate proceedings and as to
     which the Issuer has set aside on its books such reserves as may be
     required pursuant to GAAP;

     (6) statutory and contractual Liens of landlords to secure rent arising in
the ordinary course of business to the extent such Liens relate only to the
tangible property of the lessee which is located on such property and Liens of
carriers, warehousemen, mechanics, builders, suppliers, materialmen, repairmen
and other Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made in respect thereof;

     (7) Liens incurred on deposits made in the ordinary course of business:

               (a) in connection with workers' compensation, unemployment
     insurance and other types of social security, including any Lien securing
     letters of credit issued in the ordinary course of business consistent with
     past practice in connection therewith, or

               (b) to secure the performance of tenders, statutory obligations,
     surety and appeal bonds, bids, leases, government contracts, performance
     and return-of-money bonds and other similar obligations (exclusive of
     obligations for the payment of borrowed money);

                                       122
(8) easements, rights-of-way, zoning restrictions, restrictive covenants,
minor imperfections in title and other similar charges or encumbrances in
respect of real property not interfering in any material respect with the
ordinary conduct of the business of the Issuer and its Subsidiaries;

     (9) any interest or title of a lessor under any Capitalized Lease
Obligation not prohibited by the terms of the indenture; provided that such
Liens do not extend to any Property which is not leased Property subject to such
Capitalized Lease Obligation;

     (10) Liens securing reimbursement obligations, not to exceed $100,000 in
the aggregate at any time outstanding, with respect to commercial letters of
credit which encumber documents and other property relating to such letters of
credit and products and proceeds thereof;

     (11) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements, including rights
of offset and set-off;

     (12) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
indenture and Liens securing Crude Oil and Natural Gas Hedge Agreements;

     (13) statutory Liens on pipeline or pipeline facilities, Hydrocarbons or
Properties which arise out of operation of law;

     (14) royalties, overriding royalties, net profit interests, reversionary
interests, operating agreements and other similar interests, properties,
arrangements and agreements, all as ordinarily exist with respect to Properties
of the Issuer and its Subsidiaries or otherwise as are customary in the oil and
gas business, and all as relate to mineral leases and mineral interests of the
Issuer and its Subsidiaries;

     (15) any

               (a) interest or title of a lessor or sublessor under any lease,

               (b) restriction or encumbrance that the interest or title of such
     lessor or sublessor may be subject to (including, without limitation,
     ground leases or other prior leases of the demised premises, mortgages,
     mechanics' liens, builders' liens, tax liens, and easements), or

               (c) subordination of the interest of the lessee or sublessee
     under such lease to any restrictions or encumbrance referred to in the
     preceding clause (b);

     (16) Liens in favor of collecting or payor banks having a right of setoff,
revocation, refund or chargeback with respect to money or instruments on deposit
with or in possession of such bank;

     (17) judgment and attachment Liens not giving rise to an Event of Default;

     (18) Liens securing Acquired Indebtedness incurred in accordance with
"Certain Covenants -- Limitation on Incurrence of Additional Indebtedness"
above; PROVIDED, HOWEVER, that

     (19) such Liens secured such Acquired Indebtedness at the time of and prior
to the incurrence of such Acquired Indebtedness by the Issuer or a Subsidiary
and were not granted in connection with, or in anticipation of, the incurrence
of such Acquired Indebtedness by the Issuer or a Subsidiary, and

     (20) such Liens do not extend to or cover any property or assets of the
Issuer or of any of its Subsidiaries other than the property or assets that
secured the Acquired Indebtedness (and the proceeds of such property and assets)
prior to the time such Indebtedness became Acquired Indebtedness of the Issuer
or a Subsidiary and are no more favorable to the lienholders than those securing
the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness
by the Issuer or a Subsidiary.

     (21) Liens existing on the Issue Date;

                                       123
(22) Liens securing Refinancing Indebtedness which is incurred to Refinance
any Indebtedness permitted under the indenture and which has been secured by a
Lien permitted under the indenture and which has been incurred in accordance
with the provisions of the indenture; PROVIDED, HOWEVER, that such Liens

               (a) are no less favorable to the holders and are not more
     favorable to the lienholders with respect to such Liens than the Liens in
     respect of the Indebtedness being Refinanced and

               (b) do not extend to or cover any Property of the Issuer or any
     of its Subsidiaries that would not have secured the Indebtedness so
     Refinanced under the terms of the documents governing the Liens securing
     the Indebtedness being Refinanced;

     (21) Liens securing Indebtedness of the Issuer or any Subsidiary in an
aggregate principal amount at any time outstanding not to exceed the sum of
$500,000.00; and

     (22) Permitted Farmout Agreements.

     "PERMITTED OPERATING OBLIGATIONS" means Indebtedness of the Issuer or any
Subsidiary in respect of one or more standby letters of credit, bid, performance
or surety bonds, or other reimbursement obligations, issued for the account of,
or entered into by, the Issuer or any Subsidiary in the ordinary course of
business consistent with past practices (excluding obligations related to the
purchase by the Issuer or any Subsidiary of Hydrocarbons for which the Issuer or
any Subsidiary has contracts to sell), or in lieu of any thereof or in addition
to any thereto, guarantees and letters of credit supporting any such obligations
and Indebtedness (in each case, other than for an obligation for borrowed money,
other than borrowed money represented by any such letter of credit, bid,
performance or surety bond, or reimbursement obligation itself, or any guarantee
and letter of credit related thereto).

     "PERSON" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.

     "PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.

     "PROPERTY" OR "PROPERTY" means, with respect to any Person, any interests
of such Person in any kind of property or asset, whether real, personal or
mixed, or tangible or intangible, including, without limitation, Capital Stock,
partnership interests and other equity or ownership interests in any other
Person.

     "PURCHASE MONEY INDEBTEDNESS" means Indebtedness the net proceeds of which
are used to finance the cost (including the cost of construction) of property or
assets acquired in the normal course of business by the Person incurring such
Indebtedness.

     "Q1-2003 BUDGET" equals the Q1-2003 Closing Budget Ratio multiplied by the
Total Assets at March 31, 2003.

     "Q1-2003 CAPEX AMOUNT" equals the lesser of $8 million and the Q1-2003
Budget.

     "Q1-2003 CLOSING BUDGET RATIO" equals (a) $8 million or such lower amount
budgeted prior to the Issue Date by the Issuer for Capital Expenditures for the
first calendar quarter of 2003 divided by (b) Total Assets at the end of the
calendar quarter in which the Issue Date occurs.

     "Q2,3,4-2003 BUDGET" equals, for each of the last three calendar quarters
of 2003, the applicable Q2,3,4-2003 Closing Budget Ratio multiplied by the Total
Assets at the start of the applicable calendar quarter in 2003.

     "Q2,3,4-2003 CAPEX AMOUNT" equals, for each of the last three calendar
quarters of 2003, the lesser of $2.5 million and the Q2,3,4-2003 Budget.

                                       124
"Q2,3,4-2003 CLOSING BUDGET RATIO" equals, for each of the last three
calendar quarters of 2003, (a) $2.5 million or such lower amount budgeted prior
to the Issue Date by the Issuer for Capital Expenditures for such calendar
quarter divided by (b) Total Assets at the end of the calendar quarter in which
the Issue Date occurs.

     "QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.

     "QUALIFIED SENIOR AFFILIATE INDEBTEDNESS" means Indebtedness of the Issuer
to the Senior Credit Facility Representative, any Senior Credit Facility Lender
or any Affiliate of the Senior Credit Facility Representative or any such lender
in connection with (x) hedging activities (i.e., Indebtedness under Hedge
Agreements) or (y) cash management services entered into in the ordinary course
of business with any such Person (i.e., Indebtedness under Bank Products
Agreements).

     "QUALIFIED LEASE OPERATING COSTS" means lease operating costs reasonably
incurred in the ordinary course of business consistent with past practices and
industry standards pursuant to a budget approved by the Board of Directors of
the Issuer and relating to proved developed oil and gas properties.

     "REFINANCE" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part.

     "REFINANCING INDEBTEDNESS" means any Indebtedness that is the result of
Refinancing by the Issuer or any Subsidiary of Indebtedness incurred in
accordance with the covenant described in "Limitation on Incurrence of
Additional Indebtedness" above (other than pursuant to clause (1) (2), (3), (4),
(5), (6), (7), (8), (9), (10), (11), (12), or (15) of the definition of
Permitted Indebtedness), in each case that does not:

     (1) result in an increase in the total principal amount of Indebtedness of
the Issuer or such Subsidiary as of the date of such proposed Refinancing (other
than increases from any premium required to be paid under the terms of the
instrument governing such Indebtedness, capitalized interest, and the amount of
reasonable expenses incurred by the Issuer or such Subsidiary in connection with
such Refinancing, all of which are included in the term "Refinancing
Indebtedness"), or

     (2) create Indebtedness with

               (a) a Weighted Average Life to Maturity that is less than the
     Weighted Average Life to Maturity of the Indebtedness being Refinanced or

               (b) a final maturity earlier than the final maturity of the
     Indebtedness being Refinanced;

     PROVIDED, HOWEVER, that

                    (i) if such Indebtedness being Refinanced is Indebtedness
               solely of the Issuer or a Subsidiary Guarantor or is Indebtedness
               of the Issuer and any Subsidiary Guarantor or Subsidiary
               Guarantors, then such Refinancing Indebtedness shall be
               Indebtedness solely of the Issuer or such Subsidiary Guarantor or
               of the Issuer and such Subsidiary Guarantor or Subsidiary
               Guarantors, as the case may be, and

                    (ii) if such Indebtedness being Refinanced is subordinate or
               junior to the notes or a Guarantee, then such Refinancing
               Indebtedness shall be subordinate to the notes or such Guarantee,
               as the case may be, at least to the same extent and in the same
               manner as the Indebtedness being Refinanced.

     "RELATED PERSON" of any Person means any other Person directly or
indirectly owning 10% or more of the outstanding voting common stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the equity interest in such Person).

                                       125
"RESTRICTED CASH" means, at any time, the lesser of (i) $5 million and (ii)
the minimum amount of cash required to be maintained at that time by the Issuer
pursuant to the terms of the Senior Credit Agreement.

     "ROLLOVER DECREASE" means, for a particular calendar quarter, the amount of
reduced availability of SG&A or Capital Expenditures, as the case may be, due to
any a prior quarter's SG&A Excess Amount or CapEx Excess Amount.

     "ROLLOVER INCREASE" means, for a particular calendar quarter, the amount of
increased availability of SG&A or Capital Expenditures, as the case may be, due
to any a prior quarter's SG&A Deficit Amount or CapEx Deficit Amount.

     "SANDIA" means Sandia Oil and Gas Company, a Texas corporation.

     "SANDIA OPERATING" means Sandia Operating Corp., a Texas corporation, and
Wholly-Owned Subsidiary of Sandia.

     "SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Issuer or any Subsidiary of any property, whether owned by the
Issuer or such Subsidiary at the Issue Date or later acquired which has been or
is to be sold or transferred by the Issuer or any Subsidiary to such Person or
to any other Person from whom funds have been or are to be advanced by such
Person on the security of such property.

     "SECURITY DOCUMENTS" means, collectively, the Mortgages and all security
agreements, mortgages, deeds of trust, collateral assignments or other
instruments evidencing or creating any security interests in favor of the
Trustee in all or any portion of the Collateral, in each case as amended,
supplemented or modified from time to time in accordance with their terms and
the terms of the indenture.

     "SENIOR CREDIT AGREEMENT" means the Loan and Security Agreement, dated as
of January 22, 2003, entered into by the Issuer and certain Subsidiaries of the
Issuer, and the lenders named therein, or any successor or replacement
agreements, whether with the same or any other lender, group of lenders,
trustee, agent, note holder or group of note holders, together with the related
documents thereto (including, without limitation, any promissory notes,
guarantee agreements, security documents), in each case as such agreements,
instruments and documents have been or may be amended (including any amendment
and restatement thereof), supplemented, replaced, restated or otherwise modified
from time to time, including any agreements (and related instruments and
documents) extending the maturity of, refinancing, replacing or otherwise
restructuring all or any portion of the Indebtedness under such agreements (and
related instruments and documents) or any successor or replacement agreements
(and related instruments and documents).

     "SENIOR CREDIT FACILITY LENDERS" means any holders of any Indebtedness
under the Senior Credit Agreement.

     "SENIOR CREDIT FACILITY REPRESENTATIVE" means the Person designated in the
Intercreditor Agreement as the Senior Credit Facility Representative with
respect to the Senior Credit Agreement.

     "SG&A" means, for any period, amounts expended by the Issuer and its
Subsidiaries on selling, general and administrative expenses (as determined in
accordance with GAAP consistent with past practices), but excluding (without
duplication with respect to such exclusions):

       -  costs and expenses of the Issuer incurred in connection with (i)
          issuing the notes and shares of common stock contemporaneously issued
          by the Issuer, (ii) obtaining the loan evidenced by the Senior Credit
          Agreement, and (iii) the sale of stock described under the discussion
          above entitled "Business--Recent Developments--Financial
          Restructuring--Sale of Stock of Canadian Abraxas and Old Grey Wolf,"

       -  legal and accounting fees not to exceed $40,000 in any calendar year
          incurred by the Issuer in connection with preparing and filing the
          reports, information and documents

                                       126
required to be delivered to the Trustee as described above in the
          discussion entitled "Reports to Holders,"

       -  bonuses paid to officers and employees of the Issuer to the extent not
          in violation of the covenant described below in the discussion
          entitled "Transactions with Affiliates";

       -  expenditures with respect to any non-cash compensation to officers and
          employees of the Issuer and its Subsidiaries;

       -  amounts expended by the Issuer and its Subsidiaries on selling,
          general and administrative expenses for Canadian Abraxas and Old Grey
          Wolf; and

       -  the Stark Fees.

     "SG&A ANNUAL AMOUNT" equals, for any annual calendar period, the lesser of
$5 million and the SG&A Budget.

     "SG&A BUDGET" means, for any annual or quarter calendar period, as the case
may be, Closing SG&A Ratio multiplied by the Total Assets at the start of such
calendar period.

     "SG&A DEFICIT AMOUNT" means, for any calendar quarter, the amount by which
the SG&A in any such quarter (excluding the amount of SG&A due to any Rollover
Decrease because of a prior quarter's SG&A Excess Amount) is less than the
applicable SG&A Quarterly Amount.

     "SG&A EXCESS AMOUNT" means, for any calendar quarter, the amount by which
SG&A in any such quarter (excluding the amount of SG&A due to any Rollover
Increase because of a prior quarter's SG&A Deficit Amount) exceeds the
applicable SG&A Quarterly Amount.

     "SG&A QUARTERLY AMOUNT" means, for any calendar quarter, the lesser of (a)
$1.5 million and (b) one quarter of the SG&A Budget.

     "SUBORDINATED INDEBTEDNESS" means Indebtedness of the Issuer or a
Subsidiary Guarantor that is subordinated or junior in right of payment to the
notes, the relevant Guarantee and the security documents, as applicable, under a
written agreement to that effect.

     "SUBSIDIARY" means, with respect to any Person:

     (1) any corporation of which the outstanding Capital Stock having at least
a majority of the votes entitled to be cast in the election of directors under
ordinary circumstances shall at the time be owned, directly or indirectly, by
such Person, or

     (2) any other Person of which at least a majority of the voting interests
under ordinary circumstances is at the time, directly or indirectly, owned by
such Person, or

     (3) any other Person required to be consolidated with such Person for
financial reporting purposes under GAAP.

     "SUBSIDIARY GUARANTOR" means Sandia, Wamsutter, Sandia Operating, Western
Associated, Eastside Coal and New Grey Wolf and each of the Issuer's
Subsidiaries that in the future executes a supplemental indenture in which such
Subsidiary agrees to be bound by the terms of the indenture as a Subsidiary
Guarantor; PROVIDED, HOWEVER, that any Person constituting a Subsidiary
Guarantor as described above shall cease to constitute a Subsidiary Guarantor
when its Guarantee is released in accordance with the terms of the indenture.

     "TOTAL ASSETS" means, as of any date, total assets of the Issuer and its
Subsidiaries as reflected on the Issuer's consolidated balance sheet as of such
date prepared in accordance with GAAP.

     "TRUST MONEYS" means all cash or Cash Equivalents received by the Trustee:

                                       127
(1) upon the release of Collateral from the Lien of the indenture and the
security documents, including investment earnings thereon; or

     (2) pursuant to the provisions of any Mortgage; or

     (3) as proceeds of any other sale or other disposition of all or any part
of the Collateral by or on behalf of the Trustee or any collection, recovery,
receipt, appropriation or other realization of or from all or any part of the
Collateral pursuant to the indenture or any of the security documents or
otherwise; or

     (4) for application under the indenture as provided for in the indenture or
the security documents, or whose disposition is not elsewhere specifically
provided for in the indenture or in the security documents;

PROVIDED, HOWEVER, that Trust Moneys shall not include any property deposited
with the Trustee pursuant to any Change of Control Offer, a payment to Pay Down
Debt or redemption or defeasance of any notes.

     "WESTERN ASSOCIATED" means Western Associated Energy Corporation, a Texas
corporation.

     "WAMSUTTER" means Wamsutter Holdings, Inc., a Wyoming corporation.

     "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:

     (1) the then outstanding aggregate principal amount of such Indebtedness
into

     (2) the sum of the total of the products obtained by multiplying:

               (a) the amount of each then remaining installment, sinking fund,
     serial maturity or other required payment of principal, including payment
     at final maturity, in respect thereof, by

               (b) the number of years (calculated to the nearest one-twelfth)
     which will elapse between such date and the making of such payment.

     "WHOLLY OWNED SUBSIDIARY" means any Subsidiary of which all the outstanding
voting securities normally entitled to vote in the election of directors are
owned by the Issuer or another Wholly Owned Subsidiary.

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DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

     Abraxas is currently authorized to issue up to 200,000,000 shares of common
stock, par value $.01 per share.

     As of February 6, 2003 there were 35,612,688 shares of Abraxas common stock
issued and outstanding. Holders of the common stock are entitled to cast one
vote for each share held of record on all matters submitted to a vote of
stockholders and are not entitled to cumulate votes for the election of
directors. Holders of common stock do not have preemptive rights to subscribe
for additional shares of common stock issued by Abraxas.

     Holders of the common stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally available therefore.
Under the terms of the first lien notes indenture and the second lien notes
indenture, Abraxas may not pay dividends on shares of its common stock. In the
event of liquidation, holders of the common stock are entitled to share pro rata
in any distribution of Abraxas' assets remaining after payment of liabilities,
subject to the preferences and rights of the holders of any outstanding shares
of preferred stock. All of the outstanding shares of the common stock are fully
paid and nonassessable.

     References herein to Abraxas' common stock include the common share
purchase rights distributed by Abraxas to its stockholders on November 17, 1994,
as long as they trade with the common stock. See "-- Stockholder Rights Plan"
beginning on page 130.

PREFERRED STOCK

     Abraxas' Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock, par value $.01 per share, in one or more
series. The Board of Directors is authorized, without any further action by the
stockholders, to determine the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences,
sinking fund terms and other rights, preferences, privileges and restrictions of
any series of preferred stock, the number of shares constituting any such
series, and the designation thereof. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of holders of
any preferred stock that may be issued in the future.

WARRANTS

     Abraxas has warrants outstanding to purchase an aggregate of 950,000 shares
of Abraxas common stock. Basil Street Company has warrants to purchase 750,000
shares at an exercise price of $3.50 per share and Jesup & Lamont Holdings, TNC,
Inc. and Charles K. Butler (collectively "Jesup, et al") have warrants to
purchase 200,000 shares at $3.50 per share. Basil Street and Jesup, et al have
certain registration rights with respect to shares of the Abraxas common stock
issued pursuant to the exercise of such warrants. See " -- Registration Rights"
beginning on page 133.

     All outstanding warrants contain provisions that protect Basil Street and
Jesup, et al against dilution by adjusting the price at which the warrants are
exercisable and the number of shares of the Abraxas common stock issuable upon
exercise thereof upon the occurrence of certain events, including payment of
stock dividends and distributions, stock splits, recapitalizations,
reclassifications, mergers or consolidations. A holder of warrants has no rights
as a stockholder of Abraxas until the warrants are exercised. All warrants are
currently exercisable, although none have been exercised as of the date hereof.

OPTION PLANS

     Pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock Option
Plan (the "ISO Plan"), the Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan (the "1993 Plan"), the Abraxas Petroleum Corporation 1994 Long
Term Incentive Plan (the "LTIP") Abraxas grants to Abraxas'

                                       129
employees and officers (including Abraxas' directors who are also employees)
incentive stock options and non-qualified stock options. The ISO Plan, the 1993
Plan, and the LTIP are administered by the compensation committee which, based
upon the recommendation of the Chief Executive Officer, determines the number of
shares subject to each option. As of January 31, 2003, there were options to
purchase 3,305,340 shares of Abraxas common stock outstanding, of which
2,136,149 were fully vested at an average exercise price of $1.91 per share.

     Effective as of the closing date of the exchange offer and subject to any
requirements under applicable law, the Abraxas Board of Directors has approved a
reduction in the exercise price of one-half of the options to purchase Abraxas
common stock held by Mr. Watson (320,282 options), and a reduction in the
exercise price of all of stock options previously issued to Abraxas employees
(approximately 1.8 million options). The exercise price on such options will be
reduced to the price at which a share of Abraxas common stock is trading on the
American Stock Exchange at 11:00 a.m. New York time on that date.

REGISTRATION RIGHTS

     Under the terms of their warrants, Basil Street and Jesup, et al have the
right to unlimited piggyback registrations. Abraxas has agreed to pay all
expenses in connection with piggyback registrations by Basil Street and Jesup,
et al, provided, however, all underwriting discounts and selling commissions
shall be borne by Basil Street and Jesup, et al.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND
BYLAWS

     Abraxas' Articles of Incorporation and Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. The Articles of Incorporation and Bylaws provide that
the Board of Directors will consist of not less than three nor more than twelve
members, with the exact number to be determined from time to time by the
affirmative vote of a majority of directors then in office. The Board of
Directors, and not the stockholders, has the authority to determine the number
of directors. This provision could prevent any stockholder from obtaining
majority representation on Abraxas' Board of Directors by enlarging the Board of
Directors and by filling the new directorships with the stockholder's own
nominees. In addition, directors may be removed by the stockholders only for
cause.

     The Articles of Incorporation and Bylaws provide that special meetings of
stockholders of Abraxas may be called only by the Chairman of the Board, the
President or a majority of the members of the Board of Directors. This provision
may make it more difficult for stockholders to take actions opposed by the Board
of Directors.

     The Articles of Incorporation and Bylaws provide that any action required
to be taken or which may be taken by holders of Abraxas common stock must be
effected at a duly called annual or special meeting of such holders, and may not
be taken by any written consent of such stockholders. These provisions may have
the effect of delaying consideration of a stockholder proposal until the next
annual meeting unless a special meeting is called by the persons set forth
above. The provisions of the Articles of Incorporation and Bylaws prohibiting
stockholder action by written consent could prevent the holders of a majority of
the voting power of Abraxas from using the written consent procedure to take
stockholder action and taking action by consent without giving all the
stockholders of Abraxas entitled to vote on a proposed action the opportunity to
participate in determining such proposed action.

STOCKHOLDER RIGHTS PLAN

     On November 17, 1994, the Board of Directors of Abraxas adopted a
stockholder rights plan (the "Stockholder Rights Plan"). Under the terms of the
Stockholder Rights Plan, the Board of Directors of Abraxas declared a dividend
of one common share purchase right ("Stockholder Right") on each share of the
Abraxas common stock outstanding on November 17, 1994. Each Stockholder Right
entitles the holder thereof to buy one share of Abraxas common stock at an
exercise price of $40 per share, subject to adjustment.

                                       130
The Stockholder Rights are not exercisable until the occurrence of
specified events. Upon the occurrence of such an event (which events are
generally those which would signify the commencement of a hostile bid to acquire
Abraxas), the Stockholder Rights then become exercisable (unless redeemed by the
Board of Directors) for a number of shares of Abraxas common stock having a
market value of four times the exercise price of the Stockholder Right. If the
acquirer were to conclude the acquisition of Abraxas, the Stockholder Rights
would then become exercisable for shares of the controlling/surviving
corporation having a value of four times the exercise price of the Stockholder
Rights. If the Stockholder Rights were exercised at any time, significant
dilution would result, thus making the acquisition prohibitively expensive for
the acquirer. In order to encourage a bidder to negotiate with the Board of
Directors, the Stockholder Rights Plan provides that the Stockholder Rights may
be redeemed under prescribed circumstances by the Board of Directors.

     The Stockholder Rights are not intended to prevent a takeover of Abraxas
and will not interfere with any tender offer or business combination approved by
the Board of Directors. The Stockholder Rights Plan is intended to protect the
stockholders in the event of (a) an unsolicited offer to acquire Abraxas,
including offers that do not treat all stockholders equally, (b) the acquisition
in the open market of shares constituting control of Abraxas without offering
fair value to all stockholders and (c) other coercive takeover tactics which
could impair the Board's ability to fully represent the interests of the
stockholders.

ANTI-TAKEOVER STATUTES

     The Nevada General Corporation Law (the "Nevada GCL") contains two
provisions, described below as "Combination Provisions" and the "Control Share
Act," that may make more difficult the accomplishment of unsolicited or hostile
attempts to acquire control of a corporation through certain types of
transactions.

     Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Stockholders. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),
except those combinations which are approved by the board of directors before
the interested stockholder first obtained a 10% interest in the corporation's
stock. There are additional exceptions to the prohibition, which apply to
combinations if they occur more than three years after the interested
stockholder's date of acquiring shares. The Combination Provisions apply unless
the corporation elects against their application in its original articles of
incorporation or an amendment thereto, or in its bylaws. Abraxas' Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Combination Provisions inapplicable.

     Nevada Control Share Act. Nevada's Control Share Acquisition Act (the
"Control Share Act") imposes procedural hurdles on and curtails greenmail
practices of corporate raiders. The Control Share Act temporarily
disenfranchises the voting power of "control shares" of a person or group
("Acquiring Person") purchasing a "controlling interest" in an "issuing
corporation" (as defined in the Nevada GCL) not opting out of the Control Share
Act. In this regard, the Control Share Act will apply to an "issuing
corporation" unless, before an acquisition is made, the articles of
incorporation or bylaws in effect on the tenth day following the acquisition of
a controlling interest provide that it is inapplicable. Abraxas' Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.

     Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of Abraxas at the time of
the occurrence of a transaction governed by the Control Share Act (assuming that
Abraxas' Articles of Incorporation or Bylaws have not theretofore been amended
to include an opting out provision) would determine whether the Control Share
Act is applicable.

                                       131
The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
interest," and (2) acquired within 90 days immediately preceding that date. A
"controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with
one-fifth) of all voting power of the corporation. The Acquiring Person may not
vote any control shares without first obtaining approval from the stockholders
not characterized as "interested stockholders" (as defined below).

     To obtain voting Rights in control shares, the Acquiring Person must file a
statement at the principal office of the issuer ("Offeror's Statement") setting
forth certain information about the acquisition or intended acquisition of
stock. The Offeror's Statement may also request a special meeting of
stockholders to determine the voting Rights to be accorded to the Acquiring
Person. A special stockholders' meeting must then be held at the Acquiring
Person's expense within 30 to 50 days after the Offeror's Statement is filed. If
a special meeting is not requested by the Acquiring Person, the matter will be
addressed at the next regular or special meeting of stockholders.

     At the special or annual meeting at which the issue of voting rights of
control shares will be addressed, "interested stockholders" may not vote on the
question of granting voting rights to control the corporation or its parent
unless the articles of incorporation of the issuing corporation provide
otherwise. Abraxas' Articles of Incorporation do not currently contain a
provision allowing for such voting power.

     If full voting power is granted to the Acquiring Person by the
disinterested stockholders, and the Acquiring Person has acquired control shares
with a majority or more of the voting power, then (unless otherwise provided in
the articles of incorporation or bylaws in effect on the tenth day following the
acquisition of a controlling interest) all stockholders of record, other than
the Acquiring Person, who have not voted in favor of authorizing voting rights
for the control shares, must be sent a notice advising them of the fact and of
their right to receive "fair value" for their shares. Abraxas' Articles of
Incorporation and Bylaws do not provide otherwise. Within 20 days of the mailing
of the notice, any such stockholder may demand to receive from the corporation
the "fair value" for all or part of his shares. "Fair value" is defined in the
Control Share Act as "not less than the highest price per share paid by the
Acquiring Person in an acquisition."

     The Control Share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the tenth day following the acquisition
of a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. Abraxas' Articles of Incorporation and Bylaws do not address this
matter.

                                       132
REGISTRATION RIGHTS; LIQUIDATED DAMAGES

SHELF REGISTRATION

     Pursuant to the registration rights agreement that we entered into with
Jefferies & Company, Inc., acting on behalf of the holders of the notes and
shares of common stock covered by this prospectus, we have filed a shelf
registration statement of which this prospectus is a part, covering resales of
the notes, any additional notes issued in lieu of cash interest payments and the
shares of Abraxas common stock issued in the financial restructuring exchange
offer. We will be permitted to withdraw the registration statement upon the
soonest of (1) the passage of two years following the date of closing of this
exchange offer, (2) the date on which all tendering noteholders have disposed of
all of the securities covered by such shelf registration statement, or (3) the
date that Jefferies & Company receives an opinion of counsel to Abraxas and the
guarantors that all of the securities covered by such shelf registration
statement may be sold under the provisions of Rule 144 without limitation as to
volume or manner of sale.

     If the registration statement of which this prospectus is a part ceases to
be effective or usable in connection with exchange or resales of the notes, any
additional notes issued in lieu of cash interest payments, and the common stock
during the periods specified in the registration rights agreement (and as
qualified by the exceptions described in such agreement), or if we fail to meet
other obligations under the registration rights agreement, then, as liquidated
damages for such default under the registration rights agreement, the interest
rate on the notes and any additional notes issued in lieu of cash interest
payments, with respect to the first 90 day period immediately following the
occurrence of such default under the registration rights agreement will
increase, by 3.5% per annum and will increase by an additional 0.5% per annum
with respect to each subsequent 30 day period until all such defaults have been
cured, up to a maximum per annum interest rate on such notes of 18% with respect
to all defaults under the registration rights agreement. All accrued liquidated
damages will be paid by Abraxas in the same manner and at the same time as
payments of interest on the notes and any additional notes issued in lieu of
cash interest payments. Following the cure of all defaults under the
registration rights agreement, the accrual of liquidated damages will cease. No
liquidated damages will be payable to holders of the common stock who do not
otherwise hold notes.

     With respect to the shelf registration statement of which this prospectus
is a part, holders of any securities to be covered by such registration
statement are required to deliver information to be used in connection with the
registration statement in order to have their securities included in the
registration statement and to benefit from the provisions regarding liquidated
damages set forth above, to the extent applicable. We are not responsible for
the failure of a selling security holder to provide accurate information in
connection with this prospectus.

EXCHANGE OFFER REGISTRATION

     Pursuant to the registration rights agreement, we have also filed with the
SEC a registration statement with respect to an offer to exchange the notes
covered by this prospectus and any additional notes issued in lieu of cash
interest payments for a new issue of notes registered under the Securities Act,
with terms identical in all material respects to those of the outstanding notes.
We have agreed that if we are not permitted to consummate the exchange offer or
if fewer than all of the outstanding notes are successfully exchanged in the
exchange offer, that we will use our reasonable best efforts to maintain the
effectiveness of the shelf registration statement of which this prospectus is a
part to cover the resales of such notes remaining outstanding. To the extent
that outstanding notes are exchanged in the exchange offer for registered notes,
such outstanding notes will be removed from this prospectus.

     This summary of the registration rights agreement is subject to, and is
qualified in its entirety by reference to, all the provisions of the
registration rights agreement, a copy of which is filed as an exhibit to the
shelf registration statement of which this prospectus is a part.

                                       133
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

SCOPE AND LIMITATIONS

     The following general discussion summarizes certain United States federal
income tax aspects of the ownership of the notes and Abraxas common stock. This
discussion is a summary for general information purposes only, and does not
purport to describe all of the United States federal income tax consequences
resulting from the acquisition, ownership and disposition of notes and Abraxas
common stock nor does it describe United States federal income tax consequences
resulting to Non-U.S. Holders, except as expressly indicated. This summary deals
only with notes and Abraxas common stock that are held as capital assets by a
purchaser and does not deal with special situations, such as those of brokers,
dealers in securities or currencies, financial institutions, tax-exempt
entities, insurance companies, persons liable for alternative minimum tax,
United States persons whose "functional currency" is not the U.S. dollar,
persons holding the notes as part of a hedging, integrated, conversion or
constructive sale transaction or a straddle, and traders in securities that
elect to use a mark-to-market method of accounting for their securities
holdings. The following summary does not address any state, local or non-United
States tax consequences or United States federal tax consequences (e.g., estate
or gift tax) other than those pertaining to the income tax.

     Furthermore, this discussion is based on provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations of the foregoing,
all as in effect as of the date hereof and all of which are subject to change,
possibly with retroactive effect. This discussion will not be binding in any
manner on the Internal Revenue Service (the "IRS") or the courts. No ruling has
been or will be requested from the IRS on any of the matters relating to holding
the notes and Abraxas common stock, and no assurance can be given that the IRS
will not successfully challenge certain of the conclusions set forth below. If a
partnership holds the notes and/or Abraxas common stock, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. Partners of partnerships that hold notes and/or Abraxas
common stock, should consult their own tax advisors.

     As used herein, the term "U.S. Holder" means a holder of notes or Abraxas
common stock that is, for United States federal income tax purposes:

     (1)  an individual who is a citizen or resident of the United States;

     (2)  a corporation or partnership created or organized in or under the law
          of the United States or of any political subdivision thereof;

     (3)  an estate, the income of which is includible in gross income for
          United States federal income tax purposes regardless of its source; or

     (4)  a trust if (a) a United States court is able to exercise primary
          supervision over the administration of the trust and one or more
          United States persons have the authority to control all substantial
          decisions of the trust, or (b) the trust was in existence on August
          20, 1996, was treated as a United States person prior to that date,
          and elected to continue to be treated as a United States person.

     For purposes of this discussion, the term "non-U.S. Holder" means any
person other than a U.S. Holder.

EACH U. S. HOLDER, NON-U.S. HOLDER, PROSPECTIVE U.S. HOLDERS AND PROSPECTIVE
NON-U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S.
FEDERAL INCOME TAX CONSEQUENCES TO SUCH HOLDER OR PROSPECTIVE HOLDER OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND/OR ABRAXAS COMMON STOCK, AS
WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY OTHER RELEVANT
FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.

                                       134
TAX CONSEQUENCES TO U.S. HOLDERS

     ORIGINAL ISSUE DISCOUNT ON THE NOTES. In general, subject to a de minimis
rule, a debt obligation will be treated as being issued with original issue
discount ("OID") if the "stated redemption price at maturity" of the instrument
exceeds that instrument's "issue price"(as described below in "Issue Price").

     The stated redemption price at maturity of a debt obligation is the
aggregate of all payments due to the U.S. Holder under that debt obligation at
or prior to its maturity date, other than interest that is actually and
unconditionally payable in cash or property (other than debt instruments of the
issuer) at a single fixed (or a qualified floating) rate (or a permitted
combination of the two) at least annually ("QSIPs"). Interest on the notes will
be payable in cash, except that Abraxas may, subject to certain conditions, pay
the interest due on any interest payment date through and including the maturity
date of the notes by the issuance of additional notes ("PIK notes"). Because the
interest on the notes due on any payment date may be paid through the issuance
of additional PIK notes, none of the interest payments on the notes will qualify
as QSIPs. Thus, the stated redemption price at maturity of the notes will
include all payments of principal and all of the interest required under the
notes. Furthermore, under the regulations issued pursuant to the OID provisions
of the Code (the "OID Regulations"), a note and any PIK notes issued with
respect thereto are treated as part of the same debt instrument. Accordingly,
the adjusted issue price of the combined note and PIK note will not be reduced
upon the issuance of the PIK note, and the stated redemption price at maturity
of the combined note and PIK note will not change upon the issuance of the PIK
note and will include the interest payable under the PIK note.

     Since the stated redemption price at maturity of the notes exceeds their
issue price, the notes were issued with OID. A U.S. Holder of notes, subject to
the adjustments discussed below, will be required to include in gross income for
federal income tax purposes the sum of the daily portions of OID for each day
during the taxable year or portion thereof during which the U.S. Holder holds
the notes, whether or not the U.S. Holder actually receives a payment relating
to OID in such year. The daily portion is determined by allocating to each day
of the relevant "accrual period" a pro rata portion of an amount equal to (a)
the product of (1) the "adjusted issue price" of the notes at the beginning of
each accrual period, multiplied by (2) the yield to maturity of the notes
(determined by semi-annual compounding) less (b) the sum of any QSIPs during the
accrual period. The "adjusted issue price" of a note at any given time is its
issue price increased by all accrued OID for prior accrual periods (without
regard to the acquisition premium rules) and decreased by the amount of any
payment previously made on the notes other than a QSIP. As discussed above, only
a portion of the interest payments on the notes will qualify as QSIPs.

     A U.S. Holder of a note will be required to include OID in income as such
OID accrues, regardless of the U.S. Holder's method of accounting and regardless
of when such U.S. Holder receives cash payments relating to the OID. A U.S.
Holder's tax basis in a note will be increased by the amount of OID included in
the U.S. Holder's income and reduced by the portion of all interest payments not
qualifying as QSIPs (other than payments in the form of PIK notes) received on
the notes.

     The computation of OID and adjusted issue price with respect to the
combined notes and PIK notes will take into account accruals and payments with
respect to both instruments, with the result that the U.S. Holder of a note
generally will be required to include in income as OID the portion of interest
that accrues under the note that does not give rise to QSIPs and the interest
that accrues under any PIK note issued in respect thereof, regardless of whether
any cash payments are received. Each U.S. Holder of a note will be required to
include in income cash payments of stated interest qualifying as QSIPs in
accordance with their regular method of accounting.

     Upon a disposition of a note or a PIK note issued in respect thereof, the
U.S. Holder will be required (unless it disposes of a note together with all PIK
notes issued in respect thereof) to allocate adjusted issue price, stated
redemption price at maturity and acquisition premium (discussed below), if any,
of the combined note and PIK note among the instruments retained and the
instruments disposed of in order to determine OID with respect to the retained
instruments. Although it is not clear, it is likely that the adjusted tax basis
and adjusted issue price of a note would be allocated between such note and any
PIK notes issued with respect thereto at the time of such issuance, based on
their respective principal amounts. OID on the PIK notes will accrue in the same
manner as described above in respect of the notes.

                                       135
A purchaser of a note who purchases the note at a cost less than the
remaining stated redemption price at maturity but greater than its adjusted
issue price (a purchase at an "acquisition premium") also will be required to
include in gross income the sum of the daily portions of OID on that note . (For
purposes of these rules, a "purchase" is any acquisition of a debt instrument.)
In computing the daily portions of OID for such a purchaser, however, the daily
portion is reduced by the amount that would be the daily portion for such day
(computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the purchaser's
basis in the note on the date of purchase exceeds the adjusted issue price of
the note at that time, and the denominator of which is the sum of the daily
portions for that notes for all days beginning on the day after the purchase
date and ending on the maturity date.

     Abraxas will furnish annually to the IRS, and to each U.S. Holder of notes
to whom Abraxas is required to report, information relating to the OID accruing
during the calendar year. U.S. Holders will be required to determine for
themselves whether, by reason of the rules described above, they are eligible to
report a reduced amount of OID for federal income tax purposes.

     Pursuant to the OID Regulations, U.S. Holders of debt instruments are
permitted to elect to include all interest, discount (including de minimis
market discount) and premium on a debt instrument in income currently on a
constant yield to maturity basis. Such election would constitute an election to
include market discount currently in income on all market discount bonds held by
such U.S. Holders. U.S. Holders of notes are urged to consult their own tax
advisors regarding the availability and advisability of making such an election.

     ISSUE PRICE. The "issue price" of the notes was determined by reference to
the fair market value of the second lien notes and old notes for which they were
exchanged pursuant to the exchange offer. The fair market value of the second
lien notes and old notes was allocated based upon the relative fair market value
of the consideration received by Holders pursuant to the exchange offer.
Information regarding the issue price of the notes may be obtained by sending a
request in writing addressed to the Chief Financial Officer of Abraxas Petroleum
Corporation at 500 North Loop 1604, Suite 100, San Antonio, Texas 78232.

     SALE, EXCHANGE OR REDEMPTION OF NOTES. As noted above, the OID Regulations
treat a note and any PIK notes issued with respect thereto as a part of the same
debt instrument. If, however, a U.S. Holder disposes of a note or a PIK note
separately, in order to determine the amount of its gain or loss recognized, the
U.S. Holder will be required to allocate adjusted issue price and acquisition
premium of the combined note and the PIK notes issued with respect thereto among
the debt instruments retained and disposed of, as described above. See "Original
Issue Discount on the Notes" above.

     Under the OID Regulations, an unscheduled payment made on a debt instrument
such as a note prior to maturity that results in a substantially pro rata
reduction of each payment of principal and interest remaining on the instrument
is treated as a payment in retirement of a portion of the instrument, which may
result in gain or loss to the U.S. Holder. The gain or loss is calculated by
treating the debt obligation as consisting of two instruments, one that is
retired and one that remains outstanding, and by allocating the adjusted issue
price and the U.S. Holder's adjusted basis between the two instruments based
upon the relative principal amount of the portion of the obligation that is
treated as retired by the pro rata prepayment. The stated redemption price at
maturity of and the OID on the remaining instrument will be determined according
to the same principles discussed above. See "Original Issue Discount on the
Notes" above.

     Except as discussed above, upon the sale, exchange or retirement of a note,
a U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement of
the note (other than amounts representing accrued and unpaid interest) and such
U.S. Holder's adjusted tax basis in the note . A U.S. Holder's adjusted tax
basis in a note generally will equal such U.S. Holder's initial investment in
the note increased by any original issue discount included in income and any
accrued market discount included in income, decreased by the amount of any
payments that are not deemed qualified stated interest payments and amortizable
bond premium applied to reduce interest with respect to such note . Such gain or
loss generally will be long term capital gain or loss if the note has been held
for more than one year at the time of such sale, exchange or retirement.

                                       136
ACCRUED MARKET DISCOUNT. A debt instrument has "market discount" if its
stated redemption price at maturity exceeds its tax basis in the hands of the
U.S. Holder immediately after its acquisition, unless a statutorily defined de
minimis exception applies. Any gain recognized on the maturity or disposition of
a note will be treated as ordinary income to the extent that such gain does not
exceed the accrued market discount on such note . Alternatively, a U.S. Holder
of a note may elect to include market discount in income currently over the life
of the note . Such election shall apply to all debt instruments with market
discount acquired by the electing U.S. Holder on or after the first day of the
first year to which the election applies and may not be revoked without the
consent of the IRS.

     AMORTIZABLE BOND PREMIUM. Generally, a U.S. Holder of a note has
"amortizable bond premium" to the extent that the purchase price of a note
exceeds the note 's stated redemption price at maturity. Such a note will not be
treated as issued with OID. If the U.S. Holder makes (or has made) a timely
election under Section 171 of the Code, such U.S. Holder may amortize the bond
premium, on a constant yield basis, by offsetting the interest income from the
notes.

     If the U.S. Holder of a note makes an election to amortize bond premium,
the tax basis of the debt instrument must be reduced by the amount of the
aggregate amortization deductions allowable for the bond premium. Any such
election to amortize bond premium would apply to all debt instruments held or
subsequently acquired by the electing U.S. Holder and cannot be revoked without
permission from the IRS.

     BACKUP WITHHOLDING. A U.S. Holder of a note may be subject to backup
withholding at the rate of 31% with respect to "reportable payments," which
include payments in respect of interest or accrued OID, and the proceeds of a
sale, exchange or redemption of a note . Abraxas will be required to deduct and
withhold the prescribed amount if (a) the U.S. Holder fails to furnish a
taxpayer identification number ("TIN") to Abraxas in the manner required, (b)
the IRS notifies Abraxas that the TIN furnished by the U.S. Holder is incorrect,
(c) there has been a failure of the U.S. Holder to certify under penalty of
perjury that the U.S. Holder is not subject to withholding under Section
3406(a)(1)(C) of the Tax Code, or (d) the U.S. Holder is notified by the IRS
that he or she failed to report properly payments of interest and dividends and
the IRS has notified Abraxas that he or she is subject to backup withholding.

     Amounts paid as backup withholding do not constitute an additional tax and
will be credited against the U.S. Holder's U.S. federal income tax liabilities,
so long as the required information is provided to the IRS. Abraxas will report
to the U.S. Holders of notes and to the IRS the amount of any "reportable
payments" for each calendar year and the amount of tax withheld, if any, with
respect to payments on such notes to any noncorporate U.S. Holder other than an
"exempt recipient."

THE TAX RULES GOVERNING INSTRUMENTS ISSUED WITH OID AND THE DISCUSSION ABOVE
UNDER "ORIGINAL ISSUE DISCOUNT ON THE NOTES," "SALE, EXCHANGE AND RETIREMENT OF
NOTES," "ACCRUED MARKET DISCOUNT" AND "AMORTIZABLE BOND PREMIUM" ARE COMPLEX AND
THEIR APPLICATION TO A U.S. HOLDER WILL DEPEND UPON SUCH U.S. HOLDER'S
INDIVIDUAL SITUATION. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISOR ABOUT
THE APPLICATION OF THESE RULES TO THE THEM.

     TAX CONSEQUENCES OF HOLDING COMMON STOCK

     RULES GENERALLY RELATING TO DISTRIBUTIONS WITH RESPECT TO STOCK. When a
corporation makes a distribution with respect to its capital stock, the amount
of the distribution received by the stockholder will be treated as a dividend
which will be taxable to the stockholder as ordinary income, to the extent it is
paid from the current or accumulated earnings and profits of the corporation.
The amount of a distribution made in property other than cash is the fair market
value of that property at the time of the distribution. U.S. Holders that are
corporations are entitled to a dividends-received deduction subject to certain
limitations. Earnings and profits for this purpose consists of an amount based
on the taxable income of the corporation as adjusted by the application of
detailed rules set forth in Treasury Regulations. A distribution will be treated
as a dividend even though we have an overall deficit in our earnings and profits
to the extent we have positive earnings and profits in the year in which we make
the distribution (i.e., current earnings and profits). If the amount of a
distribution exceeds the current and accumulated earnings and profits of the

                                       137
corporation, the excess will be treated first as a tax-free return of investment
up to the basis of the stock, and this amount will reduce the stockholder's tax
basis in the stock. If the distribution exceeds the current and accumulated
earnings and profits, and the stockholder's tax basis in the stock, this excess
amount will be treated as capital gain to the stockholder. If the stockholder is
a U.S. corporation, the stockholder would generally be able to claim a deduction
equal to a portion of the amount of the distribution treated as a dividend ,
subject to certain requirements under the Code, in accordance with the foregoing
rules.

     REDEMPTION OF COMMON STOCK. Upon redemption of the common stock by Abraxas
for cash or property other than capital stock, the redemption should be treated
as a sale or exchange under Section 302 of the Code and the tendering holder
should recognize capital gain or loss to the extent the redemption proceeds are
greater or less than the holder's adjusted tax basis in the common stock if the
redemption proceeds received in exchange for the common stock:

       -  are not essentially equivalent to a dividend distribution;

       -  are substantially disproportionate with respect to the tendering
          holder;

       -  completely terminate the holder's equity interest in Abraxas; or

       -  are distributed to an individual U.S. Holder as part of a partial
          liquidation of shares (as defined in Section 302 of the Code).

In determining whether a cash redemption qualifies for sale or exchange
treatment under Section 302 of the Code, a tendering U.S. Holder must take into
account shares of Abraxas stock that are actually owned by the tendering holder
and, in certain situations, shares that such U.S. Holder is deemed to own
through a related person or entity.

     If the redemption does not qualify for sale or exchange treatment under
Section 302 of the Code, the redemption proceeds will be treated as a
distribution with respect to the common stock. The distribution will be taxable
as a dividend to the extent of current or accumulated earnings and profits. The
amount of the distribution in excess of current or accumulated earnings and
profits will be treated as a tax-free return of basis to the extent of the
tendering U.S. Holder's basis in its common stock and as capital gain to the
extent the distribution exceeds its basis in the common stock.

     SALE OF COMMON STOCK. U.S. Holders will generally recognize capital gain or
loss on a sale or exchange of common stock. The gain or loss will equal the
difference between the proceeds received and the adjusted tax basis in the
stock. The gain or loss recognized by a U.S. Holder on a sale or exchange of
stock will be long-term capital gain or loss if the holding period for the stock
is more than one year.

NON-U.S. HOLDERS

     Subject to the discussion of backup withholding below, the interest income
and gains that a non-U.S. Holder derives in respect of holding notes and Abraxas
common stock generally will be exempt from United States federal income taxes,
including withholding tax.

     Payments of interest or principal in respect of the notes by Abraxas or the
paying agent to a holder that is a non-U.S. Holder will not be subject to
withholding of United States federal income tax, provided that, in the case of
payments of interest (including OID):

     (1)  the income is effectively connected with the conduct by such non-U.S.
          Holder of a trade or business carried on in the United States and the
          non-U.S. Holder complies with applicable identification requirements
          (described below under "Backup Withholding and Information
          Reporting"); or

     (2)  the non-U.S. Holder and/or each securities clearing organization,
          bank, or other financial institution that holds the notes on behalf of
          such non-U.S. Holder in the ordinary course of its trade or business,
          in the chain between the non-U.S. Holder and the paying agent,
          complies with applicable identification requirements (described below
          under "Backup Withholding and Information Reporting") to establish
          that the holder is a non-U.S. Holder

                                       138
and in addition, that the following requirements of the "portfolio
          interest" exemption under the Code are satisfied:

          -    the non-U.S. Holder does not actually or constructively own 10%
               or more of the voting stock of Abraxas;

          -    the non-U.S. Holder is not a controlled foreign corporation with
               respect to Abraxas; and

          -    the non-U.S. Holder is not a bank whose receipt of interest on
               the notes is described in Section 881(c)(3)(A) of the Code.

     Any gain realized by a non-U.S. Holder on the sale or exchange of the
notes, or Abraxas common stock generally will be exempt from U.S. federal income
tax, including withholding tax, unless:

     (1)  such gain is effectively connected with the conduct of a trade or
          business in the United States (or if a tax treaty applies, such gain
          is attributable to a permanent establishment of the non-U.S. Holder);

     (2)  in the case of a non-U.S. Holder that is an individual, such non-U.S.
          Holder is present in the United States for 183 days or more during the
          taxable year in which such sale, exchange, or other disposition
          occurs; or

     (3)  in the case of gain representing accrued interest, the requirements of
          the portfolio interest exemption are not satisfied.

     If the interest income (including OID) paid on the notes or gain recognized
from a sale or exchange of the notes, or Abraxas common stock, is effectively
connected with the conduct of a trade or business in the United States by a
non-U.S. Holder, such non-U.S. Holder will generally be taxed under the same
rules that govern the taxation of a U.S. Holder. In addition, if such holder is
a foreign corporation, it may be subject to an additional branch profits tax.

BACKUP WITHHOLDING AND INFORMATION REPORTING

     Payment of the proceeds of a sale of a note or payment of interest
(including original issue discount) will be subject to information reporting
requirements and backup withholding tax unless the beneficial owner certifies
its non-United States status under penalties of perjury or otherwise establishes
an exemption provided that the paying agent does not actually know, or has
reason to know, that the holder is actually a U.S. Holder). Recently promulgated
Treasury Regulations provide certain presumptions under which a non-U.S. Holder
will be subject to backup withholding and information reporting unless such
holder certifies as to its non-U.S. status or otherwise establishes an
exemption. In addition, the recent Treasury Regulations change certain
procedural requirements related to establishing a holder's non-United States
status. Non-U.S. Holders should consult with their tax advisors regarding the
above issues.

     Any amounts withheld from a payment to a non-U.S. Holder under the backup
withholding rules will be allowed as a credit against the holder's United States
federal income tax liability and may entitle the holder to a refund, provided
that the required information is furnished to the Internal Revenue Service.

     Applicable identification requirements generally will be satisfied if there
is delivered to a securities clearing organization either directly, or
indirectly, by the appropriate filing of a Form W-8IMY:

     (1)  IRS Form W-8BEN signed under penalties of perjury by the non-U.S.
          Holder, stating that such holder of the notes is not a United States
          person and providing such non-U.S. Holder's name and address;

     (2)  with respect to non-U.S. Holders of the notes residing in a country
          that has a tax treaty with the United States who seek an exemption or
          reduced tax rate (depending on the treaty terms), Form W-8BEN. If the
          treaty provides only for a reduced rate, withholding tax will be
          imposed at that rate unless the non-U.S. Holder qualifies under the
          portfolio interest rules set forth in the Code and files a W-8BEN; or

                                       139
(3)  with respect to interest income "effectively connected" with the
          conduct by such non-U.S. Holder of a trade or business carried on in
          the United States, Form W-8ECI;

     provided that in any such case:

          -    - the applicable form is delivered pursuant to applicable
               procedures and is properly transmitted to the United States
               withholding agent, otherwise required to withhold tax; and

          -    - none of the entities receiving the form has actual knowledge or
               reason to know that the holder is a U.S. Holder.

                                       140
LEGAL MATTERS

     The validity of the issuance of the notes and the Abraxas common stock
covered by this prospectus has been passed upon for Abraxas by Cox & Smith
Incorporated, San Antonio, Texas.

                                     EXPERTS

     The consolidated financial statements of Abraxas as of December 31, 2001
and 2000, and for each of the two years in the period ended December 31, 2001,
included in this prospectus and registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to significant subsequent events and an
explanatory paragraph referring to a change in the method of accounting for
derivative financial instruments), and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.

     The consolidated financial statements of Abraxas for the year ended
December 31, 1999, appearing in this prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firms as experts in accounting and
auditing.

     The historical reserve information prepared by DeGolyer and MacNaughton and
McDaniel and Associates Consultants Ltd. included in this prospectus has been
included herein in reliance upon the authority of such firm as experts with
respect to matters contained in such reserve reports.

                       WHERE YOU CAN FIND MORE INFORMATION

     Abraxas and the guarantors of the notes have filed the registration
statement regarding the notes and Abraxas common stock with the SEC. This
prospectus does not contain all of the information included in the registration
statement. Any statement made in this prospectus concerning the contents of any
other document is not necessarily complete. If we have filed any other document
as an exhibit to the registration statement, you should read the exhibit for a
more complete understanding of the document or matter. Each statement regarding
any other document does not necessarily contain all of the information important
to you.

     Abraxas files annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document Abraxas files at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the SEC's public reference room in Washington, D.C. by calling the
SEC at 1-800-SEC-0330.

                                       141
GLOSSARY OF TERMS

     Unless otherwise indicated in this prospectus, natural gas volumes are
stated at the legal pressure base of the State or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
NGLs.

     The following definitions shall apply to the technical terms used in this
prospectus.

TERMS USED TO DESCRIBE QUANTITIES OF CRUDE OIL AND NATURAL GAS

     "BBL" -- barrel or barrels.

     "BCF" -- billion cubic feet.

     "BCFE" -- billion cubic feet equivalent.

     "BOE" -- barrels of

     "BOPD" -- barrels of crude oil per day.

     "MBBL" -- thousand barrels.

     "MCF" -- thousand cubic feet.

     "MCFE" -- thousand cubic feet equivalent.

     "MMBBLS" -- million barrels.

     "MMBTU" -- million British Thermal Units.

     "MMBTUPD" -- million British Thermal Units per day.

     "MMCF" -- million cubic feet.

     "MMCFE" -- million cubic feet equivalent.

     "MMCFPD" -- million cubic feet per day.

TERMS USED TO DESCRIBE OUR INTERESTS IN WELLS AND ACREAGE

     "DEVELOPED ACREAGE" means acreage which consists of acres spaced or
     assignable to productive wells.

     "GROSS" natural gas and crude oil wells or "gross" wells or acres is the
     number of wells or acres in which we have an interest.

     "NET" natural gas and crude oil wells or "net" acres are determined by
     multiplying "gross" wells or acres by our working interest in such wells or
     acres.

     "UNDEVELOPED ACREAGE" means leased acres on which wells have not been
     drilled or completed to a point that would permit the production of
     commercial quantities of crude oil and natural gas, regardless whether or
     not such acreage contains proved reserves.

TERMS USED TO ASSIGN A PRESENT VALUE TO OR TO CLASSIFY OUR RESERVES

     "PV-10" means estimated future net revenue, discounted at a rate of 10% per
     annum, before income taxes and with no price or cost escalation or
     de-escalation in accordance with guidelines promulgated by the SEC.

     "PROVED RESERVES" or "RESERVES" means natural gas and crude oil, condensate
     and NGLs on a net revenue interest basis, found to be commercially
     recoverable.

     "PROVeD UNDEVELOPED RESERVES" includes those proved reserves expected to be
     recovered from new wells on undrilled acreage or from existing wells where
     a relatively major expenditure is required for recompletion.

TERMS USED TO DESCRIBE COSTS

                                       142
"DD&A" means depletion, depreciation and amortization.

     "LOE" means lease operating expenses and production taxes.

TERMS USED TO DESCRIBE TYPES OF WELLS

     "DEVELOPMENT WELL" means a well drilled within the proved area of a crude
     oil or natural gas reservoir to the depth of stratigraphic horizon (rock
     layer or formation) known to be productive for the purpose of extraction of
     proved crude oil or natural gas reserves.

     "DRY HOLE" means an exploratory or development well found to be incapable
     of producing either crude oil or gas in sufficient quantities to justify
     completion as a crude oil or natural gas well.

     "EXPLORATORY WELL" means a well drilled to find and produce crude oil or
     natural gas in an unproved area, to find a new reservoir in a field
     previously found to be producing crude oil or natural gas in another
     reservoir, or to extend a known reservoir.

     "PRODUCTIVE WELLS" mean producing wells and wells capable of production.

     "SERVICE WELL" is a well used for water injection in secondary recovery
     projects or for the disposal of produced water.

OTHER TERMS

     "CHARGE" means an encumbrance, lien, claim or other interest in property
     securing payment or performance of an obligation.

     "EBITDA" means earnings from continuing operations before income taxes,
     interest expense, DD&A and other non-cash charges.

     "NGL" means natural gas liquid.

     "NYMEX" means the New York Mercantile Exchange.

                                      143
INDEX TO FINANCIAL STATEMENTS
Page
                                                                                                    ----
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

Independent Auditors' Reports for the years ended December 31, 2001 and 2000........................F-2
Independent Auditors' Report for the year ended December 31, 1999 ..................................F-3
Consolidated Balance Sheets at December 31, 2000 and 2001 ..........................................F-4
Consolidated Statements of Operations for the years ended December 31, 1999,
   2000 and 2001 ...................................................................................F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
   December 31, 1999, 2000 and 2001 ................................................................F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
   2000 and 2001 ...................................................................................F-9
Notes to Consolidated Financial Statements .........................................................F-11

Unaudited Consolidated Balance Sheet at September 30, 2002 and December 31, 2001 ...................F-50
Unaudited Consolidated Statement of Operations for the three and nine months ended
   September 30, 2002 and 2001......................................................................F-52
Unaudited Consolidated Statement of Stockholders Equity (Deficit)
   at September 30, 2002 and December 31, 2001......................................................F-53
Unaudited Consolidated Statement of Cash Flows for the nine months
   ended September 30, 2002 and December 31, 2001...................................................F-54
Notes to Unaudited Consolidated Financial Statements ...............................................F-55

GREY WOLF EXPLORATION INC.

Auditors' Report for the years ended December 31, 2001 and 2000.....................................F-75
Comments by Auditors' for US readers on Canada - US reporting differences...........................F-76
Auditors' Report for the year ended December 31, 1999...............................................F-77
Balance Sheets at December 31, 2000 and 2001........................................................F-78
Statements of Earnings and Retained Earnings for the years ended December 31, 1999, 2000
   and 2001.........................................................................................F-79
Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001.......................F-80
Notes to Financial Statements.......................................................................F-81
F-1
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation

We have audited the accompanying consolidated balance sheets of Abraxas
Petroleum Corporation and Subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2000, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 16 to the financial statements, in 2001 the Company changed
its method of accounting for derivative financial instruments to conform to
Statement of Financial Accounting Standards No. 133.

We have not audited any financial statements of the Company for any period
subsequent to December 31, 2001. However, as discussed in Note 19 to the
financial statements, the Company sold various assets and repurchased a
production payment obligation during 2002; and on January 23, 2003, sold all of
the outstanding common stock of two wholly owned subsidiaries, Canadian Abraxas
Petroleum Limited and Grey Wolf Exploration Inc., repaid certain debt, and also
entered into an agreement to exchange cash, new debt and common stock of the
Company for certain other debt.

/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
March 26, 2002
(January 23, 2003 as to Note 19)

                                       F-2
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Abraxas Petroleum Corporation

     We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Abraxas Petroleum
Corporation and Subsidiaries for the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Abraxas Petroleum Corporation and Subsidiaries for the year ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.

                                                               ERNST & YOUNG LLP

San Antonio, Texas
March 17, 2000

                                       F-3
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
DECEMBER 31
                                                               ---------------------------
                                                                   2000           2001
                                                               ------------   ------------
                                                                  (Dollars in thousands)
Current assets:
   Cash ....................................................   $      2,004   $      7,605
   Accounts receivable, less allowance for doubtful
     accounts:
       Joint owners ........................................          3,771          2,785
       Oil and gas production sales ........................         16,106          4,758
       Other ...............................................            841            504
                                                               ------------   ------------
                                                                     20,718          8,047
   Equipment inventory .....................................          1,411          1,251
   Other current assets ....................................            179            443
                                                               ------------   ------------
     Total current assets ..................................         24,312         17,346

Property and equipment:
     Oil and gas properties, full cost method of accounting:
       Proved ..............................................        481,802        486,098
       Unproved, not subject to amortization ...............         12,831         10,626
     Other property and equipment ..........................         63,720         67,632
                                                               ------------   ------------
           Total ...........................................        558,353        564,356
         Less accumulated depreciation, depletion, and
          amortization .....................................        253,569        282,462
                                                               ------------   ------------
       Total property and equipment - net ..................        304,784        281,894

Deferred financing fees, net of accumulated amortization
   of $6,917 and $8,668 at December 31, 2000 and 2001,
   respectively ............................................          5,556          3,928

Other assets ...............................................            908            545
                                                               ------------   ------------
   Total assets ............................................   $    335,560   $    303,713
                                                               ============   ============
See accompanying Notes to Consolidated Financial Statements.

                                       F-4
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31
                                                                                   ---------------------------
                                                                                       2000           2001
                                                                                   ------------   ------------
                                                                                      (Dollars in thousands)
Current liabilities:
   Accounts payable ............................................................   $     22,721   $     10,542
   Joint interest oil and gas production payable ...............................          6,281          3,596
   Accrued interest ............................................................          6,079          6,013
   Other accrued expenses ......................................................          1,932          1,116
   Hedge liability .............................................................              -            658
   Current maturities of long-term debt ........................................          1,128            415
                                                                                   ------------   ------------
     Total current liabilities .................................................         38,141         22,340

Long-term debt .................................................................        266,441        285,184

Deferred income taxes ..........................................................         21,079         20,621

Future site restoration ........................................................          4,305          4,056

Minority interest in foreign subsidiary ........................................         12,097              -

Commitments and contingencies

Stockholders' equity (deficit):
   Common stock, par value $.01 per share - authorized 200,000,000 shares;
     issued 22,759,852 and 30,145,280
     shares at December 31, 2000 and 2001, respectively ........................            227            301
   Additional paid-in capital ..................................................        130,409        136,830
   Accumulated deficit .........................................................       (131,376)      (151,094)
   Treasury stock, at cost, 165,883 shares at December 31, 2000
     and 2001 ..................................................................           (964)          (964)
   Accumulated other comprehensive income (loss) ...............................         (4,799)       (13,561)
                                                                                   ------------   ------------
Total stockholders' equity  (deficit) ..........................................         (6,503)       (28,488)
                                                                                   ------------   ------------
   Total liabilities and stockholders' equity  (deficit) .......................   $    335,560   $    303,713
                                                                                   ============   ============
See accompanying Notes to Consolidated Financial Statements.

                                       F-5
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
                                                               ------------------------------------------
                                                                   1999           2000          2001
                                                               ------------   ------------   ------------
                                                                  (In thousands except per share data)
Revenues:
   Oil and gas production revenues .........................   $     59,025   $     72,973   $     73,201
   Gas processing revenues .................................          4,244          2,717          2,438
   Rig revenues ............................................            444            505            756
   Other ...................................................          3,057            405            848
                                                               ------------   ------------   ------------
                                                                     66,770         76,600         77,243
Operating costs and expenses:
   Lease operating and production taxes ....................         17,938         18,783         18,616
   Depreciation, depletion, and amortization ...............         34,811         35,857         32,484
   Proved property impairment ..............................         19,100              -          2,638
   Rig operations ..........................................            624            717            702
   General and administrative ..............................          5,269          6,533          6,445
   General and administrative (Stock-based compensation) ...              -          2,767         (2,767)
                                                               ------------   ------------   ------------
                                                                     77,742         64,657         58,118
                                                               ------------   ------------   ------------
Operating income (loss) ....................................        (10,972)        11,943         19,125

Other (income) expense:
   Interest income .........................................           (666)          (530)           (78)
   Amortization of deferred financing fees .................          1,915          2,091          2,268
   Interest expense ........................................         36,815         31,140         31,523
   (Gain) loss on sale of equity investment ................              -        (33,983)           845
   Other ...................................................              -          1,563            207
                                                               ------------   ------------   ------------
                                                                     38,064            281         34,765
                                                               ------------   ------------   ------------
Income (loss) from operations before income tax and
   extraordinary item ......................................        (49,036)        11,662        (15,640)
Income tax expense (benefit):
   Current .................................................            491         (1,233)           505
   Deferred ................................................        (13,116)         4,938          1,897
Minority interest in income of consolidated foreign
   subsidiary (2001 prior to purchase) .....................            269          1,281          1,676
                                                               ------------   ------------   ------------
Income (loss) before extraordinary item ....................        (36,680)         6,676        (19,718)
Extraordinary item:
   Gain on debt extinguishment .............................              -          1,773              -
                                                               ------------   ------------   ------------
Net income (loss) ..........................................   $    (36,680)  $      8,449   $    (19,718)
                                                               ============   ============   ============

Basic earnings (loss) per common share:
   Net income (loss) before extraordinary item .............   $      (5.41)  $       0.29   $      (0.76)
   Extraordinary item ......................................              -           0.08              -
                                                               ------------   ------------   ------------
Net income (loss) per common share - basic .................   $      (5.41)  $       0.37   $      (0.76)
                                                               ============   ============   ============

Diluted earnings (loss) per common share:
   Net income (loss) before extraordinary item .............   $      (5.41)  $       0.21   $      (0.76)
   Extraordinary item ......................................              -           0.05              -
                                                               ------------   ------------   ------------
Net income (loss) per common share - diluted ...............   $      (5.41)  $       0.26   $      (0.76)
                                                               ============   ============   ============
See accompanying Notes to Consolidated Financial Statements.

                                       F-6
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                       (In thousands except share amounts)
COMMON STOCK                  TREASURY STOCK
                                           ----------------------------    ---------------------------
                                              SHARES         AMOUNT           SHARES         AMOUNT
                                           ------------    ------------    -----------    ------------
Balance at January 1, 1999 .............      6,501,441    $         65        171,015    $     (1,167)

   Comprehensive income
     (loss):
     Net loss ..........................              -               -              -               -

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -              -               -

   Comprehensive income (loss)

   Issuance of common stock
     for compensation ..................          3,314               -        (18,932)             96

   Issuance of common stock
     in connection with
     Exchange Offer (Note 2,
     5 and 6) ..........................     16,242,344             162              -               -
                                           ------------    ------------    -----------    ------------
Balance at December 31, 1999 ...........     22,747,099    $        227        152,083    $     (1,071)

   Comprehensive income
     (loss):
   Net income ..........................              -               -              -               -

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -              -               -

   Comprehensive income (loss) .........
   Stock-based compensation
     expense ...........................              -               -              -               -

   Issuance of common stock
     and warrants for
     compensation ......................         12,753               -        (25,000)            185
   Purchase of treasury stock ..........              -               -         38,800             (78)
                                           ------------    ------------    -----------    ------------
Balance at December 31, 2000 ...........     22,759,852    $        227        165,883    $       (964)
                                           ------------    ------------    -----------    ------------
ACCUMULATED
                                            ADDITIONAL                        OTHER
                                             PAID-IN        ACCUMULATED   COMPREHENSIVE
                                             CAPITAL          DEFICIT     INCOME (LOSS)       TOTAL
                                           ------------    ------------   -------------   ------------
Balance at January 1, 1999 .............   $     51,695    $   (103,145)  $     (10,970)  $    (63,522)

   Comprehensive income
     (loss):
     Net loss ..........................              -         (36,680)              -        (36,680)

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -          14,572         14,572
                                                                                          ------------
   Comprehensive income (loss)

                                                                                               (22,108)
   Issuance of common stock
     for compensation ..................            (43)              -               -             53

   Issuance of common stock
     in connection with
     Exchange Offer (Note 2,
     5 and 6) ..........................         75,910               -               -         76,072
                                           ------------    ------------   -------------   ------------
Balance at December 31, 1999 ...........   $    127,562    $   (139,825)   $      3,602   $     (9,505)

   Comprehensive income
     (loss):
   Net income ..........................              -           8,449               -          8,449

     Other comprehensive
       income:
       Foreign currency
         translation
         adjustment ....................              -               -          (8,401)        (8,401)
                                                                                          ------------
   Comprehensive income (loss) .........                                                            48
   Stock-based compensation
     expense ...........................          2,767               -               -          2,767

   Issuance of common stock
     and warrants for
     compensation ......................             80               -               -            265
   Purchase of treasury stock ..........              -               -               -            (78)
                                           ------------    ------------   -------------   ------------
Balance at December 31, 2000 ...........   $    130,409    $   (131,376)   $     (4,799)  $     (6,503)
                                           ------------    ------------   -------------   ------------
F-7
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
                       (In thousands except share amounts)
COMMON STOCK                  TREASURY STOCK
                                           ----------------------------    --------------------------
                                              SHARES          AMOUNT          SHARES        AMOUNT
                                           ------------    ------------    -----------   ------------
Balance at December 31, 2000 ...........     22,759,852    $        227        165,883   $       (964)

   Comprehensive income
     (loss):
     Net loss ..........................              -               -              -              -

     Other comprehensive
       income:
       Hedge loss ......................              -               -              -              -

       Foreign currency
         translation
         adjustment ....................              -               -              -              -

   Comprehensive income ................
     (loss)
   Stock-based compensation
     expense ...........................              -               -              -              -

   Issuance of common stock
     for contingent value
     rights ............................      3,386,488              34              -              -
   Issuance of common stock
     and stock options for
     acquisition of
     minority interest in
     Grey Wolf Exploration,
     Inc ...............................      3,990,565              40              -              -
   Stock options exercised .............          8,375               -              -              -
                                           ------------    ------------    -----------   ------------
Balance at December 31, 2001 ...........     30,145,280    $        301        165,883   $       (964)
                                           ============    ============    ===========   ============
PAID-IN       ACCUMULATED    COMPREHENSIVE
                                             CAPITAL         DEFICIT      INCOME (LOSS)        TOTAL
                                           ------------   -------------   -------------    ------------
Balance at December 31, 2000 ...........   $    130,409    $   (131,376)   $     (4,799)   $     (6,503)

   Comprehensive income
     (loss):
     Net loss ..........................              -         (19,718)              -         (19,718)

     Other comprehensive
       income:
       Hedge loss ......................              -               -            (566)           (566)

       Foreign currency
         translation
         adjustment ....................              -               -          (8,196)         (8,196)
                                                                                           ------------
   Comprehensive income ................                                                        (28,480)
     (loss)
   Stock-based compensation
     expense ...........................         (2,767)              -               -          (2,767)

   Issuance of common stock
     for contingent value
     rights ............................            (34)              -               -               -
   Issuance of common stock
     and stock options for
     acquisition of
     minority interest in
     Grey Wolf Exploration,
     Inc ...............................          9,206               -               -           9,246
   Stock options exercised .............             16               -               -              16
                                           ------------   -------------   -------------    ------------
Balance at December 31, 2001 ...........   $    136,830    $   (151,094)   $    (13,561)   $    (28,488)
                                           ============    ============    ============    ============
See accompanying Notes to Consolidated Financial Statements.

                                       F-8
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
                                                               ------------------------------------------
                                                                  1999            2000           2001
                                                               ------------   ------------   ------------
                                                                             (In thousands)
OPERATING ACTIVITIES
Net income (loss) ..........................................   $    (36,680)  $      8,449   $    (19,718)
Adjustments to reconcile net income
   (loss) to net cash provided by operating activities:
     Minority interest in income of
       foreign subsidiary ..................................            269          1,281          1,676
        Extraordinary gain on
       extinguishment of debt ..............................              -         (1,773)             -
     (Gain) loss on sale of equity .........................              -        (33,983)           845
       investment
     Depreciation, depletion, and
       amortization ........................................         34,811         35,857         32,484
     Proved property impairment ............................         19,100              -          2,638
     Deferred income tax (benefit) expense
                                                                    (13,116)         4,938          1,897
     Amortization of deferred financing ....................          1,915          2,091          2,268
       fees
     Amortization of premium on long term
       debt ................................................           (579)             -              -
     Stock-based compensation ..............................              -          2,767         (2,767)
     Issuance of common stock and
       warrants for compensation ...........................             53            265              -
     Changes in operating assets and
       liabilities:
         Accounts receivable ...............................         (2,698)        (7,036)        12,693
         Equipment inventory ...............................             57           (538)           (76)
         Other .............................................            396         (1,839)          (106)
         Accounts payable ..................................           (744)        11,318        (14,848)
         Accrued expenses ..................................          1,098           (425)          (723)
                                                               ------------   ------------   ------------
Net cash provided by operating activities ..................          3,882         21,372         16,263

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ...........................       (128,708)       (74,412)       (57,056)
Proceeds from sale of oil and gas
   properties ..............................................         17,494         21,157         28,938
Acquisition of minority interest ...........................              -              -         (2,679)
Proceeds from sale of equity investment ....................              -         34,482              -
                                                               ------------   ------------   ------------
Net cash used in investing activities ......................       (111,214)       (18,773)       (30,797)
F-9
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31
                                                               ------------------------------------------
                                                                  1999            2000           2001
                                                               ------------   ------------   ------------
                                                                             (In thousands)
FINANCING ACTIVITIES
Purchase of treasury stock, net ............................   $          -   $        (78)  $          -
Proceeds from issuance of common stock .....................              -              -             16
Proceeds from long-term borrowings .........................         88,457          6,400         29,995
Payments on long-term borrowings ...........................        (35,747)       (10,163)        (9,326)
Deferred financing fees ....................................         (3,586)            23              -
                                                               ------------   ------------   ------------
Net cash provided by (used in) financing
   activities ..............................................         49,124         (3,818)        20,685
                                                               ------------   ------------   ------------
Increase (decrease) in cash ................................        (58,208)        (1,219)         6,151
                                                               ------------   ------------   ------------
Effect of exchange rate changes on cash ....................            617           (576)          (550)
                                                               ------------   ------------   ------------
Increase (decrease) in cash ................................        (57,591)        (1,795)         5,601
Cash at beginning of year ..................................         61,390          3,799          2,004
                                                               ------------   ------------   ------------
Cash at end of year ........................................   $      3,799   $      2,004   $      7,605
                                                               ============   ============   ============

SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow
   information:
     Interest paid .........................................   $     35,979   $     33,004   $     31,752
                                                               ============   ============   ============
     Taxes paid ............................................   $          -   $          -   $        505
                                                               ============   ============   ============

Supplemental schedule of noncash investing and financing
   activities:
         In December 1999 the Company completed the exchange of $269,699,000 of
         its 11.5% Old Notes for $188,778,000 of new Second Lien Notes, issuance
         of up to 16,078,990 shares of common stock and contingent value rights.
         An additional $5,000,000 of the Second Lien Notes were issued for
         payment of fees and expenses. See Note 2, 5 and 6.
         Decrease in long-term debt.........                   $     75,921
                                                               ------------
         Increase in stockholder's equity...                   $     75,921
                                                               ------------

         In May 2001 the Company issued 3,386,488 shares of common stock upon
         the expiration of the CVRs issued in connection with the December 1999
         exchange. See Note 6.

         In September  2001 the Company  issued  3,990,565  shares of common stock and
         options  and  paid  $2,679,000   million  in  cash  in  connection  with  the
         acquisition of the minority interest in Grey Wolf. See Note 3.
         Decrease in oil and gas properties and other assets......................           $     (2,925)
                                                                                             ------------

         Decrease in deferred income tax liability................................           $      1,091
                                                                                             ------------
         Increase in stockholders equity..........................................           $     (9,246)
                                                                                             ------------
         Decrease in minority interest in foreign subsidiary......................           $     13,759
                                                                                             ------------
See accompanying Notes to Consolidated Financial Statements.

                                      F-10
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1999, 2000, and 2001

1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

     Abraxas Petroleum Corporation (the "Company" or "Abraxas") is an
independent energy company engaged in the exploration for and the acquisition,
development, and production of crude oil and natural gas primarily along the
Texas Gulf Coast, in the Permian Basin of western Texas and in Canada and the
processing of natural gas primarily in Canada. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

     The consolidated financial statements include the accounts of the Company,
its wholly-owned foreign subsidiaries Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and Grey Wolf Exploration Inc. ("Grey Wolf"). Minority
interest represents the minority shareholders' proportionate share of the equity
and income of Grey Wolf prior to the Company's acquisition of the remaining
interest in September 2001.

USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Management believes that it is reasonably possible that estimates of
proved crude oil and natural gas revenues could significantly change in the
future.

CONCENTRATION OF CREDIT RISK

     Financial instruments which potentially expose the Company to credit risk
consist principally of trade receivables, interest rate and crude oil and
natural gas price swap agreements. Accounts receivable are generally from
companies with significant oil and gas marketing activities. The Company
performs ongoing credit evaluations and, generally, requires no collateral from
its customers.

EQUIPMENT INVENTORY

     Equipment inventory principally consists of casing, tubing, and compression
equipment and is carried at the lower of cost or market.

OIL AND GAS PROPERTIES

     The Company follows the full cost method of accounting for crude oil and
natural gas properties. Under this method, all direct costs and certain indirect
costs associated with acquisition of properties and successful as well as
unsuccessful exploration and development activities are capitalized.
Depreciation, depletion, and amortization ("DD&A") of capitalized crude oil and
natural gas properties and estimated future development costs, excluding
unproved properties, are based on the unit-of-production method based on proved
reserves. Net capitalized costs of crude oil and natural gas properties, less
related deferred taxes, are limited, by country, to the lower of unamortized
cost or the cost ceiling, defined as the sum of the present value of estimated
future net revenues from proved reserves based on unescalated prices discounted
at 10 percent, plus the cost of properties not being amortized, if any, plus the
lower of cost or estimated fair

                                      F-11
value of unproved properties included in the costs being amortized, if any, less
related income taxes. Excess costs are charged to proved property impairment
expense. No gain or loss is recognized upon sale or disposition of crude oil and
natural gas properties, except in unusual circumstances - see Note 3.

     Unproved properties represent costs associated with properties on which the
Company is performing exploration activities or intends to commence such
activities. These costs are reviewed periodically for possible impairments or
reduction in value based on geological and geophysical data. If a reduction in
value has occurred, costs being amortized are increased. The Company believes
that the unproved properties will be substantially evaluated in six to
thirty-six months and it will begin to amortize these costs at such time. During
1999, 2000 and 2001, the Company capitalized $193,000, $589,000 and $164,000 of
interest expense, respectively, based on the cost of major development projects
in progress.

OTHER PROPERTY AND EQUIPMENT

     Other property and equipment are recorded on the basis of cost.
Depreciation of gas gathering and processing facilities and other property and
equipment is provided over the estimated useful lives using the straight-line
method. Major renewals and betterments are recorded as additions to the property
and equipment accounts. Repairs that do not improve or extend the useful lives
of assets are expensed.

TURNAROUND COSTS

     Turnaround costs represent major maintenance performed on the Company's gas
processing plants and are expensed as incurred.

HEDGING

     The Company periodically enters into agreements to hedge the risk of future
crude oil and natural gas price fluctuations. Such agreements, primarily in the
form of price swaps, may either fix or support crude oil and natural gas prices
or limit the impact of price fluctuations with respect to the Company's sale of
crude oil and natural gas. Gains and losses on such hedging activities are
recognized in oil and gas production revenues when hedged production is sold.
The net cash flows related to any recognized gains or losses associated with
these hedges are reported as cash flows from operations. If the hedge is
terminated prior to expected maturity, gains or losses are deferred and included
in income in the same period as the physical production required by the contract
is delivered.

     Statement of Financial Accounting Standards, ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", is effective for the Company
on January 1, 2001. SFAS 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated a fair-value hedge, the changes in the fair value of the derivative
and the hedged item will be recognized in earnings. If the derivative is
designated a cash-flow hedge, changes in the fair value of the derivative will
be recorded in other comprehensive income (OCI) and will be recognized in the
income statement when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized in earnings.

STOCK-BASED COMPENSATION

     The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.

                                      F-12
Effective July 1, 2000, the Financial Accounting Standards Board ("FASB")
issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In March 1999, the Company amended the exercise price to $2.06 on all
options with an existing exercise price greater than $2.06. See Note 7. The
Company recognized approximately $2.8 million in expense during 2000 and a
credit of $2.8 million during 2001 as General and Administrative (Stock-based
compensation). The credit for the year ended December 31, 2001 was due to a
decline in the Company's common stock price.

FOREIGN CURRENCY TRANSLATION

     The functional currency for Canadian Abraxas and Grey Wolf is the Canadian
dollar ($CDN). The Company translates the functional currency into U.S. dollars
($US) based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity (Deficit).

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
materially different from the book value. The Company assumes the book value of
those financial instruments that are classified as current approximates fair
value because of the short maturity of these instruments. For noncurrent
financial instruments, the Company uses quoted market prices or, to the extent
that there are no available quoted market prices, market prices for similar
instruments.

RESTORATION, REMOVAL AND ENVIRONMENTAL LIABILITIES

     The estimated costs of restoration and removal of major processing
facilities are accrued on a straight-line basis over the life of the property.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and the amount of
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.

REVENUE RECOGNITION

     The Company recognizes crude oil and natural gas revenue from its interest
in producing wells as crude oil and natural gas is sold from those wells, net of
royalties. Revenue from the processing of natural gas is recognized in the
period the service is performed. The Company utilizes the sales method to
account for gas production volume imbalances. Under this method, income is
recorded based on the Company's net revenue interest in production taken for
delivery. Management does not believe that the Company had material gas
imbalances at December 31, 2000 or 2001.

DEFERRED FINANCING FEES

     Deferred financing fees are being amortized on a level yield basis over the
term of the related debt arrangements.

INCOME TAXES

     The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

                                      F-13
NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, which requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142,
Goodwill and Other Intangible Assets, which discontinues the practice of
amortizing goodwill and indefinite lived intangible assets and initiates an
annual review for impairment. Intangible assets with a determinable useful life
will continue to be amortized over that period. The amortization provisions
apply to goodwill and intangible assets acquired after June 30, 2001. The
Company has applied these standards to its purchase of the minority interest in
Grey Wolf.

     In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 requires an asset retirement obligation to be recorded
at fair value during the period incurred and an equal amount recorded as an
increase in the value of the related long-lived asset. The capitalized cost is
depreciated over the useful life of the asset and the obligation is accreted to
its present value each period. SFAS No. 143 is effective for the Company
beginning January 1, 2003 with earlier adoption encouraged. The Company is
currently evaluating the impact the standard will have on its future results of
operations and financial condition.

     In August 2001, the FASB issued SFAS No. 144 ACCOUNTING FOR THE IMPAIRMENT
OF DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 retains the requirement to
recognize an impairment loss only where the carrying value of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure such loss as
the difference between the carrying amount and fair value of the asset. SFAS No.
144, among other things, changes the criteria that have to be met to classify an
asset as held-for-sale and requires that operating losses from the discontinued
operations be recognized in the period that the losses are incurred rather than
as of the measurement date. The Company adopted the accounting standard
effective January 1, 2002, which did not have a significant impact on the
Company's financial condition or results of operations.

RECLASSIFICATIONS

     Certain prior years balances have been reclassified for comparative
purposes.

2.   LIQUIDITY

     At December 31, 2001 the Company's current liabilities of approximately
$22.3 million exceeded its current assets of $17.3 million. Included in current
liabilities are trade payables of $10.5 million, revenues due third parties of
$3.6 million and accrued interest of $6.0 million. The Company's results of
operations in 2001 generated $16.3 million in cash flows from operations. The
Company will need additional funds in the future for both the development of its
assets and the service of its debt, including the repayment of the $63.5 million
in principal amount of the First Lien Notes maturing in March 2003 and the $191
million of the Second Lien Notes and Old Notes maturing in November 2004. In
order to meet the goals of developing its assets and servicing its debt
obligations, the Company will be required to obtain additional sources of
capital and/or reduce or reschedule its existing cash requirements. In order to
do so, the Company may pursue one or more of the following alternatives:

   - refinancing existing debt;
   - repaying debt with proceeds from the sale of assets;
   - exchanging debt for equity;
   - managing the timing and reducing the scope of its capital expenditures;
   - issuing debt or equity securities or otherwise raising additional funds;
     or
   - selling all or a portion of its existing assets, including interests in its
     assets.

                                      F-14
The Company has implemented a number of measures to conserve its cash
resources, including postponement of certain exploration and development
projects. However, while these measures will help conserve the Company's cash
resources in the near term, they will also limit the Company's ability to
replenish its depleting reserves, which could negatively impact the Company's
operating cash flow and results of operations in the future.

     There can be no assurance that any of the above alternatives, or some
combination thereof, will be available or, if available, will be on terms
acceptable to the Company.

     The Company will have four principal sources of liquidity going forward:
(i) cash on hand, (ii) cash flow from operations, (iii) a production payment
related to certain U.S. properties, and (iv) sale of assets and property. Grey
Wolf also has availability under its new financing agreement entered into in
December 2001, see discussion below. The First Lien Notes indenture, the Second
Lien Notes indenture and the Old Notes indenture substantially limit its use of
proceeds from asset sales. Should commodity prices not increase from levels at
December 31, 2001, most of the Company's capital expenditures are discretionary
and can be delayed to maintain current liquidity. While the availability of
capital resources cannot be predicted with certainty and is dependent upon a
number of factors including factors outside of management's control, management
believes that the net cash flow from operations plus cash on hand, cash
available under the production payment and the proceeds from the sale of
additional properties will be adequate to fund operations and planned capital
expenditures.

     The Company's wholly owned Canadian subsidiaries, Canadian Abraxas and Grey
Wolf, have entered into a definitive Purchase and Sale Agreement related to the
sale of their interest in a natural gas plant and the associated reserves. The
sale, effective March 1, 2002, is scheduled to close in the second quarter of
2002 with estimated net proceeds of US $21.5 million. See Note 19.

     In December 2001, the Company's wholly owned subsidiary, Grey Wolf, entered
into a financing agreement ("Grey Wolf Facility") with Mirant Canada Energy
Capital, Ltd. ("Mirant Canada") for US $96 million (CDN $150 million) senior
secured facility, which is non-recourse to Abraxas. Initial proceeds from this
facility of approximately US $25 million were used to retire Grey Wolf's
existing bank debt and for general corporate purposes. Up to US $71 million is
available to finance the drilling of wells and related activities in the Grey
Wolf development plan, as anticipated over the next two years.

3.   ACQUISITIONS AND DIVESTITURES

NEW CACHE PETROLEUMS LTD ACQUISITION

     In January 1999, Canadian Abraxas completed the acquisition of New Cache
Petroleums, LTD ("New Cache"), for approximately $78 million in cash and the
assumption of approximately $10 million in debt. The debt was paid off with a
portion of the proceeds from the sale of the First Lien Notes.

     The acquisition was accounted for as a purchase, and the purchase price was
allocated to the crude oil and natural gas properties based on the fair values
of the properties acquired. Results of operations for New Cache have been
included in the consolidated financial statements since January 1999.

ABRAXAS WAMSUTTER L.P. DIVESTITURE

     In November 1998, the Company sold its interest in certain Wyoming
properties to Abraxas Wamsutter L.P., a Texas limited partnership (the
"Partnership"), for approximately $58.6 million and a minority equity ownership
in the Partnership. Wamsutter Holdings, Inc. ("Wamsutter") initially owned a one
percent interest and acted as general partner of the Partnership. The investment
in the Partnership was accounted for by the equity method. After certain payback
requirements were satisfied, the Company's interest would increase to 35%
initially and could increase to as high as 65%. The Company also received a
management fee and reimbursement of certain overhead costs from the Partnership
which amounted to $594,700 and $112,700 for the years ended December 31, 1999
and 2000 respectively.

                                      F-15
In March 2000, the Partnership sold all of its interest in its crude oil
and natural gas properties to a third party. Prior to the sale of these
properties, effective January 1, 2000, the Company's equity investee share of
oil and gas property cost, results of operations and amortization were not
material to consolidated operations or financial position. As a result of the
sale, the Company received approximately $34 million, which represented a
proportional interest in the Partnership's proved properties. See Note 10
regarding a litigation provision in 2001 of $845,000 related to ad valorem
taxes.

     The condensed pro forma financial information presented below summarizes on
an unaudited pro forma basis, approximate results of the Company's consolidated
results of operations for the year ended December 31, 1999, assuming the
divestiture had occurred on January 1, 1999.
(In thousands except
                                                         per share data)
                                                      -----------------------
Revenue ........................................    $            66,770
                                                      =======================
     Net loss .......................................    $            (3,294)
                                                      =======================
     Loss per common share ..........................    $             (0.49)
                                                      =======================
ACQUISITION OF MINORITY INTEREST IN GREY WOLF

     In September 2001, the Company completed a tender offer for the minority
interest in Grey Wolf, acquiring the approximately 52% of capital stock that was
not previously owned by the Company. The Company issued 3,990,565 common shares
and 588,916 stock options, valued together at approximately $9.2 million.
Additionally, the Company incurred direct costs of approximately $2.7 million
related to the acquisition. The elimination of the minority interest through an
acquisition at a purchase price less than Grey Wolf's book value in the
Company's consolidated financial statements had the effect of reducing the
property and other assets balances by $2.9 million and deferred income taxes by
$1.1 million.

     The condensed pro forma financial information presented below summarizes,
on an unaudited pro forma basis, approximate results of the Company's
consolidated results of operations for the years ended December 31, 1999, 2000
and 2001, assuming the acquisition of the minority interest in Grey Wolf had
occurred at the beginning of each period presented.
Years ended December 31,
                                                                       1999            2000           2001
                                                                    -------------------------------------------
                                                                      (In thousands except per share items)
                                                                    ------------   ------------   ------------
Revenue ....................................................   $     66,770   $     76,600   $     77,243
                                                                    ============   ============   ============
     Income (loss) before extraordinary item ....................        (36,411)         7,957        (18,042)
                                                                    ============   ============   ============
     Net income (loss) ..........................................        (36,411)         9,730        (18,042)
                                                                    ============   ============   ============
     Income (loss) before extraordinary item, per
      common share - basic ......................................          (3.38)          0.30          (0.63)
                                                                    ============   ============   ============
     Net income (loss) per common share - basic .................          (3.38)         0.37          (0.63)
                                                                    ============   ============   ============
     Income (loss) before extraordinary item, per
      common share - diluted ....................................          (3.38)          0.22          (0.63)
                                                                    ============   ============   ============
     Net income (loss) per common share - diluted                          (3.38)          0.27          (0.63)
                                                                    ============   ============   ============
F-16
4.   PROPERTY AND EQUIPMENT

          The major components of property and equipment, at cost, are as
          follows:
DECEMBER 31
                                                                ESTIMATED        -----------------------------
                                                               USEFUL LIFE           2000             2001
                                                            -----------------    --------------   ------------
                                                                  Years                 (In thousands)
Land, buildings, and improvements ..............         15            $          318   $        318
          Crude oil and natural gas properties ...........          -                   494,633        496,724
          Natural gas processing plants ..................         18                    60,299         63,964
          Equipment and other ............................          7                     3,103          3,350
                                                                                 --------------   ------------
                                                                                 $      558,353   $    564,356
                                                                                 ==============   ============
5.   LONG-TERM DEBT

          Long-term debt consists of the following:
DECEMBER 31
                                                                                     --------------------------------
                                                                                          2000              2001
                                                                                     --------------     -------------
                                                                                              (In thousands)
11.5% Senior Notes due 2004 ("Old Notes") .............................    $          801     $         801
          12.875% Senior Secured Notes due 2003 ("First Lien Notes") ............            63,500            63,500
          11.5% Second Lien Notes due 2004 ("Second Lien Notes").................           190,178           190,178
          Grey Wolf Credit facility repaid in 2001...............................             7,859                 -
          9.5% Senior Credit Facility ("Grey Wolf Facility"), providing for
           borrowings up to approximately US $96 million (CDN $150 million).
           Secured by the assets of Grey Wolf and non-recourse to Abraxas, net
           of US $2.3 million discount...........................................                 -            22,944

          Production Payment  ...................................................             5,231             8,176
                                                                                     --------------     -------------
                                                                                            267,569           285,599
          Less current maturities ...............................................             1,128               415
                                                                                     --------------     -------------
                                                                                     $      266,441       $   285,184
                                                                                     ===============    =============
LONG-TERM INDEBTEDNESS

     OLD NOTES. On November 14, 1996, the Company consummated the offering of
$215.0 million of it's 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of its 11.5% Senior Notes due 2004,
Series C. The Series B Notes and the Series C Notes were subsequently combined
into $275.0 million in principal amount of the Old Notes in June 1998.

     Interest on the Old Notes is payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of the Company at the redemption
prices set forth below, plus accrued and unpaid interest to the date of
redemption, if redeemed during the 12-month period commencing on November 1 of
the years set forth below:
YEAR                                        PERCENTAGE
          ----                                        ----------
2001....................................       102.875%
          2002 and thereafter.....................       100.000%
The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank PARI PASSU in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and to the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by Sandia Oil and Gas Company ("Sandia"), a wholly
owned subsidiary of the Company. The guarantee is a general unsecured obligation
of Sandia and ranks PARI PASSU in right of payment to all unsubordinated
indebtedness of Sandia and senior in right of payment to all subordinated

                                      F-17
indebtedness of Sandia. The guarantee is effectively subordinated to the First
Lien Notes and the Second Lien Notes to the extent of the value of the
collateral securing the First Lien Notes and the Second Lien Notes.

     Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to repurchase
all or a portion of such holder's Old Notes at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the Old Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales.

     FIRST LIEN NOTES. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. Beginning March 15, 2002, the First Lien Notes are redeemable, in whole or
in part, at the option of Abraxas at the par value price, plus accrued and
unpaid interest to the date of redemption.

     The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter, wholly-owned subsidiaries of the Company (the
"Restricted Subsidiaries"). The guarantees are secured by substantially all of
the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas.

     Upon a Change of Control, as defined in the First Lien Notes Indenture,
each holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.

     The First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas.

     The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except in certain situations as described in the First Lien Notes
indenture.

     SECOND LIEN NOTES. In December 1999, Abraxas and Canadian Abraxas
consummated an exchange offer whereby $269,699,000 of the Old Notes were
exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of
Abraxas common stock and contingent value rights. An additional $5,000,000 of
the Second Lien Notes were issued in payment of fees and expenses.

     Interest on the Second Lien Notes is payable semi-annually in arrears on
May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas
at the redemption prices set forth below, plus accrued and unpaid interest to

                                      F-18
the date of redemption, if redeemed during the 12=month period commencing on
December 1 of the years set forth below:
YEAR                                               PERCENTAGE
          -----                                              ----------
2001............................................      102.875%
          2002 and thereafter.............................      100.000%
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.

     Upon a Change of Control, as defined in the Second Lien Notes Indenture,
each holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.

     The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.

     The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture

     The fair value of the Old Notes, First Lien Notes and Second Lien Notes was
approximately $235.2 million as of December 31, 2001. The Company has
approximately $325,000 of standby letters of credit and a $10,000 performance
bond open at December 31, 2001. Approximately $336,000 of cash is restricted and
in escrow related to certain of the letters of credit and the bond.

GREY WOLF FACILITY

     On December 20, 2001, Grey Wolf entered into a credit facility with Mirant
Canada. The Grey Wolf Facility established a revolving credit facility with a
commitment amount of CDN $150 million, (approximately US $96 million). Subject
to certain restrictions, the borrowing base may be reduced at the discretion of
Mirant Canada upon 30 days written notice. Subject to earlier termination on the
occurrence of events of default or other events, the stated maturity date is
December 20, 2007. The applicable interest rate charged on the outstanding
balance under the Grey Wolf Facility is 9.5%. Any amounts in default will

                                      F-19
accrue interest at 15%. The Grey Wolf Facility is non-recourse to Abraxas and
its properties, other than Grey Wolf properties, and Abraxas has no additional
direct obligations to Mirant Canada under the facility.

     Prior to maturity, Grey Wolf is required to make principal payments under
the Grey Wolf Facility as follows: (i) on the date of the sale of any producing
properties, Grey Wolf is required to make a payment equal to the amount of the
net sales proceeds; (ii) on a monthly basis, Grey Wolf is required to make a
payment equal to its net cash flow for the month prior to the date of the
payment; and (iii) on the date that any reduction in the commitment amount
becomes effective, Grey Wolf must repay all amounts over the commitment amount
so reduced.

     Under the Grey Wolf Facility, "net cash flow" generally means the amount of
proceeds received by Grey Wolf from the sale of hydrocarbons less taxes, royalty
and similar payments (including overriding royalty interest payments made to
Mirant Canada), interest payments made to Mirant Canada and operating and other
expenses including approved capital and G&A expenses.

     Grey Wolf may also make pre-payments at any time after December 20, 2002.

     The Company treats the Grey Wolf Facility as a revolving line of credit
since, under ordinary circumstances, the lender is paid on a net cash flow
basis. It is anticipated that the Company will be a net borrower for the next
several years due to a large number of exploration and exploitation projects and
the associated capital needs to complete the projects.

     Obligations under the Grey Wolf Facility are secured by a security interest
in substantially all of Grey Wolf's assets, including, without limitation,
working interests in producing properties and related assets owned by Grey Wolf.
None of Abraxas' assets are subject to a security interest under the Grey Wolf
Facility.

     The Grey Wolf Facility contains a number of covenants that, among other
things, restrict the ability of Grey Wolf to (i) enter into new business areas,
(ii) incur additional indebtedness, (iii) create or permit to be created any
liens on any of its properties, (iv) make certain payments, dividends and
distributions, (v) make any unapproved capital expenditures, (vi) sell any of
its accounts receivable, (vii) enter into any unapproved leasing arrangements,
(viii) enter into any take-or-pay contracts, (ix) liquidate, dissolve,
consolidate with or merge into any other entity, (x) dispose of its assets, (xi)
abandon any property subject to Mirant Canada's security interest, (xii) modify
any of its operating agreements, (xiii) enter into any unapproved hedging
agreements, and (xiv) enter into any new agreements affecting existing
agreements relating to or affecting properties subject to Mirant Canada's
security interests. In addition, Grey Wolf is required to submit a quarterly
development plan for Mirant Canada's approval and Grey Wolf must comply with
specified financial ratios and tests, including a minimum collateral coverage
ratio.

     Upon receipt by the Company of a written request from the Miranat Canada,
the Company shall promptly, and in any event within 10 days of receipt of such
request, have entered into one or more swap, hedge, floor, collar or similar
agreements which are satisfactory to the lender at a price and for a term which
is mutually acceptable to the Company and the Mirant Canada.

     The Grey Wolf Facility contains customary events of default, including
nonpayment of principal or interest, violations of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities, change of control and any material adverse change in the financial
condition of Grey Wolf.

     As a condition to the Grey Wolf Facility, Grey Wolf has granted two
overriding royalty interests to Mirant Canada, each in the amount of 2.5% of the
revenues received by Grey Wolf from oil and gas sales from all of its
properties. These overriding royalty interest result in the recording of a $2.3
million discount on the Grey Wolf Facility borrowings at December 31, 2001.

                                      F-20
PRODUCTION PAYMENT

     In October 1999 the Company entered into a non-recourse Dollar Denominated
Production Payment agreement (the "Production Payment") with a third party. The
Production Payment has an aggregate total availability of up to $50 million at
15% interest. The Production Payment relates to a portion of the production from
several natural gas wells in South Texas. As of December 31, 2001, the Company
had received $22.1 million under this agreement. The outstanding balance as of
December 31, 2001 is $8.2 million.

EXTRAORDINARY ITEM

     In June 2000, the Company retired $3.5 million of the Old Notes and $3.6
million of the Second Lien Notes at a discount of $1.8 million.

6.   STOCKHOLDERS' EQUITY

COMMON STOCK

     In 1994, the Board of Directors adopted a Stockholders' Rights Plan and
declared a dividend of one Common Stock Purchase Right ("Rights") for each share
of common stock. The Rights are not initially exercisable. Subject to the Board
of Directors' option to extend the period, the Rights will become exercisable
and will detach from the common stock ten days after any person has become a
beneficial owner of 20% or more of the common stock of the Company or has made a
tender offer or Exchange Offer (other than certain qualifying offers) for 20% or
more of the common stock of the Company.

     Once the Rights become exercisable, each Right entitles the holder, other
than the acquiring person, to purchase for $40 a number of shares of the
Company's common stock having a market value of two times the purchase price.
The Company may redeem the Rights at any time for $.01 per Right prior to a
specified period of time after a tender or Exchange Offer. The Rights will
expire in November 2004, unless earlier exchanged or redeemed

CONTINGENT VALUE RIGHTS ("CVRs")

     As part of the exchange offer consummated by the Company in December 1999,
Abraxas issued contingent value rights or CVRs, which entitled the holders to
receive up to a total of 105,408,978 of Abraxas common stock under certain
circumstances as defined. In May 2001, Abraxas issued 3,386,488 shares upon the
expiration of the CVRs.

TREASURY STOCK

     In March 1996, the Board of Directors authorized the purchase in the open
market of up to 500,000 shares of the Company's outstanding common stock, the
aggregate purchase price not to exceed $3,500,000. During the year ended
December 31, 2000, 38,800 shares with an aggregate cost of $78,000 were
purchased. During the years ended December 31, 1999 and 2001, the Company did
not purchase any shares of its common stock for treasury stock.

7.  STOCK OPTION PLANS AND WARRANTS

STOCK OPTIONS

     The Company grants options to its officers, directors, and key employees
under various stock option and incentive plans.

     During 2001, the Company's stockholders approved an amendment to the
Abraxas Petroleum Corporation 1994 Long Term Incentive Plan to increase the
number of shares of Abraxas common stock reserved for issuance under the plan to
5,000,000. The additional shares were necessary to accommodate

                                      F-21
the grant of Abraxas options to Grey Wolf option holders in connection with the
acquisition of the minority interest in Grey Wolf in September 2001 (see Note
3), and for the re-issuance of outstanding options granted under the Abraxas
Petroleum Corporation 2000 Long Term Incentive Plan, which was terminated in
2001. The options were re-issued at the same exercise price and term as the
original issuances.

     The Company's various stock option plans have authorized the grant of
options to management, employees and directors for up to approximately 5.6
million shares of the Company's common stock. All options granted have ten year
terms and vest and become fully exercisable over three to four years of
continued service at 25% to 33% on each anniversary date. At December 31, 2001
approximately 695,000 options remain available for grant.

     Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, "Accounting for Stock-Based Compensation", which
also requires that the information be determined as if the Company has accounted
for its employee stock options granted subsequent to December 31, 1995 under the
fair value method prescribed by that SFAS. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 2000, and 2001, risk-free
interest rates of 6.25%, 6.25% and 3.50%, respectively; dividend yields of -0-%;
volatility factors of the expected market price of the Company's common stock of
..928, .916 and .35, respectively; and a weighted-average expected life of the
option of ten years.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1999              2000              2001
                                                              -------------     -------------     ------------
                                                                   (In thousands except per share data)
Pro forma net income (loss) ............................   $     (37,240)    $      10,089     $    (21,002)
   Pro forma net income (loss) per common share ...........   $       (5.49)    $        0.45     $      (0.81)
   Pro forma net income (loss) per common share -  diluted    $       (5.49)    $        0.31     $      (0.81)
F-22
A summary of the Company's stock option activity, and related information for
the years ended December 31, follows:
1999                          2000                           2001
                              ---------------------------   ---------------------------   -----------------------------
                                            WEIGHTED-                                                  WEIGHTED-AVERAGE
                              OPTIONS   AVERAGE EXERCISE    OPTIONS    WEIGHTED-AVERAGE    OPTIONS      EXERCISE PRICE
                              (000s)        PRICE(1)         (000s)     EXERCISE PRICE      (000s)           (2)
                              -------   -----------------   --------   ----------------   ---------   ------------------
Outstanding-beginning of
 year ......................    1,572   $            7.33      1,890   $           1.82       4,042   $             3.37
Granted ....................      534                1.19      2,240               4.62         918                 2.81
Exercised ..................        -                   -          -                 -           (8)                1.95
Forfeited/Expired ..........     (216)               2.06        (88)              1.89         (10)                1.79
                              -------                       --------                      ---------

Outstanding-end of year ....    1,890   $            1.82      4,042   $           3.37       4,942   $             3.28
                              =======                       ========                      =========

Exercisable at end of year..      685   $            2.06      1,067   $           1.99       2,259   $             2.65
                              =======                       ========                      =========

Weighted-average fair value
 of options granted during
 the year ..................            $            1.07              $           1.21               $             1.19
Exercise prices for options outstanding as of December 31, 2001 ranged from
$0.97 to $5.03. The weighted-average remaining contractual life of those options
is approximately 7 years.

     (1)  In March 1999, the Company amended the exercise price to $2.06 per
          share on all options with an existing exercise price greater than
          $2.06. See Note 1 Stock-based compensation.
     (2)  In September 2001, the Abraxas Petroleum Corporation 2000 Long Term
          Incentive Plan was terminated, and options granted under the plan were
          reissued under the Abraxas Petroleum Corporation 1994 Long Term
          Incentive Plan at the same option price and term.

                                      F-23
STOCK AWARDS

     In addition to stock options granted under the plans described above, the
1994 Long-Term Incentive Plan also provides for the right to receive
compensation in cash, awards of common stock, or a combination thereof. In 1999,
the Company made direct awards of common stock of 18,932 shares at weighted
average fair values of $5.09 per share. The Company recorded compensation
expense of $37,900 for the year ended December 31, 1999. There were no awards in
2000 or 2001.

     The Company also has adopted the Restricted Share Plan for Directors which
provides for awards of common stock to nonemployee directors of the Company who
did not, within the year immediately preceding the determination of the
director's eligibility, receive any award under any other plan of the Company.
In 1999 and 2000, the Company made direct awards of common stock of 3,314 shares
and 12,753 shares, respectively, at weighted average fair values of $4.38 and
$0.94 per share, respectively. The Company recorded compensation expense of
$13,700 and $11,900 for the years ended December 31, 1999 and 2000,
respectively. There were no direct awards of common stock in 2001.

     During 1996, the Company's stockholders approved the Abraxas Petroleum
Corporation Director Stock Option Plan (Plan), which authorizes the grant of
nonstatutory options to acquire an aggregate of 104,000 common shares to those
persons who are directors and not officers of the Company. In March 1999 each of
the seven eligible directors were granted an option to purchase 2,000 common
shares at $2.06, in November 1999 five of the eligible directors were granted
options to purchase 15,000 common shares at $1.41. In December 1999 a new board
was appointed in connection with the Company's Exchange Offer, each of the four
new eligible directors were granted options for 75,000 common shares at $0.97.

STOCK WARRANTS AND OTHER

     In 2000, the Company issued 950,000 warrants in conjunction with a
consulting agreement. Each is exercisable for one share of common stock at an
exercise price of $3.50 per share. These warrants have a four-year term
beginning July 1, 2000. The Company recorded approximately $219,000 of
compensation expense which is included in Other expense in 2000. In addition,
the Company paid cash compensation of $360,000 and $191,000 in 2000 and 2001,
respectively, under the agreement.

     At December 31, 2001, the Company has approximately 6.6 million shares
reserved for future issuance for conversion of its stock options, warrants, and
incentive plans for the Company's directors, employees and consultants.

8.   INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31
                                                                   ---------------------------
                                                                       2000          2001
                                                                   -------------  ------------
                                                                         (In thousands)
Deferred tax liabilities:
       U.S. full cost pool ......................................  $       2,359  $      2,714
       Canadian full cost pool ..................................         21,079        24,809
                                                                   -------------  ------------
     Total deferred tax liabilities .............................         23,438        27,523
     Deferred tax assets:
      Depletion .................................................          1,439         2,035
       Net operating losses  ("NOL").............................         34,624        42,264
       Other ....................................................          1,059         2,273
                                                                   -------------  ------------
     Total deferred tax assets ..................................         37,122        46,572
     Valuation allowance for deferred tax assets ................        (34,763)      (39,670)
                                                                   -------------  ------------
     Net deferred tax assets ....................................          2,359         6,902
                                                                   -------------  ------------
     Net deferred tax liabilities ...............................  $      21,079  $     20,621
                                                                   =============  =============
F-24
Significant components of the provision (benefit) for income taxes are
          as follows:
1999         2000       2001
                                                                        ----------   ---------   ---------
Current:
       Federal........................................................  $        -   $       -   $     505
       Foreign .......................................................         491      (1,233)          -
                                                                        ----------   ---------   ---------
                                                                        $      491   $  (1,233)  $     505
                                                                        ==========   =========   =========
     Deferred:
       Federal .......................................................  $        -   $   3,433   $       -
       Foreign .......................................................     (13,116)      1,505       1,897
                                                                        ----------   ---------   ---------
                                                                        $  (13,116)  $   4,938   $   1,897
                                                                        ==========   =========   =========
As a result of the acquisition described in Note 3, deferred tax
liabilities decreased by $1,091,000.

     At December 31, 2001 the Company had, subject to the limitation discussed
below, $115,900,000 of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire from 2002 through 2021 if not utilized. At
December 31, 2001, the Company had approximately US $6,700,000 of net operating
loss carryforwards for Canadian tax purposes. These carryforwards will expire
from 2002 through 2008 if not utilized.

     As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the use
of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $3,203,000 will be limited to approximately $235,000 per year.

     During 1992, the Company acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of the acquired
corporation of $257,000 acquired in the acquisition are limited to approximately
$115,000 per year.

     As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $6,590,000 will be limited as described above and in the following paragraph.

     An ownership change under Section 382 occurred in December 1999, following
the issuance of additional shares, as described in Note 5. It is expected that
the annual use of U.S. net operating loss carryforwards subject to this Section
382 limitation will be limited to approximately $363,000, subject to the lower
limitations described above. Future changes in ownership may further limit the
use of the Company's carryforwards. In 2000 assets with built in gains were
sold, increasing the Section 382 limitation for 2001 by approximately
$31,000,000.

     The annual Section 382 limitation may be increased during any year, within
5 years of a change in ownership, in which built-in gains that existed on the
date of the change in ownership are recognized.

     In addition to the Section 382 limitations, uncertainties exist as to the
future utilization of the operating loss carryforwards under the criteria set
forth under FASB Statement No. 109. Therefore, the Company has

                                      F-25
established a valuation allowance of $34,763,000 and $39,670,000 for deferred
tax assets at December 31, 2000 and 2001, respectively.

     The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
DECEMBER 31
                                                   -------------------------------------------------------
                                                        1999                2000                  2001
                                                   -------------        -------------        -------------
                                                                        (In thousands)
Tax (expense) benefit at U.S.
       statutory rates (34%) ...............       $      16,672        $      (3,965)       $       5,318
     (Increase) decrease in deferred tax
       asset valuation allowance ...........              (3,312)               1,371               (4,907)
      NOL utilization - extraordinary gain                     -                 (603)                   -
     Write-down of non-tax basis assets.....                   -                    -                (2,194)
     Higher effective rate of foreign                       (491)              (1,098)                (136)
       operations...........................
     Percentage depletion ..................                   -                  363                  596
     Other .................................                (244)                 227               (1,079)
                                                   -------------        -------------        -------------
                                                   $      12,625        $      (3,705)       $      (2,402)
                                                   =============        =============        =============
9.   RELATED PARTY TRANSACTIONS

     Accounts receivable - Other and Other assets includes approximately
$268,000 and $195,000 as of December 31, 2000 and 2001, respectively,
representing amounts due from officers and stockholders relating primarily to
joint interest billings on properties which the Company operates and advances
made to employees.

     Grey Wolf owns a 10% interest in the Canadian Abraxas oil and gas
properties and the Canadian Abraxas gas processing plants acquired by Canadian
Abraxas in November 1996 and manages the operations of Canadian Abraxas,
pursuant to a management agreement between Canadian Abraxas and Grey Wolf. Under
the management agreement, Canadian Abraxas reimburses Grey Wolf for reasonable
costs or expenses attributable to Canadian Abraxas and for administrative
expenses based upon the percentage that Canadian Abraxas' gross revenue bears to
the total gross revenue of Canadian Abraxas and Grey Wolf. Amounts paid under
this agreement were $2.3 million, $2.5 million and $1.7 million for the years
ended December 31, 1999, 2000 and 2001, respectively.

     Wind River Resources Corporation ("Wind River"), all of the capital stock
of which is owned by the Company's President, owns a twin-engine airplane. The
airplane is available for business use by the employees of Abraxas from time to
time at Wind River's cost. Abraxas paid Wind River a total of $336,000, $336,000
and $314,000 in 1999, 2000 and 2001 respectively.

10.  COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

     During the years ended December 31, 1999, 2000 and 2001, the Company
incurred rent expense related to leasing office facilities of approximately
$396,000, $465,000 and $519,000, respectively. Future minimum rental payments
are as follows at December 31, 2001.
2002................................................................................    $   528,000
     2003 ...............................................................................        336,000
     2004 ...............................................................................        236,000
     2005 ...............................................................................        236,000
     2006 ...............................................................................        177,000
     Thereafter .........................................................................              -
F-26
LITIGATION AND CONTINGENCIES

     In 2001 the Company and the Partnership (see Note 3) were named in a
lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by the Company
related to the responsibility for year 2000 ad valorem taxes on crude oil and
natural gas properties sold by the Company and the Partnership. In February
2002, a summary judgment was granted to the plaintiff in this matter and a final
judgment in the amount of $1.3 million was entered. The Company has filed an
appeal. The Company believes these charges are without merit. The Company has
established a reserve in the amount of $845,000, which represents the Company's
interest in the judgment.

     In late 2000, the Company received a Final De Minimis Settlement Offer from
the United States Environmental Protection Agency concerning the Casmalia
Disposal Site, Santa Barbara County, California. The Company's liability for the
cleanup at the Superfund site is based on its acquisition of Bennett Petroleum
Corporation, which is alleged to have transported or arranged for the
transportation of oil field waste and drilling muds to the Superfund site. The
Company has engaged California counsel to evaluate the notice of proposed de
minimis settlement and its notice of potential strict liability under the
Comprehensive Environmental Response, Compensation and Liability Act. Defense of
the action is handled through a joint group of oil companies, all of which are
claiming a petroleum exclusion that limits the Company's liability. The
potential financial exposure and any settlement posture has yet not been
developed, but is considered by the Company to be immaterial.

     Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At December 31, 2001, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.

11.  EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted
earnings per share:
1999               2000               2001
                                                         -------------      -------------      -------------
Numerator:
   Numerator for basic and diluted earnings per share
    - net income (loss) before extraordinary item        $ (36,680,000)     $   6,676,000      $ (19,718,000)

  Extraordinary item                                                 -          1,773,000                  -
                                                         -------------      -------------      -------------

   Numerator for basis and diluted earnings per share
    - net income (loss) available to common
    stockholders                                           (36,680,000)         8,449,000        (19,718,000)
                                                         -------------      -------------      -------------

Denominator:
   Denominator for basic earnings per share -
    weighted-average shares                                  6,783,633         22,615,777         25,788,571
   Effect of dilutive securities:
    Stock options, warrants and CVRs                                 -         10,011,987                  -
                                                         -------------      -------------      -------------

   Dilutive potential common shares
                                                         =============      =============      =============
Denominator for diluted earnings per share -
 adjusted weighted-average shares and assumed
 conversions                                                 6,783,633         32,627,764         25,788,571
                                                         =============      =============      =============

   Basic earnings (loss) per share:
      Net income (loss) before extraordinary item        $       (5.41)     $        0.29      $       (0.76)
      Extraordinary item                                             -               0.08                  -
                                                         -------------      -------------      -------------
        Net income (loss) per common share               $       (5.41)     $        0.37      $       (0.76)
                                                         =============      =============      =============
   Diluted earnings (loss) per share:
      Net income (loss) before extraordinary item        $       (5.41)     $        0.21      $       (0.76)
      Extraordinary item                                             -               0.05                  -
                                                         -------------      -------------      -------------
        Net income (loss) per common share - diluted      $      (5.41)     $        0.26      $       (0.76)
                                                         =============      =============      =============
F-27
For the year ended December 31, 1999 and 2001 none of the shares issuable
in connection with stock options, warrants or CVRs are included in diluted
shares. Inclusion of these shares would be antidilutive due to losses incurred
in that year. Had a loss not been incurred, 68.2 million shares and 1.2 million
shares would have been included for the year ended December 31, 1999 and 2001,
respectively.

12.   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     Selected results of operations for each of the fiscal quarters during the
years ended December 31, 2000 and 2001 are as follows:
1ST              2ND               3RD               4TH
                                          QUARTER          QUARTER           QUARTER           QUARTER
                                         ----------      -----------      ------------      ------------
                                                     (In thousands, except per share data)
Year Ended December 31, 2000
   Net revenue ....................      $   16,717      $    16,287      $     16,377      $     27,219
   Operating income (loss) ........           1,513            1,629              (963)            9,404
   Net income (loss) before
    extraordinary item ............          27,156           (7,186)          (13,586)              292
   Net income (loss) ..............          27,156           (5,413)          (13,586)              292
   Net income (loss) before
    extraordinary item  per
    common share-basic ............      $     1.20      $     (0.32)     $      (0.60)     $       0.01
   Net income (loss) before
    extraordinary item per common
    share-diluted .................      $     0.52      $     (0.32)     $      (0.60)     $       0.01
   Net income (loss) per common
    share-basic ...................      $     1.20      $     (0.24)     $      (0.60)     $       0.01

   Net income (loss) per common
    share-diluted .................      $     0.52      $     (0.24)     $      (0.60)     $       0.01

Year Ended December 31, 2001
   Net revenue ....................      $   29,086      $    21,116      $     14,901      $     12,140
   Operating income (loss) ........          12,112            9,002             2,113            (4,102)
   Net income (loss) ..............             255           (1,274)           (5,849)          (12,850)
   Net income (loss) per common
    share-basic ...................      $     0.01      $     (0.05)     $      (0.22)     $      (0.43)

   Net income (loss) per common
    share-diluted .................      $     0.01      $     (0.05)     $      (0.22)     $      (0.43)
F-28
During the first quarter of 2000, the Company recognized a gain of $34
million on the sale of its equity investment in the Partnership. In the second
quarter of 2000, the Company recognized an extraordinary gain on debt
extinguishment of $1.8 million.

     During the fourth quarter of 2001, the Company incurred a ceiling
limitation write-down of $2.6 million, which was determined using realized
prices at March 22, 2002. Had year-end 2001 realized prices been used, the
write-down would have been $71.3 million.

13.  BENEFIT PLANS

     The Company has a defined contribution plan (401(k)) covering all eligible
employees of the Company. The Company did not contribute to the plan in 2000 or
2001. The employee contribution limitations are determined by formulas, which
limit the upper one-third of the plan members from contributing amounts that
would cause the plan to be top-heavy. The employee contribution is limited to
the lesser of 20% of the employee's annual compensation or $11,000.

14.  GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS.

     The following table presents condensed consolidating balance sheets of
Abraxas, as a parent company, and its significant subsidiaries, Canadian Abraxas
and Grey Wolf, as of December 31, 2000 and 2001 and the related consolidating
statements of operations for the years ended December 31, 1999, 2000 and 2001.
Canadian Abraxas (one of the Restricted Subsidiaries, see Note 5) is a guarantor
of the First Lien Notes ($63.5 million) and jointly and severally liable with
Abraxas for the Second Lien Notes ($190.2 million) and the Old Notes ($801,000).
Grey Wolf is a non-guarantor with respect to the First Lien Notes and the Old
Notes.

                                      F-29
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                           NON-GUARANTOR BALANCE SHEET
                               DECEMBER 31, 2001
                                (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
ASSETS:
Current assets:
   Cash ........................................   $       3,593   $     1,245   $       2,767   $          -   $      7,605
   Accounts receivable, less allowance for
    doubtful accounts...........................          17,281           792           6,782        (16,808)         8,047
   Equipment inventory .........................           1,061           178              12              -          1,251
   Other current assets ........................             250            99              94              -            443
                                                   -------------   -----------   -------------   ------------   ------------
     Total current assets ......................          22,185         2,314           9,655        (16,808)        17,346
Property and equipment - net....................         116,462       122,486          42,946              -        281,894
Deferred financing fees, net  ..................           2,779         1,042             107              -          3,928
Other assets ...................................         108,801           784           6,281       (115,321)           545
                                                   -------------   -----------   -------------   ------------   ------------
   Total assets ................................      $  250,227   $   126,626   $      58,989   $   (132,129)  $    303,713
                                                   =============   ===========   =============   ============   ============
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Current liabilities:
   Accounts payable ............................      $   10,642   $    17,009   $       9,472   $    (22,985)  $     14,138
   Accrued interest ............................           5,000         1,009               4              -          6,013
   Other accrued expenses ......................           1,052             -              64              -          1,116
   Hedge liability .............................             438           220               -              -            658
   Current maturities of long-term debt ........             415             -               -              -            415
                                                   -------------   -----------   -------------   ------------   ------------
     Total current liabilities .................          17,547        18,238           9,540        (22,985)        22,340
Long-term debt .................................         209,611        52,629          22,944              -        285,184
Deferred income taxes ..........................               -        17,718           2,903              -         20,621
Future site restoration  .......................               -         3,399             657              -          4,056
                                                   -------------   -----------   -------------   ------------   ------------
                                                         227,158        91,984          36,044        (22,985)       332,201
Stockholders' equity (deficit)..................          23,069        34,642          22,945       (109,144)       (28,488)
                                                   -------------   -----------   -------------   ------------   ------------
Total liabilities and stockholders' equity
(deficit).......................................   $     250,227   $   126,626   $      58,989   $   (132,129)  $    303,713
                                                   =============   ===========   =============   ============   ============
(1)  Includes amounts for insignificant U.S. subsidiaries, Sandia and
          Wamsutter, which are guarantors of the First and Second Lien Notes.
          Sandia is also a guarantor of the Old Notes. Additionally, these
          subsidiaries are designated as Restricted Subsidiaries along with
          Canadian Abraxas (see Note 5).

                                      F-30
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND
                          NON-GUARANTOR BALANCE SHEET
                               DECEMBER 31, 2000
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
ASSETS:
Current assets:
   Cash ........................................   $         326   $     1,678   $           -   $          -   $      2,004
   Accounts receivable, less allowance for
    doubtful accounts...........................          46,085         2,890           6,434        (34,691)        20,718
   Equipment inventory .........................             985           319             107              -          1,411
   Other current assets ........................             179             -               -              -            179
                                                   -------------   -----------   -------------   ------------   ------------
     Total current assets ......................          47,575         4,887           6,541        (34,691)        24,312
Property and equipment - net....................         119,349       148,585          36,850              -        304,784
Deferred financing fees, net  ..................           4,116         1,440               -              -          5,556
Other assets ...................................          96,666           832               -        (96,590)           908
                                                   -------------   -----------   -------------   ------------   ------------
   Total assets ................................   $     267,706   $   155,744   $      43,391   $   (131,281)  $    335,560
                                                   =============   ===========   =============   ============   ============
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Current liabilities:
   Accounts payable ............................   $      23,028   $    31,437   $       8,891   $    (34,354)  $     29,002
   Accrued interest ............................           5,057         1,009              13              -          6,079
   Other accrued expenses ......................             679          (349)          1,602              -          1,932
   Current maturities of long-term debt ........           1,128             -               -              -          1,128
                                                   -------------   -----------   -------------   ------------   ------------
     Total current liabilities .................          29,892        32,097          10,506        (34,354)        38,141
Long-term debt .................................         205,953        52,629           7,859              -        266,441
Deferred income taxes ..........................               -        18,881           2,198              -         21,079
Future site restoration  .......................               -         3,706             599              -          4,305
Minority interest in foreign subsidiary ........               -             -               -         12,097         12,097
                                                   -------------   -----------   -------------   ------------   ------------
                                                         235,845       107,313          21,162        (22,257)       342,063
Stockholders' equity (deficit)..................          31,861        48,431          22,229       (109,024)        (6,503)
                                                   -------------   -----------   -------------   ------------   ------------
Total liabilities and stockholders' equity
(deficit).......................................   $     267,706   $   155,744   $      43,391   $   (131,281)  $    335,560
                                                   =============   ===========   =============   ============   ============
F-31
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND
                      NON-GUARANTOR STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2001
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
Revenues:
   Oil and gas production revenues .............   $      34,934   $    24,308   $      13,959   $          -   $     73,201
   Gas processing revenues .....................               -         2,008             430              -          2,438
   Rig revenues ................................             756             -               -              -            756
   Other  ......................................              85           471             292              -            848
                                                   -------------   -----------   -------------   ------------   ------------
                                                          35,775        26,787          14,681              -         77,243
Operating costs and expenses:
   Lease operating and production taxes ........           9,302         6,836           2,478              -         18,616
   Depreciation, depletion, and amortization ...          12,336        14,707           5,441              -         32,484
   Proved property impairment ..................               -         2,638               -              -          2,638
   Rig operations ..............................             702             -               -              -            702
   General and administrative ..................           3,742         1,720             983              -          6,445
   General and administrative (Stock-based
     Compensation)..............................          (2,767)            -               -              -         (2,767)
                                                   -------------   -----------   -------------   ------------   ------------
                                                          23,315        25,901           8,902              -         58,118
                                                   -------------   -----------   -------------   ------------   ------------
Operating income (loss).........................          12,460           886           5,779              -         19,125

Other (income) expense:
   Interest income .............................          (1,242)            -               -          1,164            (78)
   Amortization of deferred financing fees......           1,907           361               -              -          2,268
   Interest expense.............................          25,086         7,117             484         (1,164)        31,523
   Other .......................................           1,052             -               -              -          1,052
                                                   -------------   -----------   -------------   ------------   ------------
                                                          26,803         7,478             484              -         34,765
                                                   -------------   -----------   -------------   ------------   ------------

Income (loss) from operations before income tax
   and extraordinary item.......................         (14,343)       (6,592)          5,295              -        (15,640)
Income tax expense (benefit)....................             505           (80)          1,977              -          2,402
Minority interest in income of consolidated
   foreign subsidiary ..........................               -             -               -         (1,676)        (1,676)
                                                   -------------   -----------   -------------   ------------   ------------
Net  income (loss)..............................   $     (14,848)  $    (6,512)  $       3,318   $     (1,676)  $    (19,718)
                                                   =============   ===========   =============   ============   ============
F-32
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND
                     NON-GUARANTOR STATEMENT OF OPERATIONS
                     FOR THE YEAR ENDED DECEMBER 31, 2000
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-       RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY      GUARANTOR       CATIONS      CORPORATION
                                                    INC. PARENT    (CANADIAN      SUBSIDIARY          AND           AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)    ELIMINATIONS   SUBSIDIARIES
                                                   -------------   -----------   -------------   ------------   ------------
Revenues:
   Oil and gas production revenues .............   $      32,165   $    27,425   $      13,383   $          -   $     72,973
   Gas processing revenues .....................               -         2,271             446              -          2,717
   Rig revenues ................................             505             -               -              -            505
   Other  ......................................             216           170              19              -            405
                                                   -------------   -----------   -------------   ------------   ------------
                                                          32,886        29,866          13,848              -         76,600
Operating costs and expenses:
   Lease operating and production taxes ........           7,755         8,695           2,333              -         18,783
   Depreciation, depletion, and amortization ...          12,328        18,126           5,403              -         35,857
   Rig operations ..............................             717             -               -              -            717
   General and administrative ..................           4,115         1,484             934              -          6,533
   General and administrative (Stock-based
     Compensation)..............................           2,767             -               -              -          2,767
                                                   -------------   -----------   -------------   ------------   ------------
                                                          27,682        28,305           8,670              -         64,657
                                                   -------------   -----------   -------------   ------------   ------------
Operating income (loss).........................           5,204         1,561           5,178              -         11,943

Other (income) expense:
   Interest income .............................          (2,277)            -               -          1,747           (530)
   Amortization of deferred financing fees......           1,660           431               -              -          2,091
   Interest expense ............................          24,594         7,582             711        (1,747)         31,140
   Gain on sale of equity investment ...........         (33,983)            -               -              -        (33,983)
   Other .......................................           1,116           447               -              -          1,563
                                                   -------------   -----------   -------------   ------------   ------------
                                                          (8,890)        8,460             711              -            281
                                                   -------------   -----------   -------------   ------------   ------------
Income (loss) from operations before income tax
   and extraordinary item.......................          14,094        (6,899)          4,467              -         11,662
Income tax expense (benefit)....................           3,433        (1,658)          1,930                         3,705
Minority interest in income of consolidated
   foreign subsidiary ..........................               -             -               -         (1,281)        (1,281)
                                                   -------------   -----------   -------------   ------------   ------------
Income (loss) before extraordinary item.........          10,661        (5,241)          2,537         (1,281)         6,676
Extraordinary item:
   Gain on debt extinguishment..................           1,773             -               -              -          1,773
                                                   -------------   -----------   -------------   ------------   ------------
Net income (loss)...............................   $      12,434   $    (5,241)  $       2,537   $     (1,281)  $      8,449
                                                   =============   ===========   =============   ============   ============
F-33
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                      NON-GUARANTOR STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)
ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
Revenues:
   Oil and gas production revenues ...............   $    21,331      $  29,314     $   8,380      $        -     $    59,025
   Gas processing revenues .......................             -          3,827           417               -           4,244
   Rig revenues ..................................           444              -             -               -             444
   Other  ........................................         2,811            222            24               -           3,057
                                                     -----------      ---------     ---------      ---------      -----------
                                                          24,586         33,363         8,821                          66,770
Operating costs and expenses:
   Lease operating and production taxes ..........         6,627          9,115         2,196               -          17,938
   Depreciation, depletion, and amortization .....         9,931         20,329         4,551               -          34,811
   Proved property impairment ....................             -         19,100             -               -          19,100
   Rig operations ................................           624              -             -               -             624
   General and administrative ....................         2,933          1,728           608               -           5,269
                                                     -----------      ---------     ---------      ---------      -----------
                                                          20,115         50,272         7,355               -          77,742
                                                     -----------      ---------     ---------      ---------      -----------
Operating income (loss)...........................         4,471        (16,909)        1,466               -         (10,972)

Other (income) expense:
   Interest income ...............................        (1,590)          (347)          (28)          1,299            (666)
   Amortization of deferred financing fees........         1,484            431             -               -           1,915
   Interest expense...............................        28,036          9,662           416          (1,299)         36,815
                                                     -----------      ---------     ---------      ---------      -----------
                                                          27,930          9,746           388               -          38,064
                                                     -----------      ---------     ---------      ---------      -----------
Income (loss) from operations before income tax...       (23,459)       (26,655)        1,078               -         (49,036)
Income tax expense (benefit)......................             -        (13,177)          552               -         (12,625)
Minority interest in income of consolidated
   foreign subsidiary ............................             -              -             -            (269)           (269)
                                                     -----------      ---------     ---------      ---------      -----------
Net income (loss) ...............................    $   (23,459)     $ (13,478)    $     526      $     (269)    $   (36,680)
                                                     ===========      =========     =========      ==========     ===========
F-34
CONDENSED CONSOLIDATING PARTENT, RESTRICTED SUBSIDIARY AND
                       NON-GUARANTOR STATEMENT OF CASH FLOW
                       FOR THE YEAR ENDED DECEMBER 31, 2001
                                 (IN THOUSANDS)
ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
OPERATING ACTIVITIES
Net income (loss) ...........................        $   (14,848)     $  (6,512)    $   3,318      $   (1,676)    $   (19,718)
Adjustments to reconcile net income (loss)
   to net cash provided by operating
   activities:
     Minority interest in income of foreign
       subsidiary ...........................                  -              -             -           1,676           1,676
     Loss on sale of equity investment.......                845              -             -               -             845
     Depreciation, depletion, and
       amortization .........................             12,336         14,707         5,441               -          32,484
     Proved property impairment .............                  -          2,638             -               -           2,638
     Deferred income tax (benefit) expense...                  -            (80)        1,977               -           1,897
     Amortization of deferred financing fees.              1,907            361             -               -           2,268

     Stock-based compensation ...............             (2,767)             -             -               -          (2,767)
     Changes in operating assets and
       liabilities:
         Accounts receivable ................             28,804         (9,721)       (6,390)              -          12,693
         Equipment inventory ................                (76)             -             -               -             (76)
         Other  .............................               (281)             -           175               -            (106)
         Accounts payables and accrued
           expenses .........................            (12,915)        (2,254)         (402)              -         (15,571)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided (used) by operating
   activities ...............................             13,005           (861)        4,119               -          16,263

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............            (19,126)       (15,313)      (22,617)              -         (57,056)
Proceeds from sale of oil and gas
   properties................................              9,677         15,882         3,379               -          28,938
Acquisition of minority interest ............             (2,679)             -             -               -          (2,679)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided  (used) by investing
   activities ...............................            (12,128)           569       (19,238)              -         (30,797)

FINANCING ACTIVITIES
Proceeds form issuance of common stock.......                 16              -             -               -              16
Proceeds from long-term borrowings ..........             11,700              -        18,295               -          29,995
Payments on long-term borrowings ............             (9,326)             -             -               -          (9,326)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided (used) by financing
 activities..................................              2,390              -        18,295               -          20,685
                                                     -----------      ---------     ---------      ----------     -----------
                                                           3,267           (292)        3,176               -           6,151
Effect of exchange rate changes on cash .....                  -           (141)         (409)              -            (550)
                                                     -----------      ---------     ---------      ----------     -----------
Increase (decrease) in cash .................              3,267           (433)        2,767               -           5,601
Cash at beginning of year ...................                326          1,678             -               -           2,004
                                                     -----------      ---------     ---------      ----------     -----------
Cash at end of year..........................        $     3,593      $   1,245     $   2,767      $        -     $     7,605
                                                     ===========      =========     =========      ==========     ===========
F-35
CONDENSED CONSOLIDATING PARTENT, RESTRICTED SUBSIDIARY AND
                       NON-GUARANTOR STATEMENT OF CASH FLOW
                       FOR THE YEAR ENDED DECEMBER 31, 2000
                                (IN THOUSANDS)
ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
OPERATING ACTIVITIES
Net income (loss) ...........................        $    12,434      $  (5,241)    $   2,537      $   (1,281)    $     8,449
Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
     Minority interest in income of foreign
       subsidiary ...........................                  -              -             -           1,281           1,281
        Extraordinary gain on extinguishment
       of debt...............................             (1,773)             -             -               -          (1,773)
     Gain on sale of equity investment.......            (33,983)             -             -               -         (33,983)
     Depreciation, depletion, and
       amortization .........................             12,329         18,126         5,402               -          35,857
     Deferred income tax expense (bebefit)...              3,433           (153)        1,658                           4,938
     Amortization of deferred financing fees.              1,660            431             -               -           2,091
     Stock-based compensation ...............              2,767              -             -               -           2,767
     Issuance of common stock and warrants
       for compensation .....................                265              -             -               -             265
     Changes in operating assets and
       liabilities:
         Accounts receivable ................                  8         (3,461)       (3,583)              -          (7,036)
         Equipment inventory ................               (538)             -             -               -            (538)
         Other  .............................               (184)        (1,618)         (37)               -          (1,839)
         Accounts payables and accrued
           expenses .........................              5,357            378         5,158               -          10,893
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided by operating activities ...              1,775          8,462        11,135               -          21,372

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............            (39,767)       (15,649)      (18,996)              -         (74,412)
Proceeds from sale of oil and gas
   properties ...............................              5,542          7,393         8,222               -          21,157
Proceeds from sale of equity investment .....             34,482              -             -               -          34,482
                                                     -----------      ---------     ---------      ----------     -----------
Net cash  provided (used) by investing
   activities ...............................                257         (8,256)      (10,774)              -          (18,773)

FINANCING ACTIVITIES
Purchase of treasury stock, net .............                (78)             -             -               -             (78)
Proceeds from long-term borrowings ..........              6,400              -             -               -           6,400
Payments on long-term borrowings ............             (9,979)             -          (184)              -         (10,163)
Deferred financing fees .....................                 23              -             -               -              23
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided  (used) by  financing
   activities ...............................             (3,634)             -          (184)              -          (3,818)
                                                     -----------      ---------     ---------      ----------     -----------
                                                         (1,602)            206           177               -          (1,219)
Effect of exchange rate changes on cash .....                 -            (399)         (177)              -            (576)
                                                     -----------      ---------     ---------      ----------     -----------
Increase (decrease) in cash .................             (1,602)          (193)            -               -          (1,795)
Cash at beginning of year ...................              1,928          1,871             -               -           3,799
                                                     -----------      ---------     ---------      ----------     -----------
Cash at end of year..........................        $       326      $   1,678     $       -      $        -     $     2,004
                                                     ===========      =========     =========      ==========     ===========
F-36
CONDENSED CONSOLIDATING PARTENT, RESTRICTED SUBSIDIARY AND
                      NON-GUARANTOR STATEMENT OF CASH FLOW
                      FOR THE YEAR ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)
ABRAXAS
                                                     PETROLEUM      RESTRICTED        NON-         RECLASSIFI-      ABRAXAS
                                                    CORPORATION     SUBSIDIARY      GUARANTOR       CATIONS        PETROLEUM
                                                    INC. PARENT     (CANADIAN      SUBSIDIARY         AND        CORPORATION AND
                                                    COMPANY(1)       ABRAXAS)      (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------  -------------  --------------  -------------  ----------------
OPERATING ACTIVITIES
Net income (loss) ...........................        $   (23,459)     $ (13,478)    $     526      $     (269)    $   (36,680)

Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
     Minority interest in income of foreign
       subsidiary ...........................                  -              -             -             269             269
     Depreciation, depletion, and
       amortization .........................              9,931         20,329         4,551               -          34,811
     Proved property impairment .............                  -         19,100             -               -          19,100
     Deferred income tax (benefit) expense...                  -        (13,595)          479               -         (13,116)
     Amortization of deferred financing fees.              1,484            431             -               -           1,915
     Amortization of premium on long term
       debt..................................               (579)             -             -               -            (579)
     Issuance of common stock and warrants
       for compensation .....................                 53              -             -               -              53
     Changes in operating assets and
       liabilities:
         Accounts receivable ................              3,724         (5,201)       (1,315)             94          (2,698)
         Equipment inventory ................                 57              -             -               -              57
         Other  .............................                221           (177)          352               -             396
         Accounts payables and accrued
           expenses .........................              7,816         (8,224)          762               -             354
     Other...................................            (83,656)        83,750             -             (94)              -
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided (used) by operating
   activities ...............................            (84,408)        82,935         5,355               -           3,882

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............            (19,132)       (99,600)       (9,976)              -        (128,708)
Proceeds from sale of oil and gas
   properties and equipment inventory .......              1,753         13,920         1,821               -          17,494
                                                     -----------      ---------     ---------      ----------     -----------
Net cash used by investing activities .......            (17,379)       (85,680)       (8,155)              -        (111,214)

FINANCING ACTIVITIES
Proceeds from long-term borrowings ..........             87,006             54         1,397               -          88,457
Payments on long-term borrowings ............            (35,747)             -             -               -         (35,747)
Deferred financing fees .....................             (3,586)             -             -               -          (3,586)
                                                     -----------      ---------     ---------      ----------     -----------
Net cash provided by financing activities ...             47,673             54         1,397               -          49,124
                                                     -----------      ---------     ---------      ----------     -----------
                                                         (54,114)        (2,691)       (1,403)              -         (58,208)
Effect of exchange rate changes on cash .....                  -            392           225               -             617
                                                     -----------      ---------     ---------      ----------     -----------
Increase (decrease) in cash .................            (54,114)        (2,299)       (1,178)              -         (57,591)
Cash at beginning of year ...................             56,042          4,170         1,178                -         61,390
                                                     -----------      ---------     ---------      ----------     -----------
Cash at end of year..........................        $     1,928      $   1,871     $       -      $        -     $     3,799
                                                     ===========      =========     =========      ==========     ===========
F-37
15. BUSINESS SEGMENTS

     The Company conducts its operations through two geographic segments, the
United States and Canada, and is engaged in the acquisition, development, and
production of crude oil and natural gas and the processing of natural gas in
each country. The Company's significant operations are located in the Texas Gulf
Coast, the Permian Basin of western Texas, and Canada. Identifiable assets are
those assets used in the operations of the segment. Corporate assets consist
primarily of deferred financing fees and other property and equipment. The
Company's revenues are derived primarily from the sale of crude oil, condensate,
natural gas liquids, and natural gas to marketers and refiners and from
processing fees from the custom processing of natural gas. As a general policy,
collateral is not required for receivables; however, the credit of the Company's
customers is regularly assessed. The Company is not aware of any significant
credit risk relating to its customers and has not experienced significant credit
losses associated with such receivables.

     In 2001, three customers accounted for approximately 41% of consolidated
oil and natural gas production revenue. Three customers accounted for
approximately 76% of United States revenue and five customers accounted for
approximately 78% of revenue in Canada. In 2000, two customers accounted for
approximately 26% of oil and natural gas production revenues. Three customers
accounted for approximately 59% of United States revenue and two customers
accounted for approximately 36% of revenue in Canada. In 1999, three customers
accounted for approximately 58% of oil and natural gas production revenues and
gas processing revenues.

Business segment information about the Company's 1999 operations in different
geographic areas is as follows:
U.S.       CANADA      TOTAL
                                               ---------   ---------   ---------
                                                         (In thousands)
Revenues ...................................   $  24,586   $  42,184   $  66,770
                                               =========   =========   =========

Operating profit (loss).....................   $   7,765   $ (15,444)  $  (7,679)
                                               =========   =========
General corporate ..........................                              (3,293)
Net interest expense and amortization of
   deferred financing fees .................                             (38,064)
                                                                       ---------
   Loss before income taxes ................                           $ (49,036)
                                                                       =========

Identifiable assets at December 31, 1999 ...   $ 107,336   $ 206,474   $ 313,810
                                               =========   =========
Corporate assets ...........................                               8,474
                                                                       ---------
   Total assets ............................                           $ 322,284
                                                                       =========
Business segment information about the Company's 2000 operations in different
geographic areas is as follows:
U.S.       CANADA      TOTAL
                                               ---------   ---------   ---------
                                                        (In thousands)
Revenues ...................................   $  32,886   $  43,714   $  76,600
                                               =========   =========   =========

Operating profit............................   $  12,446   $   6,739   $  19,185
                                               =========   =========
General corporate ..........................                              (7,602)
Net interest expense and amortization of
   deferred financing fees .................                             (32,701)
Other income (net)..........................                              32,780
                                                                       ---------
   Income before income taxes and
     extraordinary items ...................                           $  11,662
                                                                       =========
Identifiable assets at December 31, 2000 ...   $ 132,327   $ 197,229   $ 329,556
                                               =========   =========
Corporate assets ...........................                               6,004
                                                                       ---------
   Total assets ............................                           $ 335,560
                                                                       =========
F-38
Business segment information about the Company's 2001 operations in different
geographic areas is as follows:
U.S.       CANADA      TOTAL
                                               ---------   ---------   ---------
                                                        (In thousands)
Revenues ...................................   $  35,775   $  41,468   $  77,243
                                               =========   =========   =========

Operating profit............................   $  13,795   $   6,665   $  20,460
                                               =========   =========
General corporate ..........................                              (1,335)
Net interest expense and amortization of
   deferred financing fees .................                             (33,713)
Other expense...............................                              (1,052)
                                                                       ---------
   Loss before income taxes.................                           $ (15,640)
                                                                       =========

Identifiable assets at December 31, 2001....   $ 124,993   $ 174,063   $ 299,056
                                               =========   =========
Corporate assets ...........................                               4,657
                                                                       ---------
   Total assets ............................                           $ 303,713
                                                                       =========
16.  HEDGING PROGRAM AND DERIVATIVES

     On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended and interpreted. Under SFAS 133,
all derivative instruments are recorded on the balance sheet at fair value. If
the derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss on the derivative is recognized currently in earnings. To qualify
for hedge accounting, the derivative must qualify either as a fair value hedge,
cash flow hedge or foreign currency hedge. Currently, the Company uses only cash
flow hedges and the remaining discussion will relate exclusively to this type of
derivative instrument. If the derivative qualifies for hedge accounting, the
gain or loss on the derivative is deferred in Other Comprehensive Income (Loss),
a component of Stockholders' Equity, to the extent that the hedge is effective.

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

     Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income (Loss) and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in the
period that the related production is delivered.

     The following table sets forth the Company's hedge position as of December
31, 2001.

                                      F-39
Time Period                     Notional Quantities                   Price                Fair Value
--------------------------------------  -----------------------------  -----------------------------  ----------------
January, 2002 - October 31, 2002        20,000   Mcf/day  of  natural  Fixed price swap $2.60-$2.95   $ (658,000)
                                        gas  or  1,000   Bbl/day   of  natural gas or
                                        crude oil                      $18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS
133, the Company recorded $31.0 million, net of tax, in Other Comprehensive
Income (Loss) representing the cumulative effect of an accounting change to
recognize the fair value of cash flow derivatives. The Company recorded cash
flow hedge derivative liabilities of $38.2 million on that date and a deferred
tax asset of $7.2 million.

     For the year ended December 31, 2001, losses before tax of $12.1 million
were transferred from Other Comprehensive Income (Loss) to revenue and the fair
value of outstanding liabilities decreased by $25.5 million. The ineffective
portion of the cash flow hedges was not material at December 31, 2001.

     For the year ended December 31, 2001, $566,000 of deferred net loss on
derivative instruments were recorded in Other Comprehensive Income (Loss). All
of the deferred net loss is expected to be reclassified to earnings during the
next twelve-month period.

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

     The fair value of the hedging instrument was determined based on the base
price of the hedged item and NYMEX forward price quotes. As of December 2001, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of $1.2 million, and a commodity price decrease of 10%
would have resulted in a favorable change in fair market value of $0.9 million.

     In November 1996, the Company assumed swap arrangements extending through
October 2001 with a counterparty involving various quantities and fixed prices.
These swap arrangements provided that the Company make payments to the
counterparty to the extent the market prices, determined based on the price for
crude oil on the NYMEX and the Inside FERC, Tennessee Gas Pipeline Co. Texas
(Zone O) price for natural gas, exceed certain fixed prices and for the
counterparty to make payments to the Company to the extent the market prices
were less than such fixed prices. The Company accounted for the related gains or
losses in crude oil and natural gas revenue in the period of the hedged
production. These swap arrangements terminated in January 1999 and the Company
was paid $750,000 by the counterparty for such termination. This amount is
included in Other Revenue in the accompanying financial statements.

     In March 1998, the Company entered into a costless collar hedge agreement
with Enron Capital and Trade Resources Corp. for 2,000 Bbls of crude oil per day
with a floor price of $14.00 per Bbl and a ceiling price of $22.30 per Bbl for
crude oil on the NYMEX. The agreement was effective April 1, 1998 and extended
through March 31, 1999. Under the terms of the agreement the Company was paid
when the average monthly price for crude oil on the NYMEX was below the floor
price, and the Company paid the counterparty when the average monthly price
exceeded the ceiling price. For the year ended December 31, 1999 the Company
realized a loss of $1.8 million on this agreement, which is accounted for in
Crude Oil and Natural Gas Revenue. The Company has also entered into a costless
collar hedge agreement with Barrett Resources Corporation ("Barrett") for the
period November 1999 through October 2000. This agreement consisted of a swap
for 1,000 Bbls per day of crude oil with the Company being paid $20.30 and
paying NYMEX calendar month average, and an additional 1,000 Bbls of crude oil
per day with a floor price of $18.00 per Bbl and a ceiling of $22.00 per Bbl.
The Company realized a loss from hedges of $20.2 million for the year ended
December 31, 2000, which is accounted for in Oil and Gas Production Revenue. At
year end 2001 Barrett has a swap call on either 1,000 Bbls of crude oil or
20,000 MMBtu of

                                      F-40
natural gas per day at Barrett's option at fixed prices ($18.90
for crude oil or $2.60 to $2.95 for natural gas) through October 31, 2002. The
Company realized a loss from hedges of $12.1 million for the year ended December
31, 2001, which is accounted for in Oil and Gas Production Revenue.

17. COMPREHENSIVE INCOME

     Comprehensive income includes net income, losses and certain items recorded
directly to Stockholders' Equity and classified as Other Comprehensive Income
(Loss). The following table illustrates the calculation of comprehensive income
for the year ended December 31, 2001:
Accumulated Other
                                                                        Comprehensive      Comprehensive Income
                                                                        Income (Loss)             (Loss)
                                                                      -----------------    --------------------
                                                                        For the year
                                                                           Ended
                                                                         December 31,             As of
                                                                            2001             December 31,2001
                                                                      -----------------    --------------------
Accumulated other comprehensive loss at December 31, 2000 (a)......                        $             (4,799)
   Net loss........................................................   $         (19,718)
                                                                      -----------------

Other Comprehensive income (loss):
   Hedging derivatives (net of tax) - See Note 16
     Cumulative effect of change in accounting principle January
     1, 2001.......................................................             (30,980)
     Reclassification adjustment for settled hedge contracts.......              12,113
     Change in fair market value of outstanding hedge positions....              18,301
                                                                      -----------------
                                                                                   (566)
   Foreign currency translation adjustment.........................              (8,196)
                                                                      -----------------
Other comprehensive income (loss)..................................              (8,762)                 (8,762)
                                                                      -----------------

Comprehensive income (loss)........................................   $         (28,480)
                                                                      =================    --------------------
Accumulated other comprehensive loss at December 31, 2001..........                        $            (13,561)
                                                                                           ====================
(a) Amount at December 31, 2000 due to foreign currency translation adjustment.

18.  PROVED PROPERTY IMPAIRMENT

     In accordance with SEC requirements, the estimated discounted future net
cash flows from proved reserves are generally based on prices and costs as of
the end of the year, or alternatively, if prices subsequent to that date have
increased, a price near the periodic filing date of the Company's financial
statements. As of December 31, 2001, the Company's net capitalized costs of oil
and gas properties exceeded the present value of its estimated proved reserves
by $71.3 million ($38.9 million on the U.S. properties and $32.4 million on the
Canadian properties). These amounts were calculated considering 2001 year-end
prices of $19.84 per barrel for oil and $2.57 per Mcf for gas as adjusted to
reflect the expected realized prices for each of the full cost pools. The
Company did not adjust its capitalized costs for its U.S. properties because
subsequent to December 31, 2001, oil and gas prices increased such that
capitalized costs for its U.S. properties did not exceed the present value of
the estimated proved oil and gas reserves for its U.S. properties as determined
using increased realized prices on March 22, 2002 of $24.16 per Bbl for oil and
$2.89 per Mcf for gas. The Company also used the subsequent prices to evaluate
its Canadian properties, and reduced the 2001 year-end write-down to an amount
of $2.6 million on those properties.

19. SUBSEQUENT EVENT (UNAUDITED)

SALE OF PROPERTIES - 2002

                                      F-41
In May 2002, Grey Wolf and Canadian Abraxas sold their interest in a
natural gas processing plant and associated crude oil and natural gas reserves
in the Quirk Creek and Mahaska fields in Alberta, Canada for approximately $22.9
million.

     In June 2002, Abraxas sold its interest in the East White Point field in
South Texas for approximately $9.8 million. Abraxas reacquired the Production
Payment in June 2002, for approximately $6.8 million.

     There have been other minor asset divestitures during 2002.

CANADIAN STOCK SALES AND EXCHANGE OFFER -  2003

     On January 23, 2003 the Company sold to a third party all of the
outstanding capital stock of it's wholly owned subsidiaries, Canadian Abraxas
and Grey Wolf, for approximately $138 million, subject to closing adjustments
(certain assets were retained); repaid the Grey Wolf Facility indebtedness of
approximately $46.3 million; redeemed the First Lien Notes, at 100% of the
principal amount of the First Lien Notes, plus accrued and unpaid interest, for
approximately $66.4 million; and entered into a new senior credit agreement
providing for a revolving credit facility with an initial borrowing capacity of
$50 million and a new term facility for $4.2 million.

     On January 23, 2003 the Company completed an exchange offer, pursuant to
which it offered to exchange cash and securities for all of the outstanding
Second Lien Notes and Old Notes. In connection with the exchange offer, the
Company made cash payments of approximately $59.2 million, issued new 11.5%
secured notes due 2007 and issued approximately 5.6 million shares of Common
Stock. Such new secured notes are subordinate to the new senior credit agreement
which includes provisions regarding the payment of interest on the new secured
notes.

                                      F-42
20.  SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)

     The accompanying table presents information concerning the Company's crude
oil and natural gas producing activities as required by Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Capitalized costs relating to oil and gas producing activities are
as follows:
Years Ended December 31
                                         --------------------------------------------------------------------------
                                                        2000                                  2001
                                         -----------------------------------   ------------------------------------
                                           TOTAL         U.S.        CANADA       TOTAL        U.S.        CANADA
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                                                      (In thousands)
Proved crude oil and natural
       gas properties.................   $  481,802   $  274,939   $ 206,863   $  486,098   $  284,182   $  201,916
     Unproved properties..............       12,831            -      12,831       10,626            -       10,626
                                         ----------   ----------   ---------   ----------   ----------   ----------
       Total..........................      494,633      274,939     219,694      496,724      284,182      212,542
     Accumulated depreciation,
       depletion, and amortization,
       and impairment.................     (251,746)    (156,148)    (95,598)    (280,280)    (168,124)    (112,156)
                                         ----------   ----------   ---------   ----------   ----------   ----------
         Net capitalized costs........   $  242,887      118,791   $ 124,096   $  216,444   $  116,058   $  100,386
                                         ==========   ==========   =========   ==========   ==========   ==========
Cost incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
YEARS ENDED DECEMBER 31
                                         --------------------------------------------------------------------------
                                                        1999                                  2000
                                         -----------------------------------   ------------------------------------
                                           TOTAL         U.S.        CANADA       TOTAL        U.S.        CANADA
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                                                      (In thousands)
Property acquisition costs:
     Proved...........................   $   89,743   $        -   $  89,743   $    7,189   $        -   $    7,189
     Unproved.........................            -            -           -            -            -            -
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                         $   89,743   $        -   $  89,743   $    7,189   $        -   $    7,189
                                         ==========   ==========   =========   ==========   ==========   ==========
   Property development and
     exploration costs................   $   37,344   $   18,901   $  18,443   $   64,873   $   39,631   $   25,242
                                         ==========   ==========   =========   ==========   ==========   ==========
YEARS ENDED DECEMBER 31
                                         ------------------------------------
                                                        2001
                                         ------------------------------------
                                            TOTAL        U.S.        CANADA
                                         ----------   ----------   ----------
                                                    (In thousands)
Property acquisition costs:
     Proved...........................   $        -   $        -   $        -
     Unproved.........................            -            -            -
                                         ----------   ----------   ----------
                                         $        -   $        -   $        -
                                         ==========   ==========   ==========
   Property development and
     exploration costs................   $   56,694   $   18,867   $   37,827
                                         ==========   ==========   ==========
F-43
The results of operations for oil and gas producing activities are as
follows:
YEARS ENDED DECEMBER 31
                                         --------------------------------------------------------------------------
                                                        1999                                  2000
                                         -----------------------------------   ------------------------------------
                                           TOTAL         U.S.       CANADA       TOTAL        U.S.         CANADA
                                         ----------   ----------   ---------   ----------   ----------   ----------
                                                                      (In thousands)
Revenues...........................   $   59,025   $   21,331   $  37,694   $   72,973   $   32,165   $   40,808
   Production costs...................      (17,938)      (6,627)    (11,311)     (18,783)      (7,755)     (11,028)
   Depreciation, depletion, and
     amortization.....................      (34,452)      (9,571)    (24,881)     (35,497)     (11,968)     (23,529)

   Proved property impairment.........      (19,100)           -     (19,100)           -            -            -
   General and administrative.........       (1,317)        (733)       (584)      (1,722)      (1,118)        (604)
   Income taxes (expense) benefit.....        7,455            -       7,455         (339)           -         (339)
                                         ----------   ----------   ---------   ----------   ----------   ----------

   Results of operations from oil
     and gas producing activities
     (excluding corporate overhead
     and interest costs)..............   $   (6,327)  $    4,400   $ (10,727)  $   16,632   $   11,324   $    5,308
                                         ==========   ==========   =========   ==========   ==========   ==========
   Depletion rate per barrel of oil
     equivalent, before impact of
     impairment.......................   $     6.34   $     4.91   $    7.13   $     8.30   $     6.19   $    10.02
                                         ==========   ==========   =========   ==========   ==========   ==========
YEARS ENDED DECEMBER 31
                                         ------------------------------------
                                                        2001
                                         ------------------------------------
                                            TOTAL        U.S.        CANADA
                                         ----------   ----------   ----------
                                                   (In thousands)
Revenues...........................   $   73,201   $   34,934   $   38,267
   Production costs...................      (18,616)      (9,302)      (9,314)
   Depreciation, depletion, and
     amortization.....................      (32,124)     (11,976)     (20,148)

   Proved property impairment.........       (2,638)           -       (2,638)
   General and administrative.........       (1,565)      (1,073)        (492)
   Income taxes (expense) benefit.....       (2,419)           -       (2,419)
                                         ----------   ----------   ----------

   Results of operations from oil
     and gas producing activities
     (excluding corporate overhead
     and interest costs)..............   $   15,839   $   12,583   $    3,256
                                         ==========   ==========   ==========
   Depletion rate per barrel of oil
     equivalent, before impact of
     impairment.......................   $     8.81   $     6.96   $    10.45
                                         ==========   ==========   ==========
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

     The following table presents the Company's estimate of its net proved crude
oil and natural gas reserves as of December 31, 1999, 2000, and 2001. The
Company's management emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are expected to change as
future information becomes available. The estimates have been prepared by
independent petroleum reserve engineers.

                                      F-44
TOTAL               UNITED STATES                CANADA
                                                     ----------------------   ----------------------   -----------------------
                                                        LIQUID      NATURAL      LIQUID      NATURAL      LIQUID       NATURAL
                                                     HYDROCARBONS     GAS     HYDROCARBONS     GAS     HYDROCARBONS      GAS
                                                     ------------   -------   ------------   -------   ------------    -------
                                                      (BARRELS)      (MCF)     (BARRELS)      (MCF)     (BARRELS)       (MCF)
                                                                     (In Thousands)                        (In Thousands)
PROVED DEVELOPED AND UNDEVELOPED RESERVES:
       Balance at December 31, 1998...............          7,695   197,478          5,751   110,239          1,944(1)  87,239(2)
         Revisions of previous estimates..........           (167)  (80,592)         1,153   (45,697)        (1,320)   (34,895)
         Extensions and discoveries...............            354    30,305            196    24,686            158      5,619
         Purchase of minerals in place............          3,246    58,354              -         -          3,246     58,354
         Production...............................         (1,154)  (25,698)          (584)   (8,190)          (570)   (17,508)
         Sale of minerals in place................           (125)  (15,542)           (95)     (621)           (30)   (14,921)
                                                     ------------   -------   ------------   -------   ------------    -------
       Balance at December 31, 1999 (3)...........          9,849   164,305          6,421    80,417          3,428(1)  83,888(2)
         Revisions of previous estimates..........           (216)  (21,342)            54   (13,441)          (270)    (7,901)
         Extensions and discoveries...............            791    72,498            315    57,371            476     15,127
         Purchase of minerals in place............            254     6,822              -         -            254      6,822
         Production...............................           (952)  (19,963)          (539)   (8,364)          (413)   (11,599)
         Sale of minerals in place................           (882)  (10,993)          (170)   (1,075)          (712)    (9,918)
                                                     ------------   -------   ------------   -------   ------------    -------
       Balance at December 31, 2000...............          8,844   191,327          6,081   114,908          2,763(1)  76,419(2)
         Revisions of previous estimates..........           (627)    2,944           (688)    3,318             60       (374)
         Extensions and discoveries...............          1,063    26,329            354     4,886            710     21,443
         Production...............................           (732)  (17,495)          (416)   (7,823)          (316)    (9,672)
         Sale of minerals in place................         (1,746)  (14,348)          (924)   (6,821)          (822)    (7,527)
                                                     ------------   -------   ------------   -------   ------------    -------
       Balance at December 31, 2001...............          6,802   188,757          4,407   108,468          2,395     80,289
                                                     ============   =======   ============   =======   ============    =======
(1) Includes 269,000 and 732,000 barrels of liquid hydrocarbon reserves owned by
Grey Wolf of which approximately 138,000 and 376,000 barrels are applicable to
the minority interest's share of these reserves at December 31, 1999 and 2000,
respectively. As of December 31, 2001 Abraxas owned 100% of Grey Wolf. (2)
Includes 21,710 and 21,389 MMcf of natural gas reserves owned by Grey Wolf of
which 11,140 and 10,975 MMcf are applicable to the minority interest's share of
these reserves at December 31, 1999 and 2000, respectively. As of December 31,
2001 Abraxas owned 100% of Grey Wolf.
(3) At year end 1999 amounts exclude the Company's proportional interest in
Partnership proved reserves, accounted for by the equity method, of 2.8 Mbbls of
liquid hydrocarbons and 25.8 MMcf of natural gas.

                                      F-45
TOTAL               UNITED STATES                CANADA
                                             ----------------------   ----------------------   -----------------------
                                                LIQUID      NATURAL      LIQUID      NATURAL      LIQUID       NATURAL
                                             HYDROCARBONS     GAS     HYDROCARBONS     GAS     HYDROCARBONS      GAS
                                             ------------   -------   ------------   -------   ------------    -------
                                              (BARRELS)      (MCF)     (BARRELS)      (MCF)     (BARRELS)       (MCF)
                                                             (In Thousands)                        (In Thousands)
PROVED DEVELOPED RESERVES:
       December 31, 1999..................          7,700   128,587          4,492    53,275          3,208     75,312
                                             ============   =======   ============   =======   ============    =======

       December 31, 2000..................          7,001   119,737          4,309    48,177          2,692     71,560
                                             ============   =======   ============   =======   ============    =======

       December 31, 2001..................          5,047   111,243          2,892    40,514          2,155     70,729
                                             ============   =======   ============   =======   ============    =======
F-46
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES

     The following disclosures concerning the standardized measure of future
cash flows from proved crude oil and natural gas reserves are presented in
accordance with SFAS No. 69. The standardized measure does not purport to
represent the fair market value of the Company's proved crude oil and natural
gas reserves. An estimate of fair market value would also take into account,
among other factors, the recovery of reserves not classified as proved,
anticipated future changes in prices and costs, and a discount factor more
representative of the time value of money and the risks inherent in reserve
estimates.

     Under the standardized measure, future cash inflows were estimated by
applying period-end prices at December 31, 2001 adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the tax basis of the properties. Operating
loss carryforwards, tax credits, and permanent differences to the extent
estimated to be available in the future were also considered in the future
income tax calculations, thereby reducing the expected tax expense.

     Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.

                                      F-47
Set forth below is the Standardized  Measure relating to proved oil and gas
reserssves for:
YEARS ENDED DECEMBER 31
                                  ----------------------------------------------------------------------------
                                                  1999                                   2000
                                  -----------------------------------   --------------------------------------
                                    TOTAL         U.S.     CANADA (1)      TOTAL          U.S.      CANADA (1)
                                  ----------   ---------   ----------   -----------   -----------   ----------
                                                               (In thousands)
Future cash inflows.........   $  577,407   $ 309,609   $  267,798   $ 2,046,039   $ 1,274,871   $  771,168
   Future production and
     development costs.........     (181,109)    (96,302)     (84,807)     (318,130)     (254,667)     (63,463
   Future income tax expense...       (6,319)          -       (6,319)     (230,987)      (65,421)    (165,566
                                  ----------   ---------   ----------   -----------   -----------   ----------
   Future net cash flows.......      389,979     213,307      176,672     1,496,922       954,783      542,139
   Discount....................     (151,528)    (90,024)     (61,504)     (721,388)     (468,663)    (252,725
                                  ----------   ---------   ----------   -----------   -----------   ----------
   Standardized Measure of
     discounted future net
     cash relating to proved
     reserves..................   $  238,451   $ 123,283   $  115,168   $   775,534   $   486,120   $  289,414
                                  ==========   =========   ==========   ===========   ===========   ==========
YEARS ENDED DECEMBER 31
                                  ------------------------------------
                                                  2001
                                  ------------------------------------
                                     TOTAL         U.S.       CANADA
                                  ----------   ----------   ----------
                                             (In thousands)
Future cash inflows.........   $  607,375   $  313,640   $  293,735
   Future production and
     development costs.........     (220,613)    (138,296)     (82,317)
   Future income tax expense...            -            -            -
                                  ----------   ----------   ----------
   Future net cash flows.......      386,762      175,344      211,418
   Discount....................     (177,096)     (98,157)     (78,939)
                                  ----------   ----------   ----------
   Standardized Measure of
     discounted future net
     cash relating to proved
     reserves..................   $  209,666   $   77,187   $  132,479
                                  ==========   ==========   ==========
At year end 1999 amounts exclude the Partnership, accounted for by the equity
method, which was sold in 2000.

     (1)  The Standardized  Measure of discounted future net cash flows relating
          to proved reserves  includes  approximately  $12,400 and $43,700 as of
          December  31,  1999  and  2000,  respectively,  relating  to  minority
          interest. As of December 31, 2001, Abraxas owns 100% of Grey Wolf.

                                      F-48
CHANGES IN STANDARDIZED  MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES

     The following is an analysis of the changes in the Standardized Measure:
YEAR ENDED DECEMBER 31
                                                -----------------------------------
                                                   1999        2000        2001
                                                ---------   ----------   ----------
                                                          (In thousands)
Standardized Measure, beginning
    of year..................................   $ 181,581   $  238,451   $  775,534
  Sales and transfers of oil and gas
    produced, net of production costs........     (41,086)     (54,190)     (54,585)
  Net changes in prices and development
    and production costs from prior year.....      77,060      707,755     (613,325)
  Extensions, discoveries, and improved
    recovery, less related costs.............      34,445      290,283       39,982
  Purchases of minerals in place.............      90,510       33,586            -
  Sales of minerals in place.................     (18,797)     (75,391)     (96,096)
  Revision of previous quantity estimates....     (90,030)     (95,757)      (2,474)
  Change in future income tax expense........      (6,319)    (224,668)     230,987
  Other......................................      (7,071)     (68,380)    (147,910)
  Accretion of discount......................      18,158       23,845       77,553
                                                ---------   ----------   ----------
    Standardized Measure, end of year........   $ 238,451   $  775,534   $  209,666
                                                =========   ==========   ==========
F-49
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
SEPTEMBER 30,   DECEMBER 31,
                                                                     2002           2001
                                                                 -------------   ------------
                                                                        (In Thousands)
ASSETS:
Current assets:
   Cash.......................................................   $      13,358   $      7,605
   Accounts receivable, less allowances for doubtful
     accounts:
          Joint owners........................................           1,700          2,785
          Oil and gas production..............................           4,367          4,758
          Other...............................................           1,424            504
                                                                 -------------   ------------
                                                                         7,491          8,047

  Equipment inventory.........................................           1,061          1,251
  Other current assets........................................             672            443
                                                                 -------------   ------------
    Total current assets......................................          22,582         17,346

Property and equipment:
   Oil and gas properties, full cost method of accounting:
     Proved...................................................         516,084        486,098
     Unproved, not subject to amortization....................           6,704         10,626
   Other property and equipment...............................          42,557         67,632
                                                                 -------------   ------------
          Total...............................................         565,345        564,356
     Less accumulated depreciation, depletion, and
      amortization............................................         415,815        282,462
                                                                 -------------   ------------
      Total property and equipment - net......................         149,530        281,894

Deferred financing fees, net of accumulated
   amortization of $9,951 and $8,668..........................
   at September 30, 2002 and December 31, 2001, respectively..           2,952          3,928

Deferred income taxes.........................................           8,442              -
Other assets..................................................             387            448
                                                                 -------------   ------------
   Total assets...............................................   $     183,893   $    303,616
                                                                 =============   ============
See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-50
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
SEPTEMBER 30,   DECEMBER 31,
                                                                     2002           2001
                                                                 -------------   ------------
                                                                        (In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable............................................   $       8,484   $     10,542
  Oil and gas production payable..............................           2,696          3,596
  Accrued interest............................................           9,422          6,013
  Other accrued expenses......................................           1,993          1,116
  Hedge liability.............................................             644            658
  Current maturities of long-term debt........................          63,500            415
                                                                 -------------   ------------
            Total current liabilities.........................          86,739         22,340

Long-term debt ...............................................          231,199       285,184

Deferred income taxes.........................................               -         20,621

Future site restoration.......................................           3,987          4,056

Stockholders' equity (deficit):
  Common Stock, par value $.01 per share-
  Authorized 200,000,000 shares; issued, 30,145,280 at
   September 30, 2002 and December 31, 2001...................             301            301
   Additional paid-in capital.................................         136,830        136,830
  Accumulated deficit.........................................        (263,921)      (151,094)
  Receivables from stock sales................................             (97)           (97)
  Treasury stock, at cost, 165,883 shares.....................            (964)          (964)
  Accumulated other comprehensive loss........................         (10,181)       (13,561)
                                                                 -------------   ------------
      Total stockholders' deficit.............................        (138,032)       (28,585)
                                                                 -------------   ------------
Total liabilities and stockholders' equity (deficit)..........   $     183,893   $    303,616
                                                                 =============   ============
See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-51
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
THREE MONTHS ENDED      NINE MONTHS ENDED
                                                             SEPTEMBER 30,           SEPTEMBER 30,
                                                           2002       2001         2002        2001
                                                         --------   ---------   ----------   ---------
                                                              (In thousands except per share data)
Revenue:
   Oil and gas production revenues ...................   $ 10,129   $  13,667   $   34,158   $  62,043
   Gas processing revenues ...........................        522         777        1,933       1,711
   Rig revenues ......................................        169         199          513         607
   Other  ............................................        241         258          499         742
                                                         --------   ---------   ----------   ---------
                                                           11,061      14,901       37,103      65,103
Operating costs and expenses:
   Lease operating and production taxes ..............      3,943       4,488       11,205      13,679
   Depreciation, depletion, and amortization .........      5,086       8,021       21,010      25,150
   Proved property impairment.........................          -           -      115,995           -
   Rig operations ....................................        143         204          439         548
   General and administrative ........................      1,399       1,367        4,578       5,051
   General and administrative (Stock-based
     compensation) ...................................          -      (1,366)           -      (2,767)
                                                         --------   ---------   ----------   ---------
                                                           10,571      12,714      153,227      41,661
                                                         --------   ---------   ----------   ---------
Operating income (loss) ..............................        490       2,187     (116,124)     23,442

Other (income) expense:
   Interest income ...................................        (15)        (46)         (56)        (74)
   Amortization of deferred financing fees............        425         405        1,283       1,315
   Interest expense ..................................      8,616       8,090       25,790      23,700
   Other expense .....................................          -           -            -          16
                                                         --------   ---------   ----------   ---------
                                                            9,026       8,449       27,017      24,957
                                                         --------   ---------   ----------   ---------
Net loss from operations before taxes ................     (8,536)     (6,262)    (143,141)     (1,515)

Income tax expense (benefit)..........................        (98)       (608)     (30,314)      3,677

Minority interest in income of consolidated foreign
   subsidiary ........................................          -         195            -       1,676
                                                         --------   ---------   ----------   ---------
Net loss  ............................................   $ (8,438)     (5,849)    (112,827)     (6,868)
                                                         ========   =========   ==========   =========

Loss per common share:
   Net loss per common share - basic and diluted......   $  (0.28)  $   (0.22)  $    (3.76)      (0.28)
                                                         ========   =========   ==========   =========
See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-52
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)
Common Stock           Treasury Stock       Additional
                                                ------------------------ ----------------------   Paid-In      Accumulated
                                                   Shares       Amount     Shares      Amount     Capital        Deficit
                                                ------------  ----------  --------  ----------  ------------  -------------
Balance at December 31, 2001..................    30,145,280  $      301   165,883  $     (964) $    136,830  $    (151,094)
Comprehensive income (loss) - Note 10
  Net loss....................................             -          -          -           -             -       (112,827)
  Other comprehensive income:
    Hedge loss................................             -          -          -           -             -              -
    Foreign currency translation adjustment...             -          -          -           -             -              -

       Comprehensive income (loss)............             -          -          -           -             -              -
                                                ------------  ----------  --------  ----------  ------------  -------------
Balance at September  30, 2002................    30,145,280  $    301     165,883  $     (964) $    136,830  $    (263,921)
                                                ============  ==========  ========  ==========  ============  =============
Accumulated
                                                    Other      Receivables
                                                Comprehensive     from
                                                 Income(Loss)  Stock Sale     Total
                                                -------------  -----------  ----------
Balance at December 31, 2001..................  $     (13,561) $       (97) $  (28,585)
Comprehensive income (loss) - Note 10
  Net loss....................................              -            -    (112,827)
  Other comprehensive income:
    Hedge loss................................             54            -          54
    Foreign currency translation adjustment...          3,326            -       3,326
                                                                            ----------
       Comprehensive income (loss)............              -            -    (109,447)
                                                -------------  -----------  ----------
Balance at September  30, 2002................  $     (10,181) $       (97) $ (138,032)
                                                =============  ===========  ==========
See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-53
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                                 ------------------------
                                                                    2002          2001
                                                                 -----------   ----------
                                                                      (In thousands)
OPERATING ACTIVITIES
Net loss......................................................   $  (112,827)  $   (6,868)

Adjustments to reconcile net loss to net cash provided by
  operating activities:
Minority interest in income of foreign subsidiary.............             -        1,676
Depreciation, depletion, and amortization.....................        21,010       25,150
Proved property impairment....................................       115,995            -
Deferred income tax (benefit) expense.........................       (30,314)       2,957
Amortization of deferred financing fees.......................         1,283        1,315
Amortization of debt discount.................................           287            -
Stock-based compensation                                                   -       (2,767)
Changes in operating assets and liabilities:
  Accounts receivable.........................................           499       13,598
  Equipment inventory.........................................           191         (234)
  Other ......................................................          (249)           -
  Accounts payable and accrued expenses.......................         1,305       (8,738)
                                                                 -----------   ----------
Net cash provided by (used in) operating activities...........        (2,820)      26,089
                                                                 -----------   ----------

INVESTING ACTIVITIES
Capital  expenditures, including purchases and  development
  of properties...............................................       (33,392)     (44,793)
Proceeds from sale of oil and gas producing properties........        33,678       15,361
Acquisition of minority interest..............................             -       (2,248)
                                                                 -----------   ----------
Net cash provided by (used in) investing activities...........   $       286   $  (31,680)
                                                                 -----------   ----------

FINANCING ACTIVITIES
Proceeds from long-term borrowings............................        17,084       12,866
Payments on long-term borrowings..............................        (8,176)      (8,873)
Deferred financing fees                                                 (303)           -
Exercise of stock options.....................................             -           16
Other.........................................................             -          231
                                                                 -----------   ----------
Net cash provided by financing activities.....................         8,605        4,240
                                                                 -----------   ----------
Effect of exchange rate changes on cash.......................          (318)        (161)
                                                                 -----------   ----------
Increase (decrease) in cash...................................         5,753       (1,512)

Cash, at beginning of period..................................         7,605        2,004
                                                                 -----------   ----------

Cash, at end of period........................................   $    13,358   $      492
                                                                 ===========   ==========

Supplemental disclosures of cash flow information:
Interest paid.................................................   $    22,336   $   20,262
                                                                 ===========   ==========
Taxes paid....................................................   $         -   $      505
                                                                 ===========   ==========
See accompanying Notes to Consolidated Financial Statements to consolidated
                              financial statements

                                      F-54
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 2002

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, 2001. Such policies have been
continued without change. Also, refer to the notes to those financial statements
for additional details of the Company's financial condition, results of
operations, and cash flows. All the material items included in those notes have
not changed except as a result of normal transactions in the interim, or as
disclosed within this report. The accompanying interim consolidated financial
statements have not been audited by independent accountants, but in the opinion
of management, reflect all adjustments necessary for a fair presentation of the
financial position and results of operations. Any and all adjustments are of a
normal and recurring nature. The results of operations for the three and nine
months ended September 30, 2002 are not necessarily indicative of results to be
expected for the full year.

     The consolidated financial statements include the accounts of the Company,
its wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and Grey Wolf Exploration Inc. ("Grey Wolf"). Minority
interest in 2001 represents the minority shareholders' proportionate share of
the equity and income of Grey Wolf prior to the Company's acquiring the
remaining interest in September 2001.

     Canadian Abraxas' and Grey Wolf's assets and liabilities are translated to
U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.

     Certain prior years balances have been reclassified for comparative
purposes.

NOTE 2. BUSINESS CONDITIONS AND LIQUIDITY REQUIREMENTS

     The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
experienced net losses from operations before taxes during the nine months ended
September 30, 2002, of $143.1 million due primarily to proved property
impairments of $116 million resulting primarily from volatile commodity prices -
see Note 11. At September 30, 2002, the Company's current liabilities of
approximately $86.7 million exceeded current assets of $22.6 million resulting
in a working capital deficit of $64.2 million. The Company also had a
stockholders' deficit of $138.0 million. The Company's principal sources of
liquidity are cash on hand, cash flow from operations and proceeds from sales of
assets and properties, in addition to funding remaining available under the Grey
Wolf credit facility with Mirant Canada Energy Capital Ltd.

     The Company's continued existence as a going concern is dependent upon
several current factors including the successful pursuit of financial
restructuring alternatives and improvement in commodity prices. The Company will
need additional funds on a timely basis for both the development of its assets
and the service of its debt, including the repayment of the $63.5 million in
principal amount of 12 7/8% Senior Secured notes or First Lien Notes maturing in
March 2003 and the $191 million of 11 1/2 % Senior Secured Notes or Second Lien
Notes and 11 1/2% Senior Notes or Old Notes maturing in November 2004 - see Note
4. In order to meet the current operating requirements of developing its assets
and servicing its debt obligations, the Company will be required to obtain
additional sources of liquidity and capital and/or reduce or reschedule its
existing cash requirements including repayment of the First Lien Notes. In order
to do so, the Company is actively pursuing one or more of the following
alternatives:

     -    selling all or a portion of its existing assets, including interests
          in its assets, or subsidiary operations;

     -    negotiating the restructuring and/or refinancing of existing debt;

     -    repaying debt with proceeds from the sale of assets;

     -    exchanging debt for equity;

     -    managing the timing and reducing the scope of its capital
          expenditures; or

     -    issuing additional debt or equity securities or otherwise raising
          additional funds.

     Due to the Company's current debt levels and the restrictions contained in
the indentures governing the First Lien Notes, Second Lien Notes and Old Notes,
the Company's primary opportunity for immediate additional sources

                                      F-55
of liquidity and capital will be through the disposition of assets of subsidiary
operations and some of the other alternatives discussed above including the
restructuring of existing debt. There can be no assurance that any of the above
alternatives, or some combination thereof, will be available or, if available,
will be on terms acceptable to the Company or that such efforts will produce
enough cash to fund the Company's immediate operating and capital requirements
or make timely interest payments and principal payments due on the First Lien
Notes, Second Lien Notes and Old Notes.

     In order to meet the Company's need for current additional funds, the
Planning Committee of the Board of Directors is actively pursuing several of the
alternatives set forth above. The Planning Committee has engaged an investment
banking firm to assist in the formulation of a plan of action for consideration
by the Board of Directors. A proposed plan of action is expected before December
31, 2002. A refinancing or renegotiation of the Company's existing debt and the
sale of additional assets likely will be required for the Company to meet its
current liquidity and capital requirements. Management believes that a
successful plan of action can be implemented to provide additional liquidity and
capital, but no assurances can be given that the implementation of such a plan
of action will result in the Company being able to continue as a going concern.
The September 30, 2002 financial statements do not include any adjustments that
might result from the outcome of these going concern uncertainties.

NOTE 3. DIVESTITURE OF ASSETS

     In May of 2002, the wholly owned Canadian subsidiaries, Grey Wolf and
Canadian Abraxas, sold their interest in a natural gas processing plant and
associated crude oil and natural gas reserves in the Quirk Creek and Mahaska
fields in Alberta, Canada for approximately $22.9 million.

     In June 2002, Abraxas sold its interest in the East White Point field in
South Texas for approximately $9.8 million.

     The condensed pro forma financial information presented below summarizes on
an pro forma basis, approximate results of the Company's consolidated results of
operations for the three and nine months ended September 30, 2002, assuming the
divestitures had occurred on January 1, 2002, and the three and nine months
ended September 30, 2001, assuming the divestitures had occurred on January 1,
2001. Additionally, the pro forma information reflects an interest savings
assuming that the Company had applied a portion of the proceeds to reacquire the
Production Payment (see Note 4) on January 1st of the respective years.
THREE MONTHS ENDED        NINE MONTHS ENDED
                                          SEPTEMBER 30,            SEPTEMBER 30,
                                      ---------------------   ----------------------
                                         2002        2001        2002        2001
                                      ---------   ---------   ----------   ---------
                                          (in thousands, except per share data)
Revenue.......................   $  11,061   $  13,078   $   34,168   $  54,911
                                      =========   =========   ==========   =========
     Net loss......................   $  (8,438)  $  (6,044)  $ (112,349)    (10,726)
                                      =========   =========   ==========   =========
     Loss per common share--basic
       and diluted.................       (0.28)      (0.27)       (3.75)      (0.44)
                                      =========   =========   ==========   =========
In July 2002, Canadian Abraxas and Grey Wolf sold their interest in the
Millarville field in Alberta, Canada for approximately $1.1 million.

     Proceeds from these property sales were deposited with the Trustee for the
First Lien Notes, to be held as restricted cash until disbursement to the
Company under terms permitted by the indenture, or if not disbursed in
accordance with the indentures governing the First Lien Notes, Second Lien Notes
and Old Notes within 180 days of receipt, to be applied against the outstanding
First Lien Notes. As of September 30, 2002 all of the funds had been disbursed
to the Company.

NOTE 4.  DEBT

     Debt consists of the following:
SEPTEMBER 30   DECEMBER 31
                                                                               --------------------------
                                                                                   2002          2001
                                                                               ------------   -----------
                                                                                     (In thousands)
11.5% Senior Notes due 2004 ("Old Notes")..............................   $        801   $       801
     12.875% Senior Secured Notes due 2003 ("First Lien Notes").............         63,500        63,500
     11.5% Second Lien Notes due 2004 ("Second Lien Notes").................        190,178       190,178
     9.5% Senior Credit Facility ("Grey Wolf Facility"), providing for
          borrowings up to approximately US $96 million (CDN $150 million)
          and secured by the assets of Grey Wolf and non-recourse to
          Abraxas, net of US $2.0 and $2.3 million discount at September
          30, 2002 and December 31, 2001, respectively......................         40,220        22,944
     Production Payment.....................................................              -         8,176
                                                                               ------------   -----------
                                                                                    294,699       285,599
     Less current maturities First Lien Notes...............................         63,500           415
                                                                               ------------   -----------
                                                                               $    231,199   $   285,184
                                                                               ============   ===========
F-56
OLD NOTES. On November 14, 1996, the Company consummated the offering of
$215.0 million of its 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of its 11.5% Senior Notes due 2004,
Series C. The Series B Notes and the Series C Notes were subsequently combined
into $275.0 million in principal amount of the Old Notes in June 1998. In
December 1999, Abraxas and Canadian Abraxas completed an exchange offer which
reduced the amount of outstanding Old Notes to $801,000. See the description of
the Second Lien Notes below for more information.

     Interest on the Old Notes is payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of the Company at 100% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption, if redeemed during the 12-month period commencing on November 1,
2002 and thereafter.

     The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank PARI PASSU in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and to the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by Sandia Oil and Gas Company ("Sandia") and
Wamsutter Holdings, Inc. ("Wamsutter"), each of which is a wholly owned
subsidiary of the Company. The guarantees are general unsecured obligations of
Sandia and Wamsutter and rank PARI PASSU in right of payment to all
unsubordinated indebtedness of Sandia and Wamsutter and senior in right of
payment to all subordinated indebtedness of Sandia and Wamsutter. The guarantees
are effectively subordinated to the First Lien Notes and the Second Lien Notes
to the extent of the value of the collateral securing the First Lien Notes and
the Second Lien Notes.

     Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to repurchase
all or a portion of such holder's Old Notes at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the Old Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales.

     FIRST LIEN NOTES. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. Beginning March 15, 2002, the First Lien Notes are redeemable, in whole or
in part, at the option of Abraxas at 100% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption.

     The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter, wholly-owned subsidiaries of the Company (the
"Restricted Subsidiaries"). The guarantees are secured by substantially all of
the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas.

     Upon a Change of Control, as defined in the First Lien Notes Indenture,
each holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.

                                      F-57
The First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas.

     The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except in certain situations as described in the First Lien Notes
indenture.

     SECOND LIEN NOTES. In December 1999, Abraxas and Canadian Abraxas
consummated an exchange offer whereby $269,699,000 of the Old Notes were
exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of
Abraxas common stock and contingent value rights. An additional $5,000,000 of
the Second Lien Notes were issued in payment of fees and expenses.

     Interest on the Second Lien Notes is payable semi-annually in arrears on
May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas
at 100% of the principal amount thereof, plus accrued and unpaid interest to the
date of redemption, if redeemed during the 12-month period commencing on
December 1, 2002 and thereafter.

     The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.

     Upon a Change of Control, as defined in the Second Lien Notes Indenture,
each holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.

     The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.

     The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture.

     The fair value of the Old Notes, First Lien Notes and Second Lien Notes was
approximately $168.6 million as of September 30, 2002. The Company has
approximately $325,000 of standby letters of credit and a $10,000 performance
bond open at September 30, 2002. Approximately $336,000 of cash is restricted
and in escrow related to certain of the letters of credit and the bond.

                                      F-58
GREY WOLF FACILITY

     GENERAL. On December 20, 2001, Grey Wolf entered into a credit facility
with Mirant Canada Energy Capital, Ltd. ("Mirant Canada"). The Grey Wolf
Facility established a revolving credit facility with a commitment amount of CDN
$150 million, (approximately US $96 million). Subject to certain restrictions,
the borrowing base may be reduced at the discretion of Mirant Canada upon 30
days written notice. Subject to earlier termination on the occurrence of events
of default or other events, the stated maturity date is December 20, 2007. The
applicable interest rate charged on the outstanding balance under the Grey Wolf
Facility is 9.5%. Any amounts in default will accrue interest at 15%. The Grey
Wolf Facility is non-recourse to Abraxas and its properties, other than Grey
Wolf properties, and Abraxas has no additional direct obligations to Mirant
Canada under the facility.

     PRINCIPAL PAYMENTS. Prior to maturity, Grey Wolf is required to make
principal payments under the Grey Wolf Facility as follows: (i) on the date of
the sale of any of its producing properties, Grey Wolf is required to make a
payment equal to the amount of the net sales proceeds; (ii) on a monthly basis,
Grey Wolf is required to make a payment equal to its net cash flow for the month
prior to the date of the payment; and (iii) on the date that any reduction in
the commitment amount becomes effective, Grey Wolf must repay all amounts over
the commitment amount so reduced.

     Under the Grey Wolf Facility, "net cash flow" generally means the amount of
proceeds received by Grey Wolf from the sale of hydrocarbons less taxes, royalty
and similar payments (including overriding royalty interest payments made to
Mirant Canada), interest payments made to Mirant Canada and operating and other
expenses including approved capital and G&A expenses.

     Grey Wolf may also make pre-payments at any time after December 20, 2002
with no pre-payment penalty.

     The Company treats the Grey Wolf Facility as a revolving line of credit
since, under ordinary circumstances, the lender is paid on a net cash flow
basis. It is anticipated that the Company will be a net borrower for the next
several years due to a large number of exploration and exploitation projects and
the associated capital needs to complete the projects.

     SECURITY. Obligations under the Grey Wolf Facility are secured by a
security interest in substantially all of Grey Wolf's assets, including, without
limitation, working interests in producing properties and related assets owned
by Grey Wolf. None of Abraxas' assets are subject to a security interest under
the Grey Wolf Facility.

     COVENANTS. The Grey Wolf Facility contains a number of covenants that,
among other things, restrict the ability of Grey Wolf to (i) enter into new
business areas, (ii) incur additional indebtedness, (iii) create or permit to be
created any liens on any of its properties, (iv) make certain payments,
dividends and distributions, (v) make any unapproved capital expenditures, (vi)
sell any of its accounts receivable, (vii) enter into any unapproved leasing
arrangements, (viii) enter into any take-or-pay contracts, (ix) liquidate,
dissolve, consolidate with or merge into any other entity, (x) dispose of its
assets, (xi) abandon any property subject to Mirant Canada's security interest,
(xii) modify any of its operating agreements, (xiii) enter into any unapproved
hedging agreements, and (xiv) enter into any new agreements affecting existing
agreements relating to or affecting properties subject to Mirant Canada's
security interests. In addition, Grey Wolf is required to submit a quarterly
development plan for Mirant Canada's approval and Grey Wolf must comply with
specified financial ratios and tests, including a minimum collateral coverage
ratio. Grey Wolf was in compliance with these covenants at September 30, 2002.

     Upon receipt by the Company of a written request from Mirant Canada, the
Company shall promptly, and in any event within 10 days of receipt of such
request, have entered into one or more swap, hedge, floor, collar or similar
agreements which are satisfactory to the lender at a price and for a term which
is mutually acceptable to the Company and Mirant Canada.

     EVENTS OF DEFAULT. The Grey Wolf Facility contains customary events of
default, including nonpayment of principal or interest, violations of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in the financial condition of Grey Wolf.

     OVERRIDING ROYALTY INTERESTS. As a condition to the Grey Wolf Facility,
Grey Wolf has granted two overriding royalty interests to Mirant Canada, each in
the amount of 2.5% of the revenues received by Grey Wolf from oil and gas sales
from all of its properties. These overriding royalty interests resulted in the
recording of a $2.3 million discount on the Grey Wolf Facility borrowings at
December 31, 2001.

                                      F-59
PRODUCTION PAYMENT

     In October 1999, the Company entered into a non-recourse Dollar Denominated
Production Payment agreement (the "Production Payment") with a third party. The
Production Payment had an aggregate total availability of up to $50 million at
15% interest. The Production Payment related to a portion of the production from
several natural gas wells in South Texas. The Company reacquired the Production
Payment in June 2002, for approximately $6.8 million.

NOTE 5. EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED           NINE MONTHS ENDED
                                                          SEPTEMBER 30,                SEPTEMBER 30,
                                                  ---------------------------  --------------------------
                                                       2002          2001          2002          2001
                                                  -------------  ------------  ------------  ------------
Numerator:
  Net loss from continuing operations             $      (8,438) $     (5,849) $   (112,827) $     (6,869)
                                                  -------------  ------------  ------------  ------------

Denominator:
  Denominator for basic earnings per share -
    Weighted-average shares                          29,979,397    22,626,599    29,979,397    24,347,669

  Effect of dilutive securities:
    Stock options, warrants and CVR's                         -             -             -             -
                                                  -------------  ------------  ------------  ------------

  Dilutive potential common shares
    Denominator for diluted earnings per share -
    adjusted weighted-average shares and assumed
    Conversions                                      29,979,397    22,626,599    29,979,397    24,347,669

  Basic loss per share:
    Loss from continuing operations               $       (0.28) $      (0.60) $      (3.76) $      (0.28)
                                                  =============  ============  ============  ============

  Diluted  loss per share:
    Loss from continuing operations               $       (0.28) $      (0.60) $      (3.76) $      (0.28)
                                                  =============  ============  ============  ============
For the three and nine months ended September 30, 2002, none of the shares
issuable in connection with stock options or warrants are included in diluted
shares. Inclusion of these shares would be antidilutive due to losses incurred
in the period. Had there not been losses in this period, dilutive shares would
have been 3,000 shares and 6,487 shares for the three and nine months ended
September 30, 2002, respectively.

CONTINGENT VALUE RIGHTS ("CVRs")

     As part of the exchange offer consummated by the Company in December 1999,
Abraxas issued contingent value rights or CVRs, which entitled the holders to
receive up to a total of 105,408,978 shares of Abraxas common stock under
certain circumstances as defined. On May 21, 2001, Abraxas issued 3,386,488
shares upon the expiration of the CVRs.

NOTE 6.  GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

     The following table presents condensed consolidating balance sheets of
Abraxas, as a parent company, and its significant subsidiaries, Canadian Abraxas
and Grey Wolf, as September 30, 2002 and December 31, 2001 and the related
consolidating statements of operations and cash flows for the three and nine
months ended September 30, 2002 and 2001. Canadian Abraxas is a guarantor of the
First Lien Notes ($63.5 million) and jointly and severally liable with Abraxas
for the Second Lien Notes ($190.2 million) and the Old Notes ($801,000). Grey
Wolf is a non-guarantor with respect to the First Lien Notes, the Second Lien
Notes, and the Old Notes.

                                      F-60
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                 NON-GUARANTOR BALANCE SHEET SEPTEMBER 30, 2002
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
ASSETS:
Current assets:
   Cash .........................................  $       8,694   $     2,591   $       2,073  $          -   $        13,358
   Accounts receivable, less allowance for
     doubtful accounts...........................          3,472         4,836          10,584       (11,401)            7,491
   Equipment inventory ..........................            870           179              12             -             1,061
   Other current assets .........................            268           194             210             -               672
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current assets .......................         13,304         7,800          12,879       (11,401)           22,582
Property and equipment - net.....................         75,236        39,316          34,978             -           149,530
Deferred financing fees, net.....................          2,066           773             113             -             2,952
Other assets ....................................        108,709           787           8,381      (109,048)            8,829
                                                   -------------   -----------   -------------  ------------   ---------------
   Total assets .................................  $     199,315   $   48,676    $      56,351  $   (120,449)  $       183,893
                                                   =============   ===========   =============  ============   ===============
LIABILITIES AND STOCKHOLDER S' DEFICIT:
Current liabilities:
   Accounts payable .............................  $      13,917   $       295   $       8,285  $    (11,317)  $        11,180
   Accrued interest .............................          6,901         2,521               -             -             9,422
   Other accrued expenses .......................          1,993             -               -             -             1,993
   Hedge liability ..............................            354           290               -             -               644
   Current maturities of long-term debt .........         63,500             -               -             -            63,500
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current liabilities ..................         86,665         3,106           8,285       (11,317)           86,739
Long-term debt ..................................        138,350        52,629          40,220             -           231,199
Future site restoration  ........................             -          3,274             713             -             3,987
                                                   -------------   -----------   -------------  ------------   ---------------
                                                         225,015        59,009          49,218       (11,317)          321,925
Stockholders' equity (deficit)...................        (25,700)      (10,333)          7,133      (109,132)         (138,032)
                                                   -------------   -----------   -------------  ------------   ---------------
Total liabilities and stockholders' equity
(deficit)........................................  $     199,315   $    48,676   $      56,351  $   (120,449)  $       183,893
                                                   =============   ===========   =============  ============   ===============
(1)  Includes amounts for insignificant U.S. subsidiaries, Sandia and
          Wamsutter, which are guarantors of the First and Second Lien Notes.
          Sandia is also a guarantor of the Old Notes. Additionally, these
          subsidiaries are designated as Restricted Subsidiaries along with
          Canadian Abraxas.

                                      F-61
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARIES AND
                  NON-GUARANTOR BALANCE SHEET DECEMBER 31, 2001
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
ASSETS:
Current assets:
   Cash .........................................  $       3,593   $     1,245   $       2,767  $          -   $         7,605
   Accounts receivable, less allowance for
     doubtful accounts...........................         17,281           792           6,782       (16,808)            8,047
   Equipment inventory ..........................          1,061           178              12             -             1,251
   Other current assets .........................            250            99              94             -               443
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current assets .......................         22,185         2,314           9,655       (16,808)           17,346
Property and equipment - net.....................        116,462       122,486          42,946             -           281,894
Deferred financing fees, net.....................          2,779         1,042             107             -            3,928
Other assets ....................................        108,704           784           6,281      (115,321)              448
                                                   -------------   -----------   -------------  ------------   ---------------
   Total assets .................................  $     250,130   $   126,626   $      58,989  $   (132,129)  $       303,616
                                                   =============   ===========   =============  ============   ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
   Accounts payable .............................  $      10,642   $    17,009   $       9,472  $    (22,985)  $        14,138
   Accrued interest .............................          5,000         1,009               4             -             6,013
   Other accrued expenses .......................          1,052             -              64             -             1,116
   Hedge liability ..............................            438           220               -             -               658
   Current maturities of long-term debt .........            415             -               -             -               415
                                                   -------------   -----------   -------------  ------------   ---------------
     Total current liabilities ..................         17,547        18,238           9,540       (22,985)           22,340
Long-term debt ..................................        209,611        52,629          22,944             -           285,184
Deferred income taxes ...........................              -        17,718           2,903             -            20,621
Future site restoration  ........................              -         3,399             657             -             4,056
                                                   -------------   -----------   -------------  ------------   ---------------
                                                         227,158        91,984          36,044       (22,985)          332,201
Stockholders' equity (deficit)...................         22,972        34,642          22,945      (109,144)          (28,585)
                                                   -------------   -----------   -------------  ------------   ---------------
Total liabilities and stockholders' equity
(deficit)........................................  $     250,130   $   126,626   $      58,989  $   (132,129)  $       303,616
                                                   =============   ===========   =============  ============   ===============
F-62
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
      STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
Revenues:
   Oil and gas production revenues ..............  $       4,630   $     2,657   $       2,842  $          -   $        10,129
   Gas processing revenues ......................              -           436              86             -               522
   Rig revenues .................................            169             -               -             -               169
   Other  .......................................              1           184              56             -               241
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           4,800         3,277           2,984             -            11,061
Operating costs and expenses:
   Lease operating and production taxes .........          1,897           975           1,071             -             3,943
   Depreciation, depletion, and amortization ....          2,108         1,737           1,241             -             5,086
   Rig operations ...............................            143             -               -             -               143
   General and administrative ...................            686           426             287             -             1,399
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           4,834         3,138           2,599             -            10,571
                                                   -------------   -----------   -------------  ------------   ---------------
Operating income ................................            (34)          139             385             -               490

Other (income) expense:
   Interest income ..............................            (15)            -               -             -               (15)
   Amortization of deferred financing fees.......            331            91               3             -               425
   Interest expense..............................          6,119         1,656             841             -             8,616
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           6,435         1,747             844             -             9,026
                                                   -------------   -----------   -------------  ------------   ---------------
Loss from operations before income tax and
   extraordinary item............................         (6,469)       (1,608)           (459)            -            (8,536)
Income tax benefit...............................              -            (8)            (90)            -               (98)
                                                   -------------   -----------   -------------  ------------   ---------------
Net  loss........................................  $      (6,469)  $    (1,600)  $        (369) $          -   $        (8,438)
                                                   =============   ===========   =============  ============   ===============
F-63
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
      STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
Revenues:
   Oil and gas production revenues ..............  $      14,592   $    10,432   $       9,134  $          -   $        34,158
   Gas processing revenues ......................              -         1,593             340             -             1,933
   Rig revenues .................................            513             -               -             -               513
   Other  .......................................             70           291             138             -               499
                                                   -------------   -----------   -------------  ------------   ---------------
                                                          15,175        12,316           9,612             -            37,103
Operating costs and expenses:
   Lease operating and production taxes .........          5,666         2,809           2,730             -            11,205
   Depreciation, depletion, and amortization ....          7,167         9,030           4,813             -            21,010
   Proved property impairment....................         28,179        60,501          27,315             -           115,995
   Rig operations ...............................            439             -               -             -               439
   General and administrative ...................          2,893           787             898             -             4,578
                                                   -------------   -----------   -------------  ------------   ---------------
                                                          44,344        73,127          35,756             -           153,227
                                                   -------------   -----------   -------------  ------------   ---------------
Operating loss...................................        (29,169)      (60,811)        (26,144)            -          (116,124)

Other (income) expense:
   Interest income ..............................            (56)            -               -             -               (56)
   Amortization of deferred financing fees.......            994           274              15             -             1,283
   Interest expense..............................         18,650         4,998           2,142             -            25,790
                                                   -------------   -----------   -------------  ------------   ---------------
                                                          19,588         5,272           2,157             -            27,017
                                                   -------------   -----------   -------------  ------------   ---------------
Loss from operations before income tax and
   extraordinary item............................        (48,757)     (66,083)         (28,301)            -          (143,141)
Income tax benefit...............................              -       (18,522)        (11,792)            -           (30,314)
                                                   -------------   -----------   -------------  ------------   ---------------
Net  loss........................................  $     (48,757)  $   (47,561)  $     (16,509) $          -   $      (112,827)
                                                   =============   ===========   =============  ============   ===============
F-64
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
      STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
                                 (IN THOUSANDS)
ABRAXAS                                                     ABRAXAS
                                                     PETROLEUM     RESTRICTED                    RECLASSIFI-     PETROLEUM
                                                    CORPORATION    SUBSIDIARY    NON-GUARANTOR    CATIONS       CORPORATION
                                                   INC. - PARENT    (CANADIAN      SUBSIDIARY       AND             AND
                                                     COMPANY(1)      ABRAXAS)     (GREY WOLF)   ELIMINATIONS    SUBSIDIARIES
                                                   -------------   -----------   -------------  ------------   ---------------
Revenues:
   Oil and gas production revenues ..............  $       7,485   $     4,114   $       2,068  $          -   $        13,667
   Gas processing revenues ......................              -           677             100             -               777
   Rig revenues .................................            199             -               -             -               199
   Other  .......................................              3           164              91             -               258
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           7,687         4,955           2,259             -            14,901
Operating costs and expenses:
   Lease operating and production taxes .........          2,096         1,735             657             -             4,488
   Depreciation, depletion, and amortization ....          3,397         3,431           1,193             -             8,021
   Rig operations ...............................            204             -               -             -               204
   General and administrative ...................            945           280             142             -             1,367
   General and administrative (Stock-based
     Compensation)...............................         (1,366)            -               -             -            (1,366)
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           5,276         5,446           1,992             -            12,714
                                                   -------------   -----------   -------------  ------------   ---------------
Operating income (loss)..........................          2,411          (491)            267             -             2,187

Other (income) expense:
   Interest income ..............................           (226)            -               -           180               (46)
   Amortization of deferred financing fees.......            347            58               -             -               405
   Interest expense .............................          6,384         1,789              97          (180)            8,090
                                                   -------------   -----------   -------------  ------------   ---------------
                                                           6,505         1,847              97             -             8,449
                                                   -------------   -----------   -------------  ------------   ---------------
Income (loss) from operations before income tax
   and extraordinary item........................         (4,094)       (2,338)            170             -            (6,262)
Income tax expense (benefit).....................              -          (677)             69             -              (608)
Minority interest in income of consolidated
   foreign subsidiary ...........................              -             -               -          (195)             (195)
                                                   -------------   -----------   -------------  ------------   ---------------
Net income (loss)................................  $      (4,094)  $    (1,661)  $         101  $       (195)  $        (5,849)
                                                   =============   ===========   =============  ============   ===============
F-65
CONDENSED CONSOLIDATING PARENT COMPANY, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
                             STATEMENT OF OPERATIONS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                                 (IN THOUSANDS)
ABRAXAS                                                       ABRAXAS
                                                    PETROLEUM      RESTRICTED         NON-        RECLASSIFI-     PETROLEUM
                                                   CORPORATION     SUBSIDIARY      GUARANTOR        CATIONS      CORPORATION
                                                  INC. - PARENT    (CANADIAN         AND             AND             AND
                                                   COMPANY (1)      ABRAXAS)       GREY WOLF)    ELIMINATIONS    SUBSIDIARIES
                                                  -------------   ------------    ------------   ------------    ------------
Revenues:
   Oil and gas production revenues ............   $     30,033    $     20,537    $     11,473   $          -    $     62,043
   Gas processing revenues ....................              -           1,470             241              -           1,711
   Rig revenues ...............................            607               -               -              -             607
   Other ......................................             82             399             261              -             742
                                                  ------------    ------------    ------------   ------------    ------------
                                                        30,722          22,406          11,975              -          65,103
Operating costs and expenses:
   Lease operating and production taxes .......          6,837           5,084           1,758              -          13,679
   Depreciation, depletion, and amortization ..          9,584          11,587           3,979              -          25,150
   Rig operations .............................            548               -               -              -             548
   General and administrative .................          3,495             979             577              -           5,051
   General and administrative (Stock-based
     Compensation) ............................         (2,767)              -               -              -          (2,767)
                                                  ------------    ------------    ------------   ------------    ------------
                                                        17,697          17,650           6,314              -          41,661
                                                  ------------    ------------    ------------   ------------    ------------
Operating income ..............................         13,025           4,756           5,661              -          23,442

Other (income) expense:
   Interest income ............................           (930)              -               -            856             (74)
   Amortization of deferred financing fees ....          1,042             273               -              -           1,315
   Interest expense ...........................         18,815           5,413             328           (856)         23,700
   Other ......................................             16               -               -              -              16
                                                  ------------    ------------    ------------   ------------    ------------
                                                        18,943           5,686             328              -          24,957
                                                  ------------    ------------    ------------   ------------    ------------
Income (loss) from operations before income tax
   and extraordinary item .....................         (5,918)           (930)          5,333              -          (1,515)
Income tax expense ............................            505           1,048           2,124              -           3,677
Minority interest in income of consolidated
   foreign subsidiary .........................              -               -               -         (1,676)         (1,676)
                                                  ------------    ------------    ------------   ------------    ------------
Net loss ......................................   $     (6,423)   $     (1,978)   $      3,209   $     (1,676)   $     (6,868)
                                                  ============    ============    ============   ============    ============
F-66
CONDENSED CONSOLIDATING PARENT, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
                             STATEMENT OF CASH FLOW
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
                                 (IN THOUSANDS)
ABRAXAS                                                        ABRAXAS
                                                  PETROLEUM      RESTRICTED          NON-        RECLASSIFI-     PETROLEUM
                                                 CORPORATION     SUBSIDIARY      GUARANTOR        CATIONS       CORPORATION
                                                INC. -PARENT     (CANADIAN       SUBSIDIARY         AND             AND
                                                 COMPANY (1)      ABRAXAS)      (GREY WOLF)     ELIMINATIONS    SUBSIDIARIES
                                                ------------    ------------    ------------    ------------    ------------
OPERATING ACTIVITIES
Net loss ....................................   $    (48,757)   $    (47,561)   $    (16,509)   $          -    $   (112,827)
Adjustments to reconcile net loss to net
   cash provided by operating activities:
     Depreciation, depletion, and
       amortization .........................          7,167           9,030           4,813               -          21.010
     Proved property impairment .............         28,179          60,501          27,314               -         115,994
     Deferred income tax benefit ............              -         (18,522)        (11,792)              -         (30,314)
     Amortization of deferred financing fees             994             274              16               -           1,284
     Amortization of debt discount ..........              -               -             287               -             287
     Changes in operating assets and
       liabilities:
         Accounts receivable ................         19,401         (20,786)          2,441            (557)            499
         Equipment inventory ................            191               -               -               -             191
         Other ..............................            (22)           (165)            (62)              -            (249)
         Accounts payables and accrued
           expenses .........................            525           1,520          (1,297)            557           1,305
                                                ------------    ------------    ------------    ------------    ------------
Net cash provided (used) by operating
   activities ...............................          7,678         (15,709)          5,211               -
                                                                                                                      (2,820)

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ............         (3,845)         (4,462)        (25,085)              -         (33,392)
Proceeds from sale of oil and gas properties           9,725          21,669           2,284               -          33,678
                                                ------------    ------------    ------------    ------------    ------------
Net cash provided (used) by investing .....
   activities ...............................          5,880          17,207         (22,801)              -             286

FINANCING ACTIVITIES
Proceeds from long-term borrowings ..........              -               -          17,084               -          17,084
Payments on long-term borrowings ............         (8,176)              -               -               -          (8,176)
Deferred financing fees .....................           (281)                            (22)                           (303)
                                                ------------    ------------    ------------    ------------    ------------
Net cash provided (used) by financing
 Activities .................................         (8,457)              -          17,062               -           8,605
                                                ------------    ------------    ------------    ------------    ------------
Effect of exchange rate changes on cash .....              -            (152)           (166)              -            (318)
                                                ------------    ------------    ------------    ------------    ------------
Increase (decrease) in cash .................          5,101           1,346            (694)              -           5,753
Cash at beginning of year                              3,593           1,245           2,767               -           7,605
                                                ------------    ------------    ------------    ------------    ------------
Cash at end of year .........................   $      8,694    $      2,591    $      2,073    $          -    $     13,358
                                                ============    ============    ============    ============    ============
F-67
CONDENSED CONSOLIDATING PARENT, RESTRICTED SUBSIDIARY AND NON-GUARANTOR
                             STATEMENT OF CASH FLOW
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                                 (IN THOUSANDS)
ABRAXAS
                                                      PETROLEUM      RESTRICTED           NON-        RECLASSIFI-        ABRAXAS
                                                     CORPORATION     SUBSIDIARY         GUARANTOR      CATIONS         PETROLEUM
                                                    INC. - PARENT    (CANADIAN         SUBSIDIARY        AND         CORPORATION AND
                                                    COMPANY (1)        ABRAXAS)       (GREY WOLF)    ELIMINATIONS     SUBSIDIARIES
                                                    -------------   -------------    -------------   -------------   --------------
OPERATING ACTIVITIES
Net income (loss) ...............................   $      (6,423)  $      (2,062)   $       2,815   $      (1,198)   $      (6,868)

Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
     Minority interest in income of foreign
       subsidiary ...............................               -               -                -           1,676            1,676
     Depreciation, depletion, and
       amortization .............................           9,585          11,587            3,978               -           25,150
     Deferred income tax expense ................               -             878            2,079               -
                                                                                                                              2,957
     Amortization of deferred financing fees ....           1,042             273                -               -
                                                                                                                              1,315
     Stock-based compensation ...................          (2,767)              -                -               -
                                                                                                                             (2,767)
     Changes in operating assets and liabilities:
         Accounts receivable ....................          20,727          (8,817)           1,688               -           13,598
         Equipment inventory ....................            (234)              -                -               -             (234)
         Accounts payables and accrued
           expenses .............................          (7,280)            364           (1,822)              -           (8,738)
                                                    -------------   -------------    -------------   -------------    -------------
Net cash provided by operating activities .......          14,650           2,223            8,738             478           26,089

INVESTING ACTIVITIES
Capital expenditures, including purchases
   and development of properties ................         (15,984)        (14,340)         (13,991)           (478)         (44,793)
Proceeds from sale of oil and gas
   properties ...................................               -          11,968            3,393               -           15,361
Acquisition of minority interest ................          (2,248)         (2,248)
                                                    -------------   -------------    -------------   -------------    -------------
Net cash  used by investing activities ..........         (18,232)         (2,372)         (10,598)           (478)         (31,680)

FINANCING ACTIVITIES
Proceeds from long-term borrowings ..............          11,256               -            1,610               -           12,866
Payments on long-term borrowings ................          (8,873)              -                -               -           (8,873)
Exercise of stock options .......................              16               -                -               -               16
Other ...........................................             (52)              -              283               -              231
                                                    -------------   -------------    -------------   -------------    -------------
Net cash provided by  financing activities ......           2,347               -            1,893               -            4,240
                                                    -------------   -------------    -------------   -------------    -------------
Effect of exchange rate changes on cash .........               -            (128)             (33)              -             (161)
                                                    -------------   -------------    -------------   -------------    -------------
Decrease in cash ................................          (1,235)           (277)               -               -           (1,512)
Cash at beginning of period .....................             326           1,678                -               -            2,004
                                                    -------------   -------------    -------------   -------------    -------------
Cash at end of period ...........................   $        (909)  $       1,401       $        -    $          -    $         492
                                                    =============   =============    =============   =============    =============
F-68
NOTE 7. BUSINESS SEGMENTS

    Business segment information about the three months and nine months ended
   September 30, 2002 in different geographic areas is as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2002
                                             --------------------------------------------
                                                  U.S.            CANADA        TOTAL
                                             -------------     -----------    -----------
                                                             (In thousands)
Revenues ...............................     $       4,800     $     6,261    $    11,061
                                             =============     ===========    ===========
Operating loss..........................     $         651     $       525    $     1,176
                                             =============     ===========
General Corporate.........................................................           (686)
Interest expense and amortization of
   deferred financing fees................................................         (9,026)
                                                                              -----------
Loss before income taxes..................................................    $    (8,536)
                                                                              ===========
THREE MONTHS ENDED SEPTEMBER 30, 2001
                                             --------------------------------------------
                                                  U.S.            CANADA         TOTAL
                                             -------------     -----------    -----------
                                                            (In thousands)
Revenues ...............................     $       7,687     $     7,214    $    14,901
                                             =============     ===========    ===========
Operating profit........................     $       2,170     $      (224)   $     1,946
                                             =============     ===========
General Corporate.......................................................              241
Interest expense and amortization of
   deferred financing fees..............................................           (8,449)
                                                                              -----------
Income before income taxes..............................................      $    (6,262)
                                                                              ===========
NINE MONTHS ENDED SEPTEMBER 30, 2002
                                             --------------------------------------------
                                                  U.S.           CANADA         TOTAL
                                             -------------     -----------    -----------
                                                             (In thousands)
Revenues ...............................     $      15,175     $    21,928    $    37,103
                                             =============     ===========    ===========
Operating loss..........................     $     (26,187)    $   (86,954)   $  (113,141)
                                             =============     ===========
General Corporate.........................................................         (2,983)
Interest expense and amortization of
   deferred financing fees................................................        (27,017)
                                                                              -----------
Loss before income taxes..................................................    $  (143,141)
                                                                              ===========
NINE MONTHS ENDED SEPTEMBER 30, 2001
                                             --------------------------------------------
                                                  U.S.            CANADA        TOTAL
                                             -------------     -----------    -----------
                                                            (In thousands)
Revenues ...............................     $      30,722     $    34,381    $    65,103
                                             =============     ===========    ===========
Operating profit........................     $      14,023     $    10,417    $    24,440
                                             =============     ===========
General Corporate.........................................................           (998)
Interest expense and amortization of
   deferred financing fees................................................        (24,957)
                                                                              -----------
Income before income taxes................................................    $    (1,515)
                                                                              ===========
AT SEPTEMBER 30, 2002
                                             --------------------------------------------
                                                  U.S.            CANADA         TOTAL
                                             -------------     -----------    -----------
                                                          (In thousands)
Identifiable assets ....................     $      88,659     $    83,168    $   171,827
                                             =============     ===========
Corporate assets..........................................................         12,066
                                                                              -----------
Total assets .............................................................    $   183,893
                                                                              ===========
AT DECEMBER 31, 2001
                                             --------------------------------------------
                                                   U.S.          CANADA          TOTAL
                                             -------------     -----------    -----------
                                                               (In thousands)
Identifiable assets ....................     $     124,993     $   174,063    $   299,056
                                             =============     ===========
Corporate assets..........................................................          4,560
                                                                              -----------
Total assets .............................................................    $   303,616
                                                                              ===========
NOTE 8. HEDGING PROGRAM AND DERIVATIVES

    On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, the Company
uses only

                                      F-69
cash flow hedges and the remaining discussion will relate exclusively to this
type of derivative instrument. If the derivative qualifies for hedge accounting,
the gain or loss on the derivative is deferred in Other Comprehensive
Income/Loss, a component of Stockholders' Equity, to the extent that the hedge
is effective. Any ineffective portion is reflected in current operations.

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

     Gains and losses on hedging instruments related to Accumulated Other
Comprehensive Income/Loss and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in the
period that the related production is delivered.

     The following table sets forth the Company's hedge position as of September
30, 2002.
Time Period                      Notional Quantities                     Price              Fair Value
-------------------------------------- ---------------------------------- ------------------------------ ------------
October 1, 2002 - October 31, 2002     20,000  Mcf/day  of  natural  gas  Fixed price swap  $2.60-$2.95  $(0.6)
                                       or 1,000 Bbl/day of crude oil      natural gas or                 million
                                                                          $18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS
133, the Company recorded $31.0 million, net of tax, in Other Comprehensive
Income/Loss representing the cumulative effect of an accounting change to
recognize the fair value of cash flow derivatives. The Company recorded cash
flow hedge derivative liability of $38.2 million on that date and a deferred tax
asset of $7.2 million.

     During the first nine months of 2002 the fair value of the hedge increased
by $2.5 million. For the three and nine months ended September 30, 2002, the
ineffective portion of the cash flow hedges were not material.

     As of September 30, 2002, $0.5 million of deferred net losses on derivative
instruments were recorded in other comprehensive income, of which $0.5 million
is expected to be reclassified to earnings upon the expiration of the hedge in
October 2002.

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

NOTE 9.  CONTINGENCIES

     LITIGATION - In 2001 the Company and a limited partnership, of which a
subsidiary of the Company is the general partner (the "Partnership"), were named
in a lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by the Company
and the Partnership related to the responsibility for year 2000 ad valorem taxes
on crude oil and natural gas properties sold by the Company and the Partnership.
In February 2002, a summary judgment was granted to the plaintiff in this matter
and a final judgment in the amount of $1.3 million was entered. The Company and
the Partnership have filed an appeal. The Company believes these charges are
without merit. The Company has established a reserve in the amount of $845,000,
which represents the Company's share of the judgment. The Company believes that
the remaining portion of the judgment represents the other partner's share of
such judgment.

     In late 2000, the Company received a Final De Minimis Settlement Offer from
the United States Environmental Protection Agency concerning the Casmalia
Disposal Site, Santa Barbara County, California. The Company's liability for the
cleanup at the Superfund site is based on its acquisition of Bennett Petroleum
Corporation, which is

                                      F-70
alleged to have transported or arranged for the transportation of oil field
waste and drilling muds to the Superfund site. The Company has engaged
California counsel to evaluate the notice of proposed de minimis settlement and
its notice of potential strict liability under the Comprehensive Environmental
Response, Compensation and Liability Act. Defense of the action is handled
through a joint group of oil companies, all of which are claiming a petroleum
exclusion that would limit the Company's liability. The potential financial
exposure and any settlement posture has yet not been developed, but is
considered by the Company to be immaterial.

     Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At September 30, 2002, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.

NOTE 10.  COMPREHENSIVE INCOME

     Comprehensive income includes net income, losses and certain items recorded
directly to Stockholders' Equity and classified as Other Comprehensive Income.

     The following table illustrates the calculation of comprehensive loss for
the three and nine months ended September 30, 2002:
Accumulated
                                                                                       Other
                                                                                    Comprehensive
                                                      Comprehensive Income (Loss)   Income (Loss)
                                                      ---------------------------   -------------
                                                          Nine       Three Months       As of
                                                         Months          Ended      September 30,
                                                         Ended                          2002
                                                                                    -------------
                                                          September 30, 2002
                                                                     (In thousands)
                                                      -------------------------------------------
Accumulated other comprehensive loss at
December 31, 2001..................................                                 $     (13,561)
   Net loss........................................   $   (112,827)  $     (8,438)

Other Comprehensive loss:
Hedging derivatives (net of tax) - See Note
      Reclassification adjustment for settled
       hedge contracts.............................          2,034            883
      Change in fair market value of outstanding
       hedge positions.............................         (1,980)            (4)

   Foreign currency translation adjustment.........          3,326         (1,830)
                                                      ------------   ------------
Other comprehensive income (loss)..................          3,380           (951)          3,380
                                                      ------------   ------------

Comprehensive loss.................................   $   (109,447)  $     (9,389)
                                                      ============   ============   -------------

Accumulated other comprehensive loss at
 September 30, 2002................................                                 $     (10,181)
                                                                                    =============
NOTE 11.  PROVED PROPERTY IMPAIRMENT

     In accordance with the Securities and Exchange Commission requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the end of a period, or alternatively, if prices
subsequent to that date have increased, a price near the periodic filing date of
the Company's financial statements. As of June 30, 2002, the Company's net
capitalized costs of crude oil and natural gas properties exceeded the present
value of its estimated proved reserves by $138.7 million ($28.2 million on the
U.S. properties and $110.5 million on the Canadian properties). These amounts
were calculated considering June 30, 2002 period-end prices of $26.12 per Bbl
for crude oil and $2.16 per Mcf for natural gas as adjusted to reflect the
expected realized prices for each of the full cost pools. The Company used the
subsequent increased prices in Canada to evaluate its Canadian properties, and
reduced the period end June 30, 2002 write-down to an amount of $87.8 million on
those properties. The subsequent prices in the U.S. would not have resulted in a
reduction of the write-down for the U.S. properties. An expense recorded in one
period may not be reversed in a subsequent period even though

                                      F-71
higher crude oil and natural gas prices may have increased the ceiling
applicable to the subsequent period. At September 30, 2002 the Company's net
capitalized cost of crude oil and natural gas properties did not exceed the
present value of its estimated reserves, due to increased commodity prices
during the third quarter and as such no write down was recorded for the three
months ended September 30, 2002.

     The Company cannot assure you that it will not experience additional
write-downs in the future. Should commodity prices decline or if any of our
proved reserves are revised downward, a further write-down of the carrying value
of our crude oil and natural gas properties may be required.

NOTE 12.  NEW ACCOUNTING STANDARDS

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to
be recorded at fair value during the period incurred and an equal amount
recorded as an increase in the value of the related long-lived asset. The
capitalized cost is depreciated over the useful life of the asset and the
obligation is accreted to its present value each period. SFAS No. 143 is
effective for the Company beginning January 1, 2003. The Company is currently
evaluating the impact the standard will have on its future results of operations
and financial condition.

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

     In April 2002, the FASB issued SFAS No. 145, "Recission of FASB No. 4, 44,
and 64, Amendments of FASB Statement No. 13 and Technical Corrections." SFAS No.
145 clarifies guidance related to the reporting of gains and losses from
extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. SFAS No. 145 also amends
other existing pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions relating to the reporting of gains and losses from extinguishment of
debt become effective for the Company beginning January 1, 2003 with earlier
adoption encouraged. All other provisions of this standard have been effective
for the Company as of May 15, 2002 and did not have a significant impact on its
financial condition or results of operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities." SFAS No. 146 requires costs associated with
exit of disposal activities to be recognized when they are incurred rather than
at the date of commitment to an exit or disposal plan. SFAS No. 146 is effective
for the Company beginning January 1, 2003. The Company is currently evaluating
the impact the standard will have on its results of operations and financial
condition.

     The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, "Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. The
Company is currently evaluating the impact on its results of operations and
financial condition if this proposed Statement of Position is adopted in its
current form.

NOTE 13.  SUBSEQUENT EVENT (UNAUDITED)

CANADIAN STOCK SALES AND EXCHANGE OFFER -  2003

     On January 23, 2003 the Company sold to a third party all of the
outstanding capital stock of it's wholly owned subsidiaries, Canadian Abraxas
and Grey Wolf, for approximately $138 million, subject to closing adjustments
(certain assets were retained); repaid the Grey Wolf Facility indebtedness of
approximately $46.3 million; redeemed the First Lien Notes, at 100% of the
principal amount of the First Lien Notes, plus accrued and unpaid interest, for
approximately $66.4 million; and entered into a new senior credit agreement
providing for a revolving credit facility with an initial borrowing capacity of
$50 million and a new term facility for $4.2 million.

     On January 23, 2003 the Company completed an exchange offer, pursuant to
which it offered to exchange cash and securities for all of the outstanding
Second Lien Notes and Old Notes. In connection with the exchange offer, the
Company made cash payments of approximately $59.2 million, issued new 11.5%
secured notes due 2007 and

                                      F-72
issued approximately 5.6 million shares of Common Stock. Such new secured notes
are subordinate to the new senior credit agreement which includes provisions
regarding the payment of interest on the new secured notes.

                                      F-73
FINANCIAL STATEMENTS

GREY WOLF EXPLORATION INC.

DECEMBER 31, 2001, 2000 AND 1999

                                      F-74
AUDITORS' REPORT

To the Directors of
Grey Wolf Exploration Inc.

We have audited the balance sheets of Grey Wolf Exploration Inc. as at December
31, 2001 and 2000 and the statements of earnings and retained earnings and of
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

With respect to the financial statements for each of the years in the two year
period ended December 31, 2001, we conducted our audits in accordance with
Canadian generally accepted auditing standards and auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2001 and 2000
and the results of its operations and its cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.

On February 23, 2001, we reported separately to the shareholders of the Company
on financial statements for the year ended December 31, 2000, prepared in
accordance with the Canadian generally accepted accounting principles, which
excluded Note 10 on differences between Canadian and United States generally
accepted accounting principles.

Calgary, Canada                                    /s/ Deloitte & Touche LLP
March 28, 2002 (except for Note 11                   Chartered Accountants
for which the date is January 23, 2003)

                                      F-75
COMMENTS BY AUDITORS FOR U.S. READERS ON

                       CANADA - U.S. REPORTING DIFFERENCES

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) outlining changes in
accounting principles that have been implemented in the financial statements. As
discussed in Note 7 to the financial statements, in 2001 the Company changed its
method of computing diluted earnings per share to conform to the new Canadian
Institute of Chartered Accountants Handbook recommendations section 3500. In
addition, as discussed in Note 6 to the financial statements, in 2000 the
Company changed its method of accounting for income taxes to conform to the new
Canadian Institute of Chartered Accounts Handbook recommendations section 3465.

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) outlining significant
subsequent events that have been disclosed in the financial statements. We have
not audited any financial statements of the Company for any period subsequent to
December 31, 2001. However, as discussed in Note 11, the Company sold various
petroleum and natural gas assets in May 2002. Also as discussed in Note 11, the
Company's parent company sold all of the outstanding common shares of the
Company in January 2003.

Calgary, Canada                                    /s/ Deloitte & Touche LLP
March 28, 2002 (except for Note 11                   Chartered Accountants
for which the date is January 23, 2003)

                                      F-76
AUDITORS' REPORT

To the Directors of
Grey Wolf Exploration Inc.

We have audited the statements of earnings and retained earnings and cash flows
of Grey Wolf Exploration Inc. for the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material
respects, the results of the Company's operations and cash flows for the year
ended December 31, 1999 in accordance with Canadian generally accepted
accounting principles.

Calgary, Canada                                    /s/ Ernst & Young LLP
March 10, 2000                                     Chartered Accountants

                                      F-77
GREY WOLF EXPLORATION INC.

BALANCE SHEETS
AS AT DECEMBER 31
(THOUSANDS OF DOLLARS)
                                                       2001          2000
                                                         $             $
                                                    -----------   -----------
ASSETS
CURRENT
Cash (Note 4)                                             4,405             -
Accounts receivable (Note 9)                              9,980         9,815
                                                    -----------   -----------
                                                         14,385         9,815

Long-term receivable (Note 9)                            10,000             -
Property and equipment (Note 3)                          71,879        54,782
Deferred financing fees (Note 4)                            170             -
                                                    -----------   -----------
                                                         96,434        64,597
                                                    ===========   ===========

LIABILITIES
CURRENT
Accounts payable and accrued liabilities (Note 9)        15,183        15,764

Long-term debt (Note 4)                                  36,526        11,793
Future site restoration                                   1,050           898
Future income taxes (Note 6)                              6,359         3,297
                                                    -----------   -----------
                                                         59,118        31,752
                                                    -----------   -----------

SHAREHOLDERS' EQUITY
Share capital (Note 5)                                   27,891        27,555
Retained earnings                                         9,425         5,290
                                                    -----------   -----------
                                                         37,316        32,845
                                                    -----------   -----------
                                                         96,434        64,597
                                                    ===========   ===========

SEE ACCOMPANYING NOTES

                                      F-78
GREY WOLF EXPLORATION INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31
(THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
                                                       2001          2000          1999
                                                         $             $             $
                                                    -----------   -----------   -----------
REVENUE
Petroleum and natural gas sales                          30,268        26,009        15,427
Royalties, net of Alberta Royalty Tax Credit             (7,615)       (5,380)       (2,363)
                                                    -----------   -----------   -----------
                                                         22,653        20,629        13,064
                                                    -----------   -----------   -----------
EXPENSES
Operating                                                 3,844         3,462         3,236
General and administrative                                1,278         1,384           903
Interest and finance charges                              1,827         1,126           576
Depletion, depreciation and site restoration              8,364         7,924         6,663
                                                    -----------   -----------   -----------
                                                         15,313        13,896        11,378
                                                    -----------   -----------   -----------

Earnings before taxes                                     7,340         6,733         1,686
                                                    -----------   -----------   -----------
Provision for taxes (Note 6)
    Capital tax                                             144            61           110
    Income taxes                                          3,061         2,732           229
                                                    -----------   -----------   -----------
                                                          3,205         2,793           339
                                                    -----------   -----------   -----------

NET EARNINGS                                              4,135         3,940         1,347

Retained earnings, beginning of year                      5,290         1,912           565
Adoption of income tax accounting standard change
 (Note 6)                                                     -          (562)            -
                                                    -----------   -----------   -----------
RETAINED EARNINGS, END OF YEAR                            9,425         5,290         1,912
                                                    ===========   ===========   ===========

BASIC AND DILUTED EARNINGS PER SHARE (Note 7)              0.32          0.31          0.11
                                                    ===========   ===========   ===========

Weighted average number of shares
    Basic                                            12,776,407    12,660,528    12,695,313
    Diluted                                          12,776,407    12,732,251    12,707,805
                                                    ===========   ===========   ===========
SEE ACCOMPANYING NOTES

                                      F-79
GREY WOLF EXPLORATION INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
2001          2000          1999
                                                         $             $             $
                                                    -----------   -----------   -----------
OPERATING ACTIVITIES
Net earnings                                              4,135         3,940         1,347
Depletion, depreciation and site restoration              8,364         7,924         6,663
Future income taxes                                       3,061         2,732           229
                                                    -----------   -----------   -----------
Cash flow from operations                                15,560        14,596         8,239
Changes in non-cash working capital items (Note 8)         (746)        1,936          (289)
                                                    -----------   -----------   -----------
                                                         14,814        16,532         7,950
                                                    -----------   -----------   -----------

FINANCING ACTIVITIES
Increase (decrease) in long-term debt                    28,334          (273)        2,094
Increase in long-term receivable                        (10,000)            -             -
Issue (repurchase) of common shares                         336             3           (78)
                                                    -----------   -----------   -----------
                                                         18,670          (270)        2,016
                                                    -----------   -----------   -----------
TOTAL CASH RESOURCES PROVIDED                            33,484        16,262         9,966
                                                    -----------   -----------   -----------

INVESTING ACTIVITIES
Property and equipment received under property
 swap agreement                                               -        10,779             -
Disposal of property and equipment under property
 swap agreement                                               -       (12,332)            -
                                                    -----------   -----------   -----------
Net cash proceeds                                             -        (1,553)            -
Other acquisitions (Note 9)                               1,071            13         3,662
Expenditures for property and equipment                  36,800        17,941        10,737
Sale of property and equipment                           (8,838)         (342)       (2,629)
Site restoration                                             46           203             -
                                                    -----------   -----------   -----------
                                                         29,079        16,262        11,770
                                                    -----------   -----------   -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          4,405             -        (1,804)
Cash and cash equivalents, beginning of year                  -             -         1,804
                                                    -----------   -----------   -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                    4,405             -             -
                                                    ===========   ===========   ===========

CASH FLOW FROM OPERATIONS PER SHARE (Note 7)
Basic and diluted                                          1.22          1.15          0.65
                                                    ===========   ===========   ===========

Cash interest paid                                        1,840         1,123           614
Cash taxes paid                                              82            72           104
                                                    ===========   ===========   ===========
SEE ACCOMPANYING NOTES

                                      F-80
GREY WOLF EXPLORATION INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS

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

1.   DESCRIPTION OF BUSINESS

     Grey Wolf Exploration Inc. ("Grey Wolf" or "the Company") was incorporated
     under the laws of the Province of Alberta on December 23, 1986. The
     Company's primary business is the exploration, development and production
     of crude oil and natural gas in western Canada. As at December 31, 2001,
     the Company is a wholly-owned subsidiary of Abraxas Petroleum Corporation
     ("Abraxas").

2.   SIGNIFICANT ACCOUNTING POLICIES

     The financial statements have been prepared in accordance with Canadian
     generally accepted accounting principles and are expressed in Canadian
     dollars. Differences between Canadian and U.S. GAAP are outlined in Note 10
     to the financial statements.

     PETROLEUM AND NATURAL GAS PROPERTIES

     The Company follows the full cost method of accounting in accordance with
     the guideline issued by the Canadian Institute of Chartered Accountants
     ("CICA") whereby all costs associated with the exploration for and
     development of petroleum and natural gas reserves, whether productive or
     unproductive, are capitalized in a Canadian cost centre and charged to
     income as set out below. Such costs include acquisition, drilling,
     geological and geophysical costs related to exploration and development
     activities. Costs of acquiring and evaluating unproved properties are
     excluded from the depletion base until it is determined whether or not
     proved reserves are attributable to the properties or impairment occurs.

     Gains or losses are not recognized upon disposition of petroleum and
     natural gas properties unless crediting the proceeds against accumulated
     costs would result in a change in the rate of depletion of 20% or more.

     Depletion of petroleum and natural gas properties and depreciation of
     production equipment, except for gas plants and related facilities, is
     provided on accumulated costs using the unit-of-production method based on
     estimated proved petroleum and natural gas reserves, before royalties, as
     determined by independent engineers. For purposes of the depletion
     calculation, proven petroleum and natural gas reserves are converted to a
     common unit of measure on the basis of one barrel of oil or liquids being
     equal to six thousand cubic feet of natural gas. Depreciation of gas plants
     and related facilities is calculated on a straight-line basis over an
     average 18-year term.

     The depletion and depreciation cost base includes capitalized costs, less
     costs of unproved properties, plus provision for future development costs
     of proved undeveloped reserves.

                                      F-81
The net carrying value of the Company's petroleum and natural gas
     properties is limited to an ultimate recoverable amount. This amount is the
     aggregate of estimated future net revenues from proved reserves and the
     costs of unproved properties, net of impairment allowances, less future
     estimated production costs, general and administration costs, financing
     costs, site restoration and abandonment costs, and income taxes. Future net
     revenues are estimated using prices and costs without escalation or
     discounting, and the income tax and Alberta Royalty Tax Credit legislation
     in effect at year end.

     FUTURE ABANDONMENT AND SITE RESTORATION COSTS

     The estimated cost of future abandonment and site restoration is based on
     the current cost and the anticipated method and extent of site restoration
     in accordance with existing legislation and industry practice. The annual
     charge is provided for on a unit-of-production basis for all properties
     except for gas plants for which the annual charge is calculated on a
     straight-line basis over the estimated remaining life of the plants. Actual
     site restoration expenditures are charged to the accumulated liability
     account as incurred.

     OTHER ASSETS

     Furniture, leasehold improvements, computer hardware, software and office
     equipment are carried at cost and are depreciated over the estimated useful
     life of the assets at rates varying between 20 percent and 30 percent, on a
     declining-balance basis.

     USE OF ESTIMATES

     The amounts recorded for depletion and depreciation of property and
     equipment and the provision for abandonment and site restoration are based
     on estimates. The ceiling test calculation is based on estimates of proved
     reserves, production rates, oil and natural gas prices, future costs and
     other relevant assumptions. By their nature, these estimates are subject to
     uncertainty and the effect on the financial statements of changes in such
     estimates could be significant.

     JOINT OPERATIONS

     Substantially all of the Company's exploration and development activities
     are conducted jointly with others, and accordingly, the financial
     statements reflect only the Company's proportionate interest in such
     activities.

     REVENUE RECOGNITION

     Petroleum and natural gas sales are recognized when the commodities are
     delivered to purchasers.

                                      F-82
FUTURE INCOME TAXES

     The Company has adopted, on a retroactive basis without restatement of the
     1999 financial statements, the CICA new accounting recommendation, "Income
     Taxes". Under this standard, future income tax assets and liabilities are
     measured based upon temporary differences between the carrying values of
     assets and liabilities and their tax basis. Income tax expense (recovery)
     is computed based on the change during the year in the future tax assets
     and liabilities. Effects of changes in tax laws and tax rates are
     recognized when substantially enacted.

     FINANCIAL INSTRUMENTS

     Financial instruments of the Company consist of accounts receivable,
     long-term receivable, accounts payable and accrued liabilities, and
     long-term debt. As at December 31, 2001 and 2000, there were no significant
     differences between the carrying amounts of these financial instruments
     reported on the balance sheets and their estimated fair values.

     The Company also from time to time employs financial instruments to manage
     its exposure to commodity prices. These instruments are not used for
     speculative trading purposes. Gains and losses on commodity price hedges
     are included in revenues upon the sale of the related production provided
     there is reasonable assurance that the hedge is and will continue to be
     effective.

     STOCK OPTIONS

     The Company has a stock option plan as described in Note 5. No compensation
     expense is recognized when the stock options are issued. Consideration
     received on exercise of stock options is credited to share capital.

     EARNINGS PER SHARE

     Basic earnings per share is calculated using the weighted average number of
     common shares outstanding during the year. Diluted earnings per share is
     calculated on the basis of the weighted average number of shares
     outstanding during the year plus the additional common shares that would
     have been outstanding if potentially dilutive common shares had been issued
     using the "treasury stock" method.

     Effective January 1, 2001, the Company retroactively adopted, with
     restatement of prior periods, the recommendations of new CICA Handbook
     Section 3500 for calculating earning per share. Under the revised standard,
     the treasury stock method is used for determining the dilutive effect of
     options issued. Prior to the adoption of the new recommendations, diluted
     per share amounts were determined using the imputed earnings method.

                                      F-83
3.   PROPERTY AND EQUIPMENT
2001
                                                    -----------------------------------------
                                                                   ACCUMULATED
                                                                  DEPLETION AND       NET
                                                       COST       DEPRECIATION     BOOKVALUE
                                                         $              $              $
                                                    -----------   -------------   -----------
Petroleum and natural gas properties                89,516         (25,901)       63,615
     Gas plants and related production facilities        11,010          (2,845)        8,165
     Other assets                                           597            (498)           99
                                                    -----------   -------------   -----------
     Net property and equipment                         101,123         (29,244)       71,879
                                                    ===========   =============   ===========
2000
                                                    -----------   -------------   -----------
                                                                   ACCUMULATED
                                                                  DEPLETION AND       NET
                                                       COST        DEPRECIATION    BOOKVALUE
                                                         $              $              $
                                                    -----------   -------------   -----------
Petroleum and natural gas properties                69,543         (19,384)       50,159
     Gas plants and related production facilities         5,786          (1,326)        4,460
     Other assets                                           531            (368)          163
                                                    -----------   -------------   -----------
     Net property and equipment                          75,860         (21,078)       54,782
                                                    ===========   =============   ===========
Undeveloped property costs of $6,065,907 at December 31, 2001 (2000 -
     $6,441,705, 1999 - $7,365,579) have been excluded from the depletion base.

                                      F-84
4.   LONG-TERM DEBT

     At December 31, 2001, the Company had a credit facility with Mirant Canada
     Energy Capital Ltd., (the "Mirant Facility") with a maximum available limit
     of $150,000,000. At December 31, 2001, $40,127,000 was drawn down against
     this facility. Of the $40,127,000 drawn, $10,000,000 was advanced to
     Canaxas (Note 9). Under the Mirant Facility, the Company is required to pay
     an amount equal to monthly net cash flow from operations less interest
     payments, general and administrative expenses and approved capital
     expenditures. It is anticipated the Company will be a net borrower due to a
     number of planned capital projects over the next several years.
     Accordingly, the outstanding balance has been classified as long-term on
     the balance sheet. The facility matures in December 2007.

     Under the facility, loan advances bear interest at 9.5%, plus a 5%
     overriding royalty which will decrease to 2 1/2% when certain conditions
     are met. The overriding royalty granted to Mirant was treated as a
     disposition of petroleum and natural gas properties, with a corresponding
     deferred financing charge recorded of $3,600,000 based on the fair value at
     the date of disposition. This deferred charge was netted against the
     outstanding loan balance and will be amortized over a 6-year period ended
     in 2007. Loan advances are supported by a first charge demand debenture in
     the amount of $200,000,000 covering all the assets of the Company.

     The Mirant credit facility was used to extinguish the previous revolving
     term credit facility. As at December 31, 2001, all of the previous
     revolving term credit facility had been repaid except for a bankers
     acceptance for $5,000,000. As at December 31, 2001, equivalent cash had
     been placed in trust to cover the $5,000,000 repayment, and accordingly was
     netted against the loan for financial statement purposes. The remaining
     $5,000,000 was repaid in January 2002.

     At December 31, 2000, the Company had a revolving term credit facility with
     a Canadian chartered bank with a maximum limit of $20,000,000. At December
     31, 2000, $11,792,690 was drawn down against this facility. Under the
     facility, loan advances bore interest at bank prime plus 1/8%, or if
     bankers acceptances were utilized, the then current bankers acceptances
     rate plus 1 1/8%. Loan advances were supported by a first floating charge
     demand debenture in the amount of $25,000,000 covering all the assets of
     the Company. During May 2001, the maximum limit under the revolving term
     credit facility was increased to $27,000,000 and remained at this level
     replaced by the Mirant Facility in December 2001.

                                      F-85
5.   SHARE CAPITAL

     AUTHORIZED

     Unlimited number of common shares without nominal or par value.

     ISSUED
                                                     NUMBER OF       AMOUNT
                                                      SHARES            $
                                                    -----------   -------------

     BALANCE, DECEMBER 31, 1998                      12,704,341          27,630
     Issuer bid                                         (44,600)            (78)
                                                    -----------   -------------
     BALANCE, DECEMBER 31, 1999                      12,659,741          27,552
     Exercise of stock options                            1,800               3
                                                    -----------   -------------
     BALANCE, DECEMBER 31, 2000                      12,661,541          27,555
     Exercise of stock options                          179,786             336
                                                    -----------   -------------
     BALANCE, DECEMBER 31, 2001                      12,841,327          27,891
                                                    ===========   =============

     On May 20, 1999, the Company's shareholders approved the consolidation of
     the share capital of the Company on the basis of one common share for each
     ten common shares outstanding. All common share and per share amounts have
     been reflected on a post consolidation basis.

     STOCK OPTIONS

     A maximum of 1,270,000 options to purchase common shares have been
     authorized for issuance under the Company's stock option plan. The options
     were exercisable on a cumulative basis at 25% per year commencing one year
     after grant date and expire five years from the date of grant. During the
     year ended December 31, 2001, all options outstanding in the Company were
     cancelled and new options were issued by Abraxas.

                                                 NUMBER       WEIGHTED AVERAGE
                                               OF OPTIONS       OPTION PRICE
                                              -------------   ----------------
     BALANCE, DECEMBER 31, 1998                     897,816               3.20
     Issued                                         328,470               1.91
     Cancelled                                     (192,571)              2.83
                                              -------------   ----------------
     BALANCE, DECEMBER 31, 1999                   1,033,715               2.84
     Issued                                         398,376               1.60
     Exercised                                       (1,800)              1.60
     Cancelled                                     (420,262)              2.53
                                              -------------   ----------------
     BALANCE, DECEMBER 31, 2000                   1,010,029               2.30
                                              -------------   ----------------
     Cancelled                                    1,010,029               2.30
                                              -------------   ----------------
     BALANCE DECEMBER 31, 2001                            -                  -
                                              =============   ================

                                      F-86
6.   PROVISION FOR TAXES

     The Company accounts for future income taxes using the liability method.
     Future income tax assets and liabilities are measured based upon temporary
     differences between the carrying values of assets and liabilities and their
     tax bases. Income tax expense (recovery) is computed based on the change
     during the year in the future tax assets and liabilities. Future income tax
     liabilities or assets are calculated using tax rates anticipated to apply
     in the periods that the temporary differences are expected to reverse.
     Effects of changes in tax laws and tax rates are recognized when
     substantially enacted.

     The provision for taxes recorded on the statements of earnings and retained
     earnings differs from the tax calculated by applying the combined statutory
     Canadian corporate and provincial income tax rate as follows:
2001         2000         1999
                                                            $            $            $
                                                        ----------   ----------   ----------
Calculated income tax expense at 42.62%,
     (2000 and 1999 - 44.62%)                                3,128        3,004          752
     Increase (decrease) in tax resulting from:
     Non-deductible crown royalties and other charges        2,950        2,254        2,147
     Resource allowance and related items                   (2,757)      (2,066)      (1,174)
     Alberta Royalty Tax Credit                               (177)        (231)      (1,392)
     Non-deductible depletion and depreciation                   -            -           43
     Benefit of losses not previously recognized                 -            -         (147)
     Large Corporation Tax                                     144           61          110
     Tax rate adjustment                                      (151)           -            -
     Other                                                      68         (229)           -
                                                        ----------   ----------   ----------
     Provision for taxes                                     3,205        2,793          339
                                                        ==========   ==========   ==========
The major components of future income tax liability at December 31, 2001
     and 2000 are related to the following accounts:
                                                           2001         2000
                                                            $            $
                                                        ----------   ----------

     Property and equipment                                  7,672        4,767
     Future site restoration                                  (447)        (401)
     Share issue costs                                        (117)         (94)
     Non-capital losses carried forward                          -         (557)
     Attributed royalty income carried forward                (511)        (144)
     Resource allowance                                       (310)        (274)
     Deferred financing costs                                   72            -
                                                        ----------   ----------
     Balance, December 31                                    6,359        3,297
                                                        ==========   ==========

                                      F-87
Upon adoption of the new accounting recommendation of the CICA, the Company
     recorded a future income tax liability of $562,000 and decreased the
     Company's retained earnings by $562,000. Had the new method not been
     adopted, 2000 net earnings would have been increased by $88,000.

     As at December 31, 2001 and 2000, the Company has exploration and
     development costs, undepreciated capital costs, non-capital losses and
     unamortized share issue costs available for deduction against future
     taxable income in the following approximate amounts:

                                                           2001         2000
                                                            $            $
                                                        ----------   ----------
     Canadian oil and gas property expense                  14,816       21,158
     Canadian development expense                           18,526        9,838
     Canadian exploration expense                           11,245        5,735
     Undepreciated capital cost                              9,290        7,097
     Non-capital losses                                          -        1,249
     Unamortized share issue costs                             276          210
                                                        ----------   ----------
                                                            54,153       45,287
                                                        ==========   ==========

     The Company's non-capital losses are available to be carried forward to
     offset taxable income in future years and expire between 2002 and 2004.

7.   EARNINGS PER SHARE

     The treasury method of calculating earnings per share was adopted
     retroactively effective January 1, 2001, with restatement of prior periods.

     If the imputed earnings method was utilized for 2000, diluted net earnings
     per share would be $0.31 per share (1999 - $0.11) and diluted cash flow
     from operations per share would be $1.11 (1999 - $0.62).

     There is no impact on 2001 diluted per share figures as a result of
     adopting the new treasury method.

8.   SUPPLEMENTARY CASH FLOW INFORMATION
2001         2000         1999
                                                            $            $            $
                                                        ----------   ----------   ----------
Accounts receivable                                      (165)      (5,712)      (1,390)
     Accounts payable and accrued liabilities                 (581)       7,648        1,101
                                                        ----------   ----------   ----------
     Changes in non-cash working capital items                (746)       1,936         (289)
                                                        ==========   ==========   ==========
F-88
9.   RELATED PARTY TRANSACTIONS

     The Company manages the assets and operations of Canadian Abraxas Petroleum
     Limited ("Canaxas") pursuant to a Management Agreement dated November 12,
     1996. Canaxas is a wholly-owned subsidiary of Abraxas. As at December 31,
     2001, Abraxas owned 97.3% (2000 - 46.0%) of the common shares of the
     Company and Canaxas owned 2.7% (2000 - 2.7%) of the common shares of the
     Company. The aggregate common costs of operations and administration of the
     Canaxas and Grey Wolf assets are shared on a pro-rata basis, based on
     revenue.

     Amounts due to and from these related parties with respect to the
     Management Agreement are $3,741,000 at December 31, 2001 (2000 -
     $3,823,000). Abraxas also charged the Company a corporate service charge of
     $849,000 in 2001 (2000 and 1999 - $Nil) of which $589,000 was charged out
     to Canaxas. The amounts are non-interest earning, are not collateralized
     and are due on demand. In addition, at December 31, 2001, the Company had a
     long-term receivable from Canaxas in the amount of $10,000,000 (Note 4)
     (2000 - $Nil). The balance bears interest at 9.65% and has no fixed terms
     of repayment.

                                                           2001         2000
                                                            $            $
                                                        ----------   ----------
     Receivable from Canaxas                                 4,330        3,823
     Long-term receivable from Canaxas                      10,000            -
     Payable to Abraxas                                        849            -

     In July 1999, the Company purchased undeveloped property from a wholly-owed
     subsidiary of Canaxas for a total cost of $3,421,000. As a result of this
     acquisition, the Company was committed to spend $6,000,000 prior to June
     30, 2002 pursuant to the terms of a farm-in agreement between the Company
     and the wholly-owned subsidiary of Canaxas.

10.  DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
     ACCOUNTING PRINCIPLES

     RECONCILIATION OF FINANCIAL STATEMENTS TO UNITED STATES GENERALLY ACCEPTED
     ACCOUNTING PRINCIPLES

     The financial statements of the Company have been prepared in accordance
     with Canadian generally accepted accounting principles ("Canadian GAAP"),
     which in most respects, conform to accounting principles generally accepted
     in the United States of America ("U.S. GAAP"). Differences from U.S. GAAP
     having a significant effect on the Company's balance sheets and statements
     of earnings and retained earnings and of cash flows are described and
     quantified below for the years indicated:

                                      F-89
(a)  Under U.S. GAAP, interest costs associated with certain capital
          expenditures are required to be capitalized as part of the historical
          cost of the oil and gas assets. Under Canadian GAAP, the calculation
          of interest costs eligible for capitalization differs from the
          calculation under U.S. GAAP in certain respects and is optional at the
          discretion of the entity. Accordingly, no amounts have been
          capitalized with respect to the Canadian GAAP financial statements.
          The impact of recording capitalized interest under U.S. GAAP would be
          to increase the carrying value of property and equipment by $119,000
          in 2001 and $69,000 in 2000 with a corresponding decrease in interest
          expense in the respective periods.

     (b)  Under U.S. GAAP, deferred taxes are recorded based upon the liability
          method. When a business combination occurs, deferred taxes are
          recognized for the tax effect of timing differences, with a
          corresponding increase in property and equipment. Under Canadian GAAP,
          prior to the adoption of the new CICA accounting recommendation,
          "Future Income Taxes" effective January 1, 2000, the Company followed
          the deferral method of accounting for income taxes. The impact of the
          difference in 1999 is an additional deferred tax expense under U.S.
          GAAP of $480,000. Upon adoption of the new recommendation for Canadian
          GAAP, companies were permitted to record the impact of differences in
          accounting and tax bases related to prior business combinations to
          retained earnings as a one-time transition adjustment. Accordingly,
          property and equipment is higher under U.S. GAAP by $682,000 for 2001
          and 2000 before the impact of depletion. The impact of the additional
          depletion expense related to the increased property and equipment for
          U.S. GAAP purposes is to decrease net income by $62,000 in 2001,
          $88,000 in 2000, and $77,000 in 1999. The cumulative impact of the
          depletion expense relating to years prior to 1999 is $78,000.

     (c)  In September 2001, Abraxas acquired the remaining non-controlling
          interest of the Company. Consideration was comprised of 0.6 common
          shares of Abraxas, in exchange for each common share of the Company.
          Under U.S. GAAP, the costs assigned to assets and liabilities by the
          acquiring company under a business combination are considered to
          constitute a new basis of accounting. Accordingly, the historical
          carrying values of assets and liabilities of the subsidiary are
          comprehensively revalued based on the purchase price assigned for
          consolidation purposes at the time it becomes wholly owned ("push down
          accounting"). Under Canadian GAAP, comprehensive revaluation of assets
          and liabilities in the financial statements of a subsidiary based on a
          purchase transaction involving acquisition of all of the equity
          interests is permitted, but not required. Had the consolidation
          entries of Abraxas related to the acquisition been applied in the
          Company's financial statements using "push down accounting", property
          and equipment and future income tax liability would be reduced by
          $4,074,000 and $1,736,000, respectively, accounts receivable would be
          increased and interest and finance charges decreased by $984,000
          (relating to certain costs of the transaction paid by the Company),
          with the remaining amount of $2,338,000 recorded as a revaluation
          adjustment within shareholders'equity.

                                      F-90
(d)  Prior to 2001, Canadian GAAP required the use of the imputed earnings
          method for purposes of the calculation of fully diluted earnings per
          share. For fiscal periods beginning on or after January 1, 2001,
          retroactive application of the treasury stock method with restatement
          of prior periods is required, which is substantially the same as No.
          SFAS 128 under U.S. GAAP. Accordingly, no adjustments are required to
          conform the diluted earnings per share figures to U.S. GAAP, except
          for the net income effect of the above-noted Canadian - U.S. GAAP
          differences identified.

     (Tabular amounts are in thousands of Canadian dollars, except per share
     amounts)

     STATEMENTS OF EARNINGS

     The application of U.S. GAAP would have the following effect on the
     Statements of Earnings:
YEARS ENDED DECEMBER 31,
                                                        ----------   ----------   ----------
                                                           2001         2000         1999
                                                            $            $            $
                                                        ----------   ----------   ----------
Net earnings, as reported                               4,135        3,940        1,347

        Capitalized interest (a)                               119           69            -
        Depreciation, depletion and amortization (b)           (62)         (88)         (77)
        Deferred income tax expense benefit (b)                  -            -         (480)
        Interest and finance charges (c)                       984            -            -
                                                        ----------   ----------   ----------

     Net earnings, U.S. GAAP                                 5,176        3,921          790
                                                        ==========   ==========   ==========

     Basic earnings per share, as reported                    0.32         0.31         0.11
        Effect of increase (decrease) in net earnings
         under U.S. GAAP (d)                                  0.09            -        (0.05)
                                                        ----------   ----------   ----------
     Basic earnings per share, U.S. GAAP                      0.41         0.31         0.06
                                                        ==========   ==========   ==========

     Diluted earnings per share, as reported                  0.32         0.31         0.11
        Effect of increase (decrease) in net earnings
         under U.S. GAAP (d)                                  0.09            -        (0.05)
                                                        ----------   ----------   ----------
     Diluted earnings per share, U.S. GAAP                    0.41         0.31         0.06
                                                        ==========   ==========   ==========
F-91
BALANCE SHEETS

          The application of U.S. GAAP would have the following effect on the
          Balance Sheets:
AS AT DECEMBER 31, 2001                       AS AT DECEMBER 31, 2000
                                            ----------------------------------------      ---------------------------------------
                                                                                                         CUMULATIVE
                                                AS           INCREASE         U.S.            AS          INCREASE         U.S.
                                             REPORTED       (DECREASE)        GAAP         REPORTED      (DECREASE)        GAAP
                                            ----------     ------------     --------      ----------     -----------     --------
ASSETS

Accounts receivable (c)                          9,980              984       10,964            9,815             -         9,815
Property and equipment (a) (b) (c)              71,879           (3,509)      68,370           54,782           510        55,292

LIABILITIES

Deferred income taxes (c)                        6,359           (1,736)       4,623            3,297             -         3,297

SHAREHOLDERS' EQUITY

Revaluation adjustment (c)                           -           (2,338)      (2,338)               -             -             -
Retained earnings (a) (b)                        9,425            1,549       10,974            5,290           510         5,800
F-92
STATEMENTS OF CASH FLOWS

     The application of U.S. GAAP would have the following effect on the
     Statements of Cash Flows:
YEARS ENDED DECEMBER 31,
                                                           --------------------------------------------
                                                               2001             2000           1999
                                                                $                $              $
                                                           ------------     -----------     -----------
OPERATING ACTIVITIES

     Cash flow from operating activities, as reported            14,814        16,532           7,950

     Increase (decrease) in:
        Net earnings (loss)                                       1,041           (19)           (557)
        Depletion, depreciation and amortization (b)                 62            88              77
        Deferred income taxes (b)                                     -             -             480
        Changes in non-cash working capital items (c)              (984)            -               -
                                                           ------------     -----------     -----------
     Cash flow from operating activities, U.S. GAAP              14,933        16,601           7,950
                                                           ============     ===========     ===========

     INVESTING ACTIVITIES

     Net cash (used) provided by investing activities,
      as reported                                               (29,079)      (16,262)        (11,770)

        Increase in capital expenditures (a)                       (119)          (69)              -
                                                           ------------     -----------     -----------

     Net cash (used) provided by investing activities,
        U.S. GAAP                                               (29,198)      (16,331)        (11,770)
                                                           ============     ===========     ===========
STATEMENTS OF CASH FLOWS

     The investing activities portion of the statement of cash flows for 2000
     prepared under Canadian GAAP discloses the aggregate costs related to a
     property swap arrangement, with adjustments to arrive at the cash component
     of the transaction. Under U.S. GAAP only the net cash amount would be
     presented on the statement of cash flows.

                                      F-93
Under Canadian GAAP, corporations are permitted to present a sub-total
     prior to changes in non-cash working capital within operating activities.
     This information is perceived to be useful information for various users of
     the financial statements and is commonly presented by Canadian public
     corporations. Under U.S. GAAP, this sub-total is not permitted to be shown
     and would be removed in the statements of cash flows for all periods
     presented. In addition, cash flow from operations per share figures would
     not be presented under U.S. GAAP.

     RECENT DEVELOPMENTS IN U.S. ACCOUNTING

     The Financial Accounting Standards Board recently issued Statement No. 141,
     "Business Combinations" (FAS No. 141) and Statement No. 142 "Goodwill and
     Other Intangible Assets" (FAS No. 142). FAS No. 141 requires the purchase
     method of accounting to be used for all business combinations after July 1,
     2001. FAS No. 142 requires that goodwill and intangible assets with an
     indefinite useful life no longer be amortized, but instead tested for
     impairment at least annually. Enterprises are required to adopt FAS No. 142
     for fiscal years beginning after December 15, 2001. FAS No. 141 has been
     applied with respect to the acquisition by Abraxas of the remaining
     non-controlling interest in Grey Wolf. The Company currently has no
     goodwill or other intangible assets that will be impacted by the adoption
     of FAS No. 142.

     Statement No. 143, "Accounting for Asset Retirement Obligations" (FAS No.
     143) was released by the Financial Accounting Standards Board in June 2001.
     FAS No. 143 requires liability recognition for retirement obligations
     associated with tangible long-lived assets. The initial market of the asset
     retirement obligation is to be at fair value. The asset retirement cost
     equal to the fair value of the retirement obligation is to be capitalized
     as part of the cost of the related long-lived asset and amortized to
     expense over the useful life of the asset. Enterprises are required to
     adopt FAS No. 143 for fiscal years beginning after June 15, 2002. The
     Company is currently assessing the impact that adoption of this standard
     would have on its financial position and results of operations.

                                      F-94
The Financial Accounting Standards Board also recently issued Statement No.
     144, "Accounting for the Impairment of Disposal of Long-Lived Assets" (FAS
     No. 144). FAS No. 144 will replace previous Untied States generally
     accepted accounting principles regarding accounting for impairment of
     long-lived assets and accounting and reporting for discontinued operations.
     FAS No. 144 retains the fundamental provisions of the prior standard for
     recognizing and measuring impairment losses on long-lived assets. FAS No.
     144 retains the basic provisions of the prior standard for presentation of
     discontinued operations in the income statement, but broadens that
     presentation to include a component of an entity rather than a segment of a
     business. Enterprises are required to adopt FAS No. 144 for fiscal years
     beginning after December 15, 2001. The Company has adopted the accounting
     standard effective January 1, 2002 which is not expected to have a
     significant impact on the Company's financial position and results of
     operations.

11.  SUBSEQUENT EVENTS

     In May 2002, the Company sold its non-operated interest in the Quirk Creek
     gas processing facilities and related petroleum and natural gas rights, and
     certain other producing properties in the Mahaska and Millarville areas for
     total gross proceeds of $3,617,000.

     In January 2003, Abraxas completed the sale of all of the outstanding
     common shares of the Company to an unrelated third party (the "Purchaser")
     for gross cash proceeds of approximately $110,790,000, subject to closing
     adjustments. Upon closing of the sale, the Company was required to repay
     the outstanding indebtedness under the Mirant Facility, totaling
     $72,847,000, including accrued interest. Prior to the sale, certain
     petroleum and natural gas assets of the Company were transferred to a
     newly-formed subsidiary of Abraxas, a portion of which will be developed
     jointly under farmout arrangements with the Purchaser.

                                      F-95
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

         The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by us. All of such amounts
(except the SEC Registration Fee) are estimated.
SEC Registration Fee.......................................   $5,986
                                                                       ------
         Federal Taxes..............................................   $
                                                                       ------
         State and Local Taxes......................................   $
                                                                       ------
         Trustee and Transfer Agent Fees............................   $
                                                                       ------
         Printing and Mailing Costs.................................   $
                                                                       ------
         Legal Fees and Expenses....................................   $
                                                                       ------
         Accounting Fees and Expenses...............................   $
                                                                       ------
         Miscellaneous..............................................   $
                                                                       ------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

         Abraxas' Articles of Incorporation contain a provision that eliminates
the personal monetary liability of directors and officers to Abraxas and its
stockholders for a breach of fiduciary duties to the extent currently allowed
under the Nevada General Corporation Law (the "Nevada Statute"). If a director
or officer of Abraxas were to breach his fiduciary duties, neither Abraxas nor
its stockholders could recover monetary damages, and the only course of action
available to Abraxas' stockholders would be equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty.
To the extent certain claims against directors or officers are limited to
equitable remedies, this provision of Abraxas' Articles of Incorporation may
reduce the likelihood of derivative litigation and may discourage stockholders
or management from initiating litigation against directors or officers for
breach of their duty of care. Additionally, equitable remedies may not be
effective in many situations. If a stockholder's only remedy is to enjoin the
completion of the Board of Director's action, this remedy would be ineffective
if the stockholder did not become aware of a transaction or event until after it
had been completed. In such a situation, it is possible that the stockholders
and Abraxas would have no effective remedy against the directors or officers.

         Liability for monetary damages has not been eliminated for acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law or payment of an improper dividend in violation of section 78.300 of the
Nevada Statute. The limitation of liability also does not eliminate or limit
director liability arising in connection with causes of action brought under the
Federal securities laws.

         The Nevada Statute permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
against all expenses (including attorneys' fees) actually and reasonably
incurred by, or imposed upon, him in connection with the defense by reason of
his being or having been a director or officer if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
where he has been adjudged by a court of competent jurisdiction (and after
exhaustion of all appeals) to be liable for gross negligence or willful
misconduct in the performance of his duty. The Bylaws of Abraxas provide
indemnification to the same extent allowed pursuant to the foregoing provisions
of the Nevada Statute.

         Nevada corporations also are authorized to obtain insurance to
protect officers and directors from certain liabilities, including liabilities
against which the corporation cannot indemnify its directors and officers.
Alberta Business Corporation Act corporations are permitted to obtain such
insurance also, except for liability relating to the failure to act honestly
and in good faith with a view to the best interests of the corporation.
Abraxas currently has a directors' and officers' liability insurance policy in
effect providing $3.0 million in coverage and an additional $1.0 million in
coverage for certain employment related claims.

                                      II-1
Abraxas has entered into indemnity agreements with each of its
directors and officers. These agreements provide for indemnification to the
extent permitted by the Nevada Statute.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since January 2000, we have issued and sold the following unregistered
securities:

(a) On August 1, 2000, Abraxas issued a warrant to purchase 750,000 shares at an
exercise price of $3.50 per share. The warrant was issued pursuant to Section
4(2) of the Securities Act of 1933, as amended.

(b) On January 23, 2003, Abraxas issued $109,523,000 principal amount of 11 1/2%
Secured Notes due 2007, Series A and 5,633,291 shares of Abraxas common stock.
These securities were issued pursuant to Section 4(2) of the Securities Act of
1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

3.1      Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to Abraxas'
         Registration Statement on Form S-4, No. 33-36565).

3.2      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         October 22, 1990 (Filed as Exhibit 3.3 to Abraxas' Registration
         Statement on Form S-4, No. 33-36565).

3.3      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         December 18, 1990 (Filed as Exhibit 3.4 to Abraxas' Registration
         Statement on Form S-4, No. 33-36565).

3.4      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         June 8, 1995 (Filed as Exhibit 3.4 to the Abraxas' Registration
         Statement on Form S-3, No. 333-00398 (the "1995 S-3 Registration
         Statement")).

3.5      Articles of Amendment to the Articles of Incorporation of Abraxas dated
         as of August 12, 2000 (Filed as Exhibit 3.5 to Abraxas' Annual Report
         on Form 10-K filed April 2, 2001).

3.6      Articles of Incorporation of Sandia Oil & Gas Corporation (Filed as
         Exhibit 3.7 to Abraxas and Canadian Abraxas' Registration Statement on
         Form S-4, No. 333-79349 (the "1999 Exchange Offer Registration
         Statement")).

*3.7     Articles of Incorporation of Sandia Operating Corp.

3.8      Articles of Incorporation of Wamsutter Holdings, Inc. (Filed as Exhibit
         3.7 to the Abraxas, Sandia Oil & Gas Corporation and New Cache
         Petroleums Ltd. Registration Statement on Form S-1, No. 333-95281 (the
         "2000 S-1 Registration Statement")).

*3.9     Articles of Incorporation of Western Associated Energy Corporation.

*3.10    Articles of Incorporation of Eastside Coal Company, Inc.

*3.11    Certificate of Incorporation of Grey Wolf Exploration Inc.

3.12     Amended and Restated Bylaws of Abraxas (Filed as Exhibit 3.6 to
         Abraxas' Annual Report on Form 10-K filed April 5, 2002).

                                      II-2
*3.13    Amended and Restated By-Laws of Sandia Oil & Gas Corporation.

*3.14    By-Laws of Sandia Operating Corp.

3.15     By-Laws of Wamsutter Holdings, Inc. (Filed as Exhibit 3.11 to the 2000
         S-1 Registration Statement).

*3.16    By-Laws of Western Associated Energy Corporation.

*3.17    By-Laws of Eastside Coal Company, Inc.

*3.18    By-Laws of Grey Wolf Exploration Inc.

4.1      Specimen Common Stock Certificate of Abraxas (Filed as Exhibit 4.1 to
         Abraxas' Registration Statement on Form S-4, No. 33-36565).

4.2      Specimen Preferred Stock Certificate of Abraxas (Filed as Exhibit 4.2
         to Abraxas' Annual Report on Form 10-K filed on March 31, 1995).

4.3      Rights Agreement dated as of December 6, 1994 between Abraxas and First
         Union National Bank of North Carolina ("FUNB") (Filed as Exhibit 4.1 to
         Abraxas' Registration Statement on Form 8-A filed on December 6, 1994).

4.4      Amendment to Rights Agreement dated as of July 14, 1997 by and between
         Abraxas and American Stock Transfer and Trust Company (Filed as
         Exhibit 1 to Amendment No. 1 to Abraxas' Registration Statement on
         Form 8-A filed on August 20, 1997).

4.5      Second Amendment to Rights Agreement as of May 22, 1998, by and between
         Abraxas and American Stock Transfer & Trust Company (Filed as Exhibit 1
         to Amendment No. 2 to Abraxas' Registration Statement on Form 8-A filed
         on August 24, 1998).

4.6      Indenture dated as of January 23, 2003, among Abraxas, as Issuer, the
         Subsidiary Guarantors party thereto, and U.S. Bank, N.A., as Trustee,
         relating to Abraxas' 11-1/2% Secured Notes due 2007 (the "Indenture")
         (Filed as Exhibit 4.1 to Abraxas' Current Report on Form 8-K filed
         February 6, 2003).

4.7      Registration Rights Agreement dated as of January 23, 2003 by and among
         Abraxas, Sandia Oil & Gas Corporation, Sandia Operating Corp.,
         Wamsutter Holdings, Inc., Grey Wolf Exploration Inc. and Jefferies &
         Company, Inc. (Filed as Exhibit 10.4 to Abraxas' Current Report on Form
         8-K filed February 6, 2003).

4.8      Form of 111/2% Secured Note due 2007 (Filed as Exhibit A to the
         Indenture).

*5.1     Opinion of Cox & Smith Incorporated.

**5.2    Opinion of Osler, Hoskin & Harcourt LLP.

+10.1    Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
         amended and restated (Filed as Exhibit 10.7 to Abraxas' Annual Report
         on Form 10-K filed April 14, 1993).

+10.2    Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, as
         amended and restated (Filed as Exhibit 10.8 to Abraxas' Annual Report
         on Form 10-K filed April 14, 1993).

+10.3    Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan
         (Filed as Exhibit 10.9 to Abraxas' Annual Report on Form 10-K filed
         April 14, 1993).

+10.4    Abraxas Petroleum Corporation 401(k) Profit Sharing Plan (Filed as
         Exhibit 10.4 to Abraxas' Registration Statement on Form S-4,
         No. 333-18673 (the "1996 Exchange Offer Registration Statement)).

                                      II-3
+10.5    Abraxas Petroleum Corporation Director Stock Option Plan (Filed as
         Exhibit 10.5 to 1996 Exchange Offer Registration Statement).

+10.6    Abraxas Petroleum Corporation Restricted Share Plan for Directors
         (Filed as Exhibit 10.20 to Abraxas' Annual Report on Form 10-K filed on
         April 12, 1994).

+10.7    Abraxas Petroleum Corporation 1994 Long Term Incentive Plan (Filed as
         Exhibit 10.21 to Abraxas' Annual Report on Form 10-K filed on April 12,
         1994).

+10.8    Abraxas Petroleum Corporation Incentive Performance Bonus Plan (Filed
         as Exhibit 10.24 to Abraxas' Annual Report on Form 10-K filed on
         April 12, 1994).

10.9     Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
         Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to Abraxas'
         and Canadian Abraxas' Registration Statement on Form S-1, Registration
         No. 33-66446).

10.10    Form of Indemnity Agreement between Abraxas and each of its directors
         and officers (Filed as Exhibit 10.30 to Abraxas' and Canadian Abraxas'
         Registration Statement on Form S-1, Registration No. 33-66446).

+10.11   Employment Agreement between Abraxas and Robert L. G. Watson (Filed as
         Exhibit 10.19 to the 2000 S-1 Registration Statement).

+10.12   Employment Agreement between Abraxas and Chris E. Williford (Filed as
         Exhibit 10.20 to the 2000 S-1 Registration Statement).

+10.13   Employment Agreement between Abraxas and Stephen T. Wendel (Filed as
         Exhibit 10.26 to the 1995 S-3 Registration Statement).

+10.14   Employment Agreement between Abraxas and Robert W. Carington, Jr (Filed
         as Exhibit 10.22 to the 2000 S-1 Registration Statement).

10.15    Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
         Basil Street Company (Filed as Exhibit 10.15 to Abraxas Annual Report
         on Form 10-K filed on April 2, 2001).

10.16    Common Stock Purchase Warrant dated September 1, 2000 between Jessup &
         Lamont Holdings (Filed as Exhibit 10.16 to Abraxas Annual Report on
         Form 10-K filed on April 2, 2001).

10.17    Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
         TNC, Inc. (Filed as Exhibit 10.17 to Abraxas Annual Report on Form 10-K
         filed on April 2, 2001).

10.18    Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
         Charles K. Butler (Filed as Exhibit 10.17 to Abraxas Annual Report on
         Form 10-K filed on April 2, 2001).

10.19    Agreement of Limited Partnership of Abraxas Wamsutter L.P. dated as of
         November 12, 1998 by and between Wamsutter Holdings, Inc. and
         TIFD III-X Inc. (Filed as Exhibit 10.2 to Abraxas' Current Report on
         Form 8-K filed November 30, 1998).

10.20    Purchase Agreement for Dollar Denominated Production Payment dated as
         of October 6, 1999 by and between Abraxas and Southern Producer
         Services, L.P. (Filed as Exhibit 10.1 to Abraxas' Quarterly Report on
         Form 10-Q filed November 15, 1999).

10.21    Conveyance of Dollar Denominated Production Payment dated as of
         October 6, 1999 by and between Abraxas and Southern Producer
         Services, L.P. (Filed as Exhibit 10.2 to Abraxas' Quarterly Report on
         Form 10-Q filed November 15, 1999).

                                      II-4
10.22    Purchase and Sale Agreement dated November 21, 2002, by and among
         Abraxas, as Seller, Primewest Gas Inc., as Purchaser, Primewest Energy
         Inc., as Guarantor, Canadian Abraxas and Grey Wolf Exploration Inc.,
         as the Companies (Filed as Exhibit 10.1 to Abraxas' Current Report on
         Form 8-K/A filed December 9, 2002).

10.23    Farmout Agreement between Grey Wolf Exploration Limited and PrimeWest
         Energy, Inc. (Previously filed as Exhibit 10.2 to Abraxas' Current
         Report on Form 8-K/A filed on December 9, 2002).

10.24    Farmout Agreement between Grey Wolf Exploration Limited and PrimeWest
         Energy, Inc. (Previously filed as Exhibit 10.3 to Abraxas' Current
         Report on Form 8-K/A filed on December 9, 2002).

10.25    Loan And Security Agreement dated as of January 22, 2003, by and among
         Abraxas, as Borrower, the Subsidiaries of Abraxas that are Signatories
         thereto, as Guarantors, the Lenders that are Signatories thereto, as
         Lenders, and Foothill Capital Corporation, as the Arranger and
         Administrative Agent (Filed as Exhibit 10.5 to Abraxas' Current Report
         on Form 8-K filed February 6, 2003).

10.26    Intercreditor and Subordination Agreement dated as of January 23, 2003,
         by and among Foothill, in its capacity as agent (in such capacity,
         together with any successor in such capacity, the "Senior Agent") for
         the lenders who are from time to time parties to the Loan Agreement
         (the "Senior Lenders"), U.S. Bank, N.A., a national banking association
         in its capacity as trustee (in such capacity, together with any
         successor in such capacity, the "Trustee") for the holders of the
         11 1/2% Secured Notes Due 2007, issued under the Indenture. (Filed as
         Exhibit 10.6 to Abraxas' Current Report on Form 8-K filed February 6,
         2003).

16.1     Letter addressing change in certifying accountant (Filed on Abraxas'
         Form 8-K filed on August 22, 2001).

*21.1    Subsidiaries of Abraxas.

*23.1    Consent of Delloite & Touche LLP

*23.2    Consent of Ernst & Young LLP

*23.3    Consent of Delloite & Touche LLP Chartered Accountants

*23.4    Consent of Ernst & Young LLP Chartered Accountants

*23.5    Consent of DeGolyer and MacNaughton.

*23.6    Consent of McDaniel & Associates Consultants, Ltd.

*23.7    Consent of Cox & Smith Incorporated (Included in Exhibit 5.1).

*23.8    Consent of Osler, Hoskin & Harcourt LLP.

*24.1    Power of Attorney of Craig S. Bartlett, Jr.

*24.2    Power of Attorney of Franklin Burke.

*24.3    Power of Attorney of Frederick M. Pevow, Jr.

*24.4    Power of Attorney of James C. Phelps.

                                      II-5
*24.5    Power of Attorney of Joseph A. Wagda.

*25.1    Statement of eligibility of trustee for the Indenture.

27.1     Financial Data Schedule (Omitted pursuant to Regulation S-K,
         Item 601(c)).

----------------------
*   Filed herewith.

**  To be filed by amendment.

+   Management Compensatory Plan or Agreement.

ITEM 17.  UNDERTAKINGS

     A. The undersigned registrants hereby undertake:

     (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

         (i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

         (ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.

         (iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

     (2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

     B. Each of the undersigned registrants hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

     C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
each of the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person in the successful
defense of any action, suit or proceedings) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the

                                      II-6
registrants will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by either of them is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

                                      II-7
SIGNATURES

         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.

                                          ABRAXAS PETROLEUM CORPORATION

                              By: /s/ Robert L. G. Watson
                              --------------------------------------------------
                              Chairman of the Board, Chief Executive Officer and
                              President

                                      II-8
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----
/s/ Robert L.G. Watson                      Chairman of the Board,                          February 7,  2003
------------------------------              President, Chief Executive Officer
Robert L.G. Watson                          (Principal Executive Officer) and
                                            Director of Abraxas

/s/ Chris E. Williford                      Executive Vice President,                       February 7, 2003
------------------------------              Treasurer, and Chief Financial
Chris E. Williford                          Officer (Principal Financial and
                                            Accounting Officer) of Abraxas

/s/ Robert W. Carington                     Executive Vice President of Abraxas             February 7, 2003
------------------------------
Robert W. Carington, Jr.

             *                              Director of Abraxas                             February 7, 2003
------------------------------
Craig S. Bartlett, Jr.

              *                             Director of Abraxas                             February 7, 2003
------------------------------
Franklin A. Burke

                                            Director of Abraxas                             February 7, 2003
------------------------------
Ralph F. Cox

              *                             Director of Abraxas                             February 7, 2003
------------------------------
Frederick M. Pevow, Jr.

              *                             Director of Abraxas                             February 7, 2003
------------------------------
James C. Phelps

              *                             Director of Abraxas                             February 7, 2003
------------------------------
Joseph A. Wagda

*By: /s/ Chris E. Williford
------------------------------
Chris E. Williford
Attorney-in-fact
II-9
SIGNATURES

     Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.

                                      SANDIA OIL & GAS CORPORATION

                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President

                                     II-10
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Sandia Oil & Gas Corporation

/s/ Chris E. Williford                      Vice President  (Principal                      February 7, 2003
------------------------------              Financial and Accounting Officer)
Chris E. Williford                          and Director of Sandia Oil &
                                            Gas Corporation

/s/ Robert W. Carington                     Vice President and Director                     February 7, 2003
------------------------------              of Sandia Oil & Gas Corporation
Robert W. Carington, Jr.
II-11
SIGNATURES

         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.

                                      SANDIA OPERATING CORP.

                                      By: /s/ Robert L.G. Watson
                                         -----------------------
                                         President

                                     II-12
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Sandia Operating Corp.

/s/ Chris E. Williford                      Vice President (Principal Financial             February 7, 2003
------------------------------              and Accounting Officer) and
Chris E. Williford                          Director of Sandia Operating Corp.

/s/ Robert W. Carington                     Vice President and Director                     February 7, 2003
------------------------------              of Sandia Operating Corp.
Robert W. Carington, Jr.
II-13
SIGNATURES

     Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.

                                      WAMSUTTER HOLDINGS, INC.

                                      By: /s/ Robert L.G. Watson
                                          -------------------------
                                          President

                                     II-14
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of Wamsutter
Robert L.G. Watson

/s/ Chris E. Williford                      Vice President (Principal Financial and         February 7, 2003
------------------------------              Accounting Officer) and Director
Chris E. Williford                          of Wamsutter

/s/ Robert W. Carington                     Vice President and Director                     February 7, 2003
------------------------------              of Wamsutter
Robert W. Carington, Jr.
II-15
SIGNATURES

         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.

                                      WESTERN ASSOCIATED ENERGY CORPORATION

                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President

                                     II-16
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Western Associated Energy
                                            Corporation

/s/ Chris E. Williford                      Vice President (Principal                       February 7, 2003
------------------------------              Accounting Officer) and
Chris E. Williford                          Director of Western Associated
                                            Energy Corporation

/s/ Robert W. Carington                     Vice President and Director of                  February 7, 2003
------------------------------              Western Associated Energy Corporation
Robert W. Carington, Jr.
II-17
SIGNATURES

     Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.

                                      EASTSIDE COAL COMPANY, INC.

                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President

                                     II-18
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Eastside Coal Company, Inc.

/s/ Chris E. Williford                      Vice President (Principal                       February 7, 2003
------------------------------              Accounting Officer) and
Chris E. Williford                          Director of Eastside Coal
                                            Company, Inc.

/s/ Robert W. Carington                     Vice President and                              February 7, 2003
------------------------------              Director of Eastside Coal
Robert W. Carington, Jr.                    Company, Inc.
II-19
SIGNATURES

         Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, Texas, on February 7, 2003.

                                      GREY WOLF EXPLORATION INC.

                                      By: /s/ Robert L.G. Watson
                                          ----------------------
                                          President

                                     II-20
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature                                   Name and Title                                  Date
---------                                   --------------                                  ----
/s/ Robert L.G. Watson                      President (Principal Executive                  February 7, 2003
------------------------------              Officer) and Director of
Robert L.G. Watson                          Grey Wolf Exploration Inc.

/s/ Chris E. Williford                      Vice President (Principal                       February 7, 2003
------------------------------              Financial and Accounting
Chris E. Williford                          Officer) of Grey Wolf
                                            Exploration Inc.

/s/ Vince Tkachick                          Vice President/COO and Director                 February 7, 2003
------------------------------              of Grey Wolf Exploration Inc.
Vince Tkachick
II-21
EXHIBIT INDEX
Exhibit                                                                          Page
Number:     Exhibit                                                             Number
-------     -------                                                             ------
3.7         Articles of Incorporation of Sandia Operating Corp.

3.9         Articles of Incorporation of Western Associated Energy Corporation

3.10        Articles of Incorporation of Eastside Coal Company, Inc.

3.11        Certificate of Incorporation of Grey Wolf Exploration Inc.

3.13        Amended and Restated By-Laws of Sandia Oil & Gas Corporation

3.14        By-Laws of Sandia Operating Corp.

3.16        By-Laws of Western Associated Energy Corporation

3.17        By-Laws of Eastside Coal Company, Inc.

3.18        By-Laws of Grey Wolf Exploration Inc.

5.1         Opinion of Cox & Smith Incorporated

21.1        Subsidiaries of Abraxas

23.1        Consent of Deloitte & Touche LLP

23.2        Consent of Ernst & Young LLP

23.3        Consent of Deloitte & Touche LLP Chartered Accountants

23.4        Consent of Ernst & Young LLP Chartered Accountants

23.5        Consent of DeGolyer and MacNaughton

23.6        Consent of McDaniel & Associates Consultants, Ltd.

23.7        Consent of Cox & Smith Incorporated (included in Exhibit 5.1)

23.8        Consent of Osler, Hoskin & Harcourt LLP

24.1        Power of Attorney of Craig S. Bartlett, Jr.

24.2        Power of Attorney of Franklin Burke

24.3        Power of Attorney of Frederick M. Pevow, Jr.

24.4        Power of Attorney of James C. Phelps
1
Exhibit                                                                          Page
Number:     Exhibit                                                             Number
-------     -------                                                             ------
24.5     Power of Attorney of Joseph A. Wagda

25.1     Statement of eligibility of trustee for the Indenture
2