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

                                    FORM 10-Q

     (Mark One)

     (X)          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

                       For the Quarter Ended June 30, 2006

     (  )         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 0-19118
                          ABRAXAS PETROLEUM CORPORATION

             (Exact name of Registrant as specified in its charter)


            Nevada                                     74-2584033
 (State or Other Jurisdiction of                   (I.R.S. Employer
  Incorporation or Organization)                 Identification Number)

           500 N. Loop 1604 East, Suite 100, San Antonio, Texas 78232
               (Address of Principal Executive Offices) (Zip Code)


        Registrant's telephone number, including area code (210) 490-4788


                                 Not Applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

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

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

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


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



         The number of shares of the  issuer's  common stock  outstanding  as of
August 7, 2006 was:

              Class                                    Shares Outstanding
              -----                                    ------------------
     Common Stock, $.01 Par Value                          42,638,577










Forward-Looking Information

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

         o     our high debt level;

         o     our  success  in   development,   exploitation   and  exploration
               activities;

         o     our ability to make planned capital expenditures;

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

         o     prices for natural gas and crude oil;

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

         o     economic and business conditions;

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

         o     price and availability of alternative fuels;

         o     our restrictive debt covenants;

         o     our acquisition and divestiture activities;

         o     results of our hedging activities; and

         o     other factors discussed elsewhere in this document.


         In addition to these factors, important factors that could cause actual
results to differ materially from our expectations ("Cautionary Statements") are
disclosed  under "Risk  Factors" in our Annual  Report on Form 10-K for the year
ended  December  31,  2005  which are  incorporated  by  reference  herein.  All
subsequent written and oral  forward-looking  statements  attributable to us, or
persons acting on our behalf,  are expressly  qualified in their entirety by the
Cautionary Statements.



                                       2






                          ABRAXAS PETROLEUM CORPORATION
                                   FORM 10 - Q
                                      INDEX


                                     PART I
                              FINANCIAL INFORMATION



                                                                                           
ITEM 1 -      Financial Statements (Unaudited)
                  Condensed Consolidated Balance Sheets -
                           June 30, 2006 and December 31, 2005..................................4
                  Condensed Consolidated Statements of Operations -
                           Three and Six Months Ended June 30, 2006 and 2005....................6
                  Condensed Consolidated Statements of Cash Flows -
                           Six Months Ended June 30, 2006 and 2005..............................7
                  Notes to Condensed Consolidated Financial Statements..........................8

ITEM 2 -      Management's Discussion and Analysis of Financial Condition and
                           Results of Operations...............................................13

ITEM 3 -      Quantitative and Qualitative Disclosure about Market Risks.......................26

ITEM 4 -      Controls and Procedures..........................................................26

                                     PART II
                                OTHER INFORMATION

ITEM 1  - Legal Proceedings....................................................................27
ITEM 1a - Risk Factors ........................................................................27
ITEM 2  - Unregistered Sales of Equity Securities and Use of Proceeds..........................27
ITEM 3  - Defaults Upon Senior Securities......................................................27
ITEM 4  - Submission of Matters to a Vote of Security Holders..................................27
ITEM 5  - Other Information....................................................................28
ITEM 6  - Exhibits.............................................................................28
              Signatures.......................................................................29


                                       3



                          Abraxas Petroleum Corporation
                      Condensed Consolidated Balance Sheets
                                 (in thousands)

                                                                       June 30,
                                                                         2006              December 31,
                                                                     (Unaudited)               2005
                                                                 -------------------    -------------------
                                                                                   
Assets:
Current assets:
   Cash ........................................................  $            52        $              42
   Accounts receivable, net
          Joint owners..........................................              692                     540
          Oil and gas production................................            6,700                   7,957
          Other.................................................               40                     100
                                                                  -------------------    -------------------
                                                                            7,432                   8,597
  Other current assets..........................................            1,868                   1,638
                                                                  -------------------    -------------------
       Total current assets.....................................            9,352                  10,277

Property and equipment:
  Oil and gas properties, full cost method of accounting:
      Proved....................................................          351,816                 333,373
   Other property and equipment.................................            3,395                   3,289
                                                                  -------------------    -------------------
           Total................................................          355,211                 336,662
      Less accumulated depreciation, depletion, and
        amortization............................................          238,550                 231,414
                                                                  -------------------    -------------------
      Total property and equipment - net........................          116,661                 105,248

Deferred financing fees, net ...................................            5,242                   6,037
Other assets  ..................................................              304                     304
                                                                  -------------------    -------------------
  Total assets..................................................  $       131,559        $        121,866
                                                                  ===================    ===================





      See accompanying notes to condensed consolidated financial statements


                                       4




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

                                                                       June 30,
                                                                         2006                December 31,
                                                                      (Unaudited)                2005
                                                                  --------------------    --------------------
                                                                                    
Liabilities and Stockholders' Deficit
Current liabilities:
  Accounts payable..............................................  $           9,791       $           9,814
  Oil and gas production payable................................              2,555                   3,481
  Accrued interest..............................................              1,426                   1,368
  Other accrued expenses........................................              1,059                     494
                                                                  --------------------    --------------------
    Total current liabilities...................................             14,831                  15,157

Long-term debt..................................................            136,633                 129,527

Future site restoration.........................................                953                     883
                                                                  --------------------    --------------------
         Total liabilities......................................            152,417                 145,567

Stockholders' deficit:
  Common Stock, par value $.01 per share-
  Authorized 200,000,000 shares; issued, 42,631,577 and
   42,063,167 ..................................................                427                     421
   Additional paid-in capital...................................            163,599                 162,795
  Accumulated deficit...........................................           (185,987)               (188,193)
  Treasury stock, at cost, 35,562 and 56,477 shares ............               (285)                   (408)
  Accumulated other comprehensive income........................              1,388                   1,684
                                                                  --------------------    --------------------
      Total stockholders' deficit...............................            (20,858)                (23,701)
                                                                  --------------------    --------------------
Total liabilities and stockholders' deficit.....................  $         131,559       $         121,866
                                                                  ====================    ====================






      See accompanying notes to condensed consolidated financial statements



                                       5





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

                                                          Three Months Ended June 30,             Six Months Ended June 30,
                                                      ------------------------------------- ---------------------------------------
                                                             2006              2005 (1)            2006               2005 (1)
                                                      ------------------  ----------------- ------------------  -------------------
                                                                                                       
Revenue:
   Oil and gas production revenues ...................   $      12,869       $       9,336     $     25,795        $     16,861
   Rig revenues ......................................             429                 283              805                 579
   Other  ............................................               6                   8                9                   9
                                                      ------------------  ----------------- ------------------  -------------------
                                                                13,304               9,627           26,609              17,449
Operating costs and expenses:
   Lease operating and production taxes ..............           2,716               2,522            5,538               4,800
   Depreciation, depletion, and amortization .........           3,737               1,817            7,136               3,515
   Rig operations ....................................             219                 166              430                 384
   General and administrative (including stock based
     compensation of $ 199, $16, $370, and $41).......           1,136               1,114            2,422               2,085
                                                      ------------------  ----------------- ------------------  -------------------
                                                                 7,808               5,619           15,526              10,784
                                                      ------------------  ----------------- ------------------  -------------------
Operating income .....................................           5,496               4,008           11,083               6,665

Other (income) expense:
   Interest income ...................................               -                   -               (1)                 (1)
   Interest expense ..................................           4,115               3,407            8,086               6,541
   Amortization of deferred financing fee ............             398                 403              795                 854
   Other..............................................               -                 235                -                 244
                                                      ------------------  ----------------- ------------------  -------------------
                                                                  4,513               4,045            8,880               7,638
                                                      ------------------  ----------------- ------------------  -------------------
Earnings (loss) from continuing operations ........                983                 (37)           2,203                (973)

Net income from discontinued operations (net of
   $6,060 income tax expense in 2005)..............                  -                 (27)               -              12,894
                                                      ------------------  ----------------- ------------------  -------------------
Net earnings (loss)................................      $         983       $         (64)    $      2,203        $     11,921
                                                      ==================  ================= ==================  ===================

Basic earnings (loss) per common share:
   Net earnings (loss) per common from continuing
     operations....................................      $        0.02       $        -        $       0.05       $       (0.03)
   Discontinued operations.........................                  -                -                   -                0.35
                                                      ------------------  ----------------- ------------------  -------------------
Net earnings (loss) per common share - basic.......      $        0.02       $        -        $       0.05       $        0.32
                                                      ==================  ================= ==================  ===================

Diluted earnings (loss) per common share:
   Net earnings (loss) per common from continuing
     operations....................................      $        0.02       $        -        $       0.05       $       (0.03)
   Discontinued operations.........................                  -                -                   -                0.35
                                                      ------------------  ----------------- ------------------  -------------------
Net earnings (loss) per common share - diluted.....      $        0.02       $        -                0.05       $        0.32
                                                      ==================  ================= ==================  ===================


1. Reflects retrospective adoption of SFAS 123R

      See accompanying notes to condensed consolidated financial statements


                                       6





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

                                                                                              Six Months Ended
                                                                                                  June 30,
                                                                                  -----------------------------------------
                                                                                           2006                  2005
                                                                                  ----------------------  -----------------
                                                                                                    
Operating Activities
Net earnings ..................................................................      $          2,203     $         11,921
Income from discontinued operations............................................                     --              12,894
                                                                                  ----------------------  -----------------
Loss from continuing operations................................................                 2,203                (973)
Adjustments to reconcile net income to net
   cash provided by operating activities:
Depreciation, depletion, and amortization......................................                 7,136               3,515
Amortization of deferred financing fees........................................                   795                 854
Accretion of future sit restoration............................................                    49                  45
Stock-based compensation.......................................................                   370                  41
Changes in operating assets and liabilities:
   Accounts receivable.........................................................                 1,165               1,209
   Other ......................................................................                  (526)              2,001
   Accounts payable and accrued expenses.......................................                  (305)                154
                                                                                  ----------------------  -----------------
Net cash provided by continuing operations.....................................                10,887               6,846
Net cash used by discontinued operations.......................................                     -              (4,132)
                                                                                  ----------------------  -----------------
Net cash provided by operations................................................                10,887               2,714

Investing Activities
Capital expenditures, including purchases and development of properties........               (18,549)            (17,440)
Unrealized gain on investment..................................................                     -                 966
                                                                                  ----------------------  -----------------
Net cash used in continuing operations.........................................               (18,549)            (16,474)
Net cash provided by discontinued operations...................................                     -              25,719
                                                                                  ----------------------  -----------------
Net cash provided by (used in) investing activities............................               (18,549)              9,245

Financing Activities
Proceeds from long-term borrowings.............................................                12,906              11,823
Payments on long-term borrowings...............................................                (5,800)             (1,971)
Issuance of stock for compensation.............................................                   116                 102
Deferred financing fees........................................................                     -                 (48)
Exercise of stock options......................................................                   450                 258
                                                                                  ----------------------  -----------------
Net cash provided by continuing operations.....................................                 7,672              10,164
Net cash used in discontinued operations.......................................                     -             (23,407)
                                                                                  ----------------------  -----------------
Net cash (used in) provided by financing activities............................                 7,672             (13,243)
                                                                                  ----------------------  -----------------
Increase (decrease) in cash....................................................                    10              (1,284)
Cash, at beginning of period...................................................                    42               1,284
                                                                                  ----------------------  -----------------
Cash, at end of period.........................................................   $                52       $           -
                                                                                  ======================  =================

Supplemental disclosure of cash flow information:
Interest paid..................................................................   $             7,977       $       7,290
                                                                                  ======================  =================
Non-cash items:
Future site restoration........................................................   $                20       $          19
                                                                                  ======================  =================


      See accompanying notes to condensed consolidated financial statements


                                       7


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

Note 1. Basis of Presentation

    The accounting  policies followed by Abraxas  Petroleum  Corporation and its
subsidiaries  (the  "Company"  or  "Abraxas")  are set forth in the notes to the
Company's audited  financial  statements in the Annual Report on Form 10-K filed
for the year ended December 31, 2005. 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 Company's  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 six months ended
June 30, 2006 are not  necessarily  indicative of results to be expected for the
full year.

    The consolidated  financial  statements  include the accounts of the Company
and its then wholly-owned foreign subsidiary,  Grey Wolf Exploration Inc. ("Grey
Wolf") for the 2005  period.  On  February  28, 2005 Grey Wolf closed an initial
public offering,  resulting in our substantial  divestiture of our capital stock
and  operations  in Grey Wolf.  As a result of the  disposal  of Grey Wolf,  the
results of  operations  of Grey Wolf through  February 28, 2005 are reflected in
our Financial Statements as discontinued operations.

         Stock-based Compensation.

     In December  2004,  the FASB issued SFAS No. 123R,  "Share-Based  Payment".
SFAS No.  123R is a  revision  of SFAS No.  123,  "Accounting  for  Stock  Based
Compensation",  and supersedes APB 25. Among other items,  SFAS 123R  eliminates
the use of APB 25 and the  intrinsic  value method of  accounting,  and requires
companies to recognize  the cost of employee  services  received in exchange for
awards  of equity  instruments,  based on the  grant  date  fair  value of those
awards, in the financial statements.

     The  Company  adopted  SFAS 123R in the  fourth  quarter  of 2005 using the
"modified  retrospective  method."  Under the  "modified  retrospective"  method
entities are permitted to restate financial statements of previous periods based
on proforma disclosures made in accordance with SFAS 123. This standard requires
the cost of all share-based payments, including stock options, to be measured at
fair value on the grant date and recognized in the statement of  operations.  In
accordance  with  this  standard,  all  periods  prior to  January  1, 2005 were
restated  to reflect  the impact of the  standard  as if it had been  adopted on
January 1, 1995, the original  effective date of SFAS No. 123,  "Accounting  for
Stock-Based  Compensation".  Also in accordance  with the standard,  the amounts
that are reported in the  statement of operations  for the restated  periods are
the pro forma amounts previously disclosed under SFAS No. 123.


     The Company  currently  utilizes a standard  option  pricing  model  (i.e.,
Black-Scholes)  to measure the fair value of stock options granted to employees.
While SFAS 123R permits  entities to continue to use such a model,  the standard
also permits the use of a more complex binomial,  or "lattice" model. Based upon
research done by the Company on the alternative models available to value option
grants, and in conjunction with the type and number of stock options expected to
be issued in the future, the Company has determined that it will continue to use
the Black-Scholes model for option valuation as of the current time.

     SFAS 123R includes  several  modifications to the way that income taxes are
recorded in the  financial  statements.  The expense for certain types of option
grants is only  deductible  for tax purposes at the time that the taxable  event
takes place, which could cause variability in the Company's  effective tax rates
recorded  throughout the year.  SFAS 123R does not allow  companies to "predict"
when these  taxable  events will take place.  Furthermore,  it requires that the
benefits associated with the tax deductions in excess of recognized compensation
cost be reported as a financing cash flow, rather than as an operating cash flow
as required under current literature. This requirement will reduce net operating
cash flows and increase net financing  cash flows in periods after the effective
date.  These future amounts  cannot be estimated,  because they depend on, among
other things, when employees exercise stock options.

                                       8


     The following  table  summarizes  the stock option  activities  for the six
months ended June 30, 2006 (in thousands except per share data):




                                                             Weighted            Weighted
                                                              Average             Average
                                                               Option              Grant
                                                              Exercise            Date Fair        Aggregate
                                                              Price Per           Value Per        Intrinsic
                                             Shares             Share               Share            Value
                                         ----------------    --------------     --------------   --------------
                                                                                     
Outstanding December 31, 2005.......            3,016        $     1.75         $      1.27      $     3,837

Granted.............................              188        $     5.32         $      3.82              718

Exercised...........................             (568)       $     0.79         $      0.45             (255)

Expired or canceled.................               (1)       $     6.05         $      4.35               (4)
                                         ----------------                                        --------------

Outstanding June 30, 2006...........            2,635        $     2.21         $      1.64      $    4,296
                                         ================                                        ==============


     The  following  table shows the weighted  average  assumptions  used in the
Black Scholes valuation of the fair value of option grants during 2006.

Expected dividend yield......................................             0%

Volatility...................................................           .884

Risk free interest rate......................................          4.81%

Expected life................................................           5.09

Fair value of options granted (in thousands).................     $      718

Weighted average grant date fair value of options granted....     $     3.82

     Additional information related to options at June 30, 2006 and December 31,
2005 is as follows:

                                      June 30,               December 31,
                                        2006                     2005
                                  ----------------------    --------------------
Options exercisable....                1,808,088                 2,224,998
                                  ======================    ====================

     As of June 30,  2006 there is  approximately  $2.4  million of  unamortized
compensation  expense  related to  outstanding  options that will be  recognized
through the period ended June 30, 2010.


Note 2. Discontinued operations

     On February  28,  2005,  Grey Wolf  completed  an IPO  resulting in Abraxas
substantially divesting itself of its investment in Grey Wolf.

     The operations of Grey Wolf, previously reported as a business segment, are
reported  as   discontinued   operations  for  all  periods   presented  in  the
accompanying  financial  statements  and the  operating  results  are  reflected
separately from the results of continuing operations.

     Income  from  discontinued  operations  for the period  ended June 30, 2005
includes a gain on the  disposal of Grey Wolf of $21.8  million,  less  non-cash
income  tax  of  $6.1  million,  and a  loss  from  operations,  including  debt
retirement costs, of $2.8 million.

Note 3. Income Taxes

     The Company  records  income taxes using the liability  method.  Under this
method,  deferred tax assets and liabilities are determined based on differences
between  financial  reporting  and tax basis of assets and  liabilities  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences are expected to reverse.

                                       9


     For the period ended June 30, 2006,  there is no current or deferred income
tax expense or benefit due to losses and/or loss  carryforwards  and a valuation
allowance which has been recorded against such benefits.

Note 4. Long-Term Debt

         Long-term debt consisted of the following:


                                                                              June 30,        December 31,
                                                                           -----------------------------------
                                                                                2006               2005
                                                                           ----------------  -----------------
                                                                                          
Floating rate senior secured notes due 2009............................      $    125,000       $   125,000
Senior secured revolving credit facility...............................            11,633             4,527
                                                                           ----------------  -----------------
                                                                                  136,633           129,527
Less current maturities ...............................................                 -                 -
                                                                           ----------------  -----------------
                                                                              $    136,633      $   129,527
                                                                           ================  =================


     Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in aggregate principal
amount of floating rate senior  secured notes due 2009. The notes will mature on
December 1, 2009.  Interest is payable at a per annum floating rate of six-month
LIBOR plus 7.50%.  The  interest  rate was 12.82% per annum as of June 30, 2006.
The interest rate is reset semi-annually on each June 1 and December 1. Interest
is payable semi-annually in arrears on June 1 and December 1 of each year.

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

     Outstanding  amounts under the revolving  credit  facility bear interest at
the prime rate announced by Wells Fargo Bank,  National  Association plus 1.00%.
The interest rate was 9.25% per annum as of June 30, 2006.

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

Note 5. Earnings Per Share

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



                                                       Three Months Ended June 30,         Six Months Ended June 30,
                                                     -------------------------------    -------------------------------
                                                         2006              2005             2006              2005
                                                     -------------     -------------    --------------    -------------
                                                                                             
Numerator:
  Net income (loss) before effect of
     discontinued operations....................  $           983    $         (37)    $       2,203     $       (973)
  Discontinued operations.......................               -               (27)               -            12,894
                                                      -------------     -------------    --------------    -------------
Net earnings (loss) available to common
     stockholders...............................  $           983     $        (64)    $       2,203     $     11,921
                                                      =============     =============    ==============    =============
Denominator:
  Denominator for basic earnings per share -
    Weighted-average shares.....................       42,568,822        37,821,152       42,523,816        37,215,732

  Effect of dilutive securities:
    Stock options and warrants                          1,504,071                 -        1,595,248                 -
                                                     -------------     -------------    --------------    -------------

  Dilutive potential common shares Denominator for
    diluted earnings per share -
    adjusted weighted-average shares and assumed
    Conversions.................................       44,072,893        37,821,152       44,119,064        37,215,732

  Basic earnings (loss) per share:
    Net income (loss) from continuing
     operations ................................  $          0.02     $           -    $        0.05     $       (0.03)
    Discontinued operations.....................               -                  -                -              0.35
                                                     -------------     -------------    --------------    -------------
Net earnings (loss) per common share - basic....  $          0.02     $           -    $        0.05     $        0.32
                                                     =============     =============    ==============    =============

                                       10




  Diluted earnings (loss) per share:
    Net income (loss) from continuing
     operations ................................  $          0.02     $           -    $        0.05     $       (0.03)
    Discontinued operations.....................               -                  -                -              0.35
                                                     -------------     -------------    --------------    -------------
Net earnings (loss) per common share - basic....  $          0.02     $           -    $        0.05     $        0.32
                                                     =============     =============    ==============    =============


     For the three  months ended June 30, 2005 and the six months ended June 30,
2005,  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 from continuing  operations incurred in the periods. Had there not
been losses from continuing  operations in these periods,  dilutive shares would
have  been  1,613,758  shares  for the  three  months  ended  June 30,  2005 and
1,579,067 shares for the six months ended June 30, 2005.

Note 6. Hedging Program and Derivatives

     On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments  and  Hedging   Activities"  (SFAS  133)  as  amended  by  SFAS  137
"Accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective  Date of FASB 133" and SFAS 138  "Accounting  for  Certain  Derivative
Instruments  and Certain  Hedging  Activities".  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. As of June 30, 2006, the derivatives  that the
Company had in place were not designated as hedges and, accordingly,  changes in
the fair value of the  derivatives  are  recorded in current  period oil and gas
revenue.

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

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



           Time Period                         Notional Quantities                      Price
---------------------------------- -------------------------------------------- ----------------------
                                                                          
September 2006                     10,000 MMbtu of production per day           Floor of $5.00
October 2006                       10,000 MMbtu of production per day           Floor of $5.00
November 2006                      10,000 MMbtu of production per day           Floor of $6.00
December 2006                      10,000 MMbtu of production per day           Floor of $5.50
January 2007                       10,000 MMbtu of production per day           Floor of $5.50
February 2007                      10,000 MMbtu of production per day           Floor of $5.50


Note 7. Contingencies - Litigation

     From time to time, the Company is involved in litigation relating to claims
arising out of its  operations  in the normal  course of  business.  At June 30,
2006,  the Company was not engaged in any legal  proceedings  that are expected,
individually  or in the  aggregate,  to have a  material  adverse  effect on its
operations.

Note 8. 2005 Employee  Long-Term Equity Incentive Plan.

     General.  On  September  13, 2005,  subject to  stockholder  approval,  the
Abraxas  Board of  Directors  adopted the  Abraxas  Petroleum  Corporation  2005
Employee  Long-Term Equity  Incentive Plan (the "2005 Employee Plan").  The 2005
Employee Plan was approved by the  stockholders at the Company's  annual meeting
on May 25, 2006.

     Purpose.  The  purpose  of the 2005  Employee  Plan is to employ and retain
qualified and competent  personnel and promote the growth and success of Abraxas
by aligning the  long-term  interests of Abraxas'  key  employees  with those of
Abraxas'  stockholders  by  providing an  opportunity  to acquire an interest in
Abraxas and by providing both rewards for exceptional  performance and long-term
incentives for future contributions to the success of Abraxas.

     Administration and Eligibility. The 2005 Employee Plan will be administered
by the Compensation Committee of the Board of Directors and authorizes the Board
to  grant  non-qualified  stock  options,   incentive  stock  options  or  issue
restricted stock to those persons who are employees of Abraxas.

                                       11


     Shares  Reserved and Awards.  The 2005  Employee  Plan  reserves  1,200,000
shares of Abraxas common stock,  subject to adjustment following certain events,
as  discussed  below.  The maximum  annual award for any one employee is 200,000
shares of Abraxas common stock. If options,  as opposed to restricted stock, are
awarded,  the exercise share price shall be no less than 100% of the fair market
value on the date of the award,  unless the employee is awarded  incentive stock
options and at the time of the award,  owns more than 10% of the voting power of
all classes of stock of Abraxas.  Under this  circumstance,  the exercise  share
price  shall be no less  than 110% of the fair  market  value on the date of the
award.  Option  terms  and  vesting  schedules  are  at  the  discretion  of the
Compensation Committee.

Note 9. Recent Accounting Pronouncements.

     In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes, an  interpretation  of FASB Statement No. 109." FIN 48 requires an entity
to  evaluate  its tax  positions  following a two-step  process.  The first step
requires an entity to determine  whether it is  more-likely-than-not  that a tax
position will be sustained  based on the technical  merits of the position.  The
second step requires an entity to recognize in the financial statements each tax
position that meets the  more-likely-than-not  criterion.  Each  recognized  tax
position  should be measured at the largest amount of benefit that has a greater
than 50 percent  likelihood of being realized.  FIN 48 also provides guidance on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods, disclosure and transition.

     FIN 48 is effective for fiscal years beginning after December 15, 2006. The
impact of initially applying FIN 48 is required to be recognized as a cumulative
effect  adjustment to the opening  balance of retained  earnings for that fiscal
year.  The Company is currently  unable to determine the impact of applying this
guidance if any.


                                       12



                          ABRAXAS PETROLEUM CORPORATION

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

     Prior to February  2005,  Grey Wolf  Exploration  Inc.  was a  wholly-owned
Canadian  subsidiary of Abraxas.  In February 2005, Grey Wolf, closed an initial
public  offering  resulting in the  divestiture  of a substantial  amount of our
capital stock in Grey Wolf. As a result of the Grey Wolf IPO and the significant
divestiture of our interest in Grey Wolf, the results of operations of Grey Wolf
are reflected in our Financial  Statements and in this document as "Discontinued
Operations"  and our  remaining  operations  are  referred  to in our  Financial
Statements  and in  this  document  as  "Continuing  Operations"  or  "Continued
Operations".   Unless  otherwise  noted,  all  disclosures  are  for  continuing
operations.

     The  following  is a  discussion  of our  financial  condition,  results of
operations,  liquidity and capital resources.  This discussion should be read in
conjunction  with our consolidated  financial  statements and the notes thereto,
included in our Annual Report on Form 10-K filed for the year ended December 31,
2005.

Critical Accounting Policies

     There have been no changes from the Critical  Accounting  Polices described
in our Annual Report on Form 10-K for the year ended December 31, 2005.

General

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

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

     o   the sales prices of natural gas and crude oil;

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

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

     o   the level of and interest rates on borrowings; and

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

     Commodity  Prices and Hedging  Activities.  Our results of  operations  are
significantly  affected by fluctuations in commodity prices. Price volatility in
the natural gas market has remained  prevalent in the last few years.  Beginning
in March 2002,  commodity  prices began to increase and continued higher through
December 2005. Crude oil prices have continued to remain strong during the first
six months of 2006 compared to  historical  levels,  however  natural gas prices
have weakened significantly from levels during the latter part of 2005 and first
quarter of 2006.  If natural gas prices  continue to weaken,  our cash flow from
operations will be adversely affected.

     The table below illustrates how natural gas prices have fluctuated over the
eight  quarters  prior to and  including  the  quarter  ended June 30,  2006 and
contains the average of the last three days of NYMEX traded  contracts price for
each  contract  month in the  quarter  and the prices we  realized  during  each
quarter presented, including the impact of our hedging activities.



                                       13



                  Natural Gas Prices by Quarter (in $ per Mcf)
                                  Quarter Ended
             ----------------------------------------------------------------------------------------------------------------
             Sept. 30,      Dec. 31,        Mar. 31,      June 30,      Sept. 30,      Dec. 31,      Mar. 31,      June 30,
               2004           2004           2005           2005           2005          2005          2006          2006
             ----------     ----------    -----------    ----------     ----------    ----------    ----------    -----------
                                                                                           
Index         $ 5.85          $ 6.77        $ 6.30         $ 6.80        $ 8.21        $ 12.85       $ 9.18        $ 6.89
Realized      $ 5.24          $ 6.14        $ 5.26         $ 6.33        $ 8.15        $  9.12       $ 6.52        $ 5.78


      The NYMEX natural gas price on August 7, 2006 was $6.91 per Mcf.

     The table below  illustrates  how crude oil prices have fluctuated over the
eight  quarters  prior to and  including  the  quarter  ended June 30,  2006 and
contains the average of the last three days of NYMEX traded  contracts price for
each contract month in the quarter  presented and the prices we realized  during
each quarter presented, including the impact of our hedging activities.



                   Crude Oil Prices by Quarter (in $ per Bbl)
                                  Quarter Ended
             ----------------------------------------------------------------------------------------------------------------
             Sept. 30,      Dec. 31,        Mar. 31,      June 30,      Sept. 30,      Dec. 31,      Mar. 31,      June 30,
               2004           2004           2005           2005           2005          2005          2006          2006
             ----------     ----------    -----------    ----------     ----------    ----------    ----------    -----------
                                                                                           
Index        $ 42.32        $ 49.46        $ 47.33        $ 51.76        $ 60.26       $ 61.51       $ 61.53       $ 67.38
Realized     $ 42.43        $ 46.81        $ 47.13        $ 49.43        $ 60.24       $ 57.18       $ 59.57       $ 66.09



     The NYMEX crude oil price on August 7, 2006 was $76.98 per Bbl.

     We seek to reduce our exposure to price  volatility by hedging a portion of
our production through price floors.

     Under  the terms of our  revolving  credit  facility,  we are  required  to
maintain  hedging  positions with respect to not less than 25% nor more than 75%
of our crude oil and natural  gas  production,  on an  equivalent  basis,  for a
rolling six-month period. We currently have the following hedges in place:



           Time Period                         Notional Quantities                      Price
---------------------------------- -------------------------------------------- ----------------------
                                                                          
September 2006                     10,000 MMbtu of production per day           Floor of $5.00
October 2006                       10,000 MMbtu of production per day           Floor of $5.00
November 2006                      10,000 MMbtu of production per day           Floor of $6.00
December 2006                      10,000 MMbtu of production per day           Floor of $5.50
January 2007                       10,000 MMbtu of production per day           Floor of $5.50
February 2007                      10,000 MMbtu of production per day           Floor of $5.50


     At June 30,  2006,  the  aggregate  fair  market  value of our  hedges  was
approximately $439,000.

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

     We had  capital  expenditures  of $18.4  million in the first six months of
2006. As a result of the capital spending  limitations  included in our previous
credit  agreement  and our 11 1/2  notes  due  2007  which  were  eliminated  in
connection with our October 2004  refinancing,  we were limited for most of 2004
in our ability to replace existing production and, consequently,  our production
volumes  decreased during 2004 and continued to decrease in the first quarter of
2005.  Beginning in the second quarter of 2005, our production  volumes began to
increase and have continued to increase through the first six months of 2006. If
crude oil and natural gas prices return to depressed levels or if our production
levels decrease, our revenues, cash flow from operations and financial condition
will be materially adversely affected.

                                       14


     Availability  of Capital.  As  described  more fully under  "Liquidity  and
Capital Resources" below, our sources of capital going forward will primarily be
cash from operating  activities,  funding under our revolving  credit  facility,
cash on hand, and if an appropriate  opportunity presents itself,  proceeds from
the  sale of  properties.  We  currently  have  approximately  $2.8  million  of
availability under our revolving credit facility.

     Exploitation,  Exploration  and Development  Activity.  We believe that our
high quality asset base, high degree of operational  control and large inventory
of  drilling  projects  position  us  for  future  growth.  Our  properties  are
concentrated  in locations  that  facilitate  substantial  economies of scale in
drilling and  production  operations  and more  efficient  reservoir  management
practices.  At year end  December  31,  2005 we operated  95% of the  properties
accounting for  approximately  94% of our PV-10,  giving us substantial  control
over the timing  and  incurrence  of  operating  and  capital  expenditures.  In
addition,  we had 53 proved  undeveloped  locations and have identified over 184
drilling and recompletion  opportunities on our existing acreage, the successful
development  of  which  we  believe  could  significantly   increase  our  daily
production  and proved  reserves.  During the first six months of 2006,  we made
capital  expenditures of  approximately  $18.4 million for wells in south Texas,
west Texas and Wyoming.  We are currently  completing  and/or testing  Woodford,
Atoka,  Wolfcamp  and Devonian  wells in west Texas and  continue to  recomplete
various  wells in south  Texas.  On four wells  drilled in Wyoming in late 2005,
testing has been  completed this year and all four wells have gone on production
at a combined initial rate of 80-100 barrels per day. We successfully  completed
one vertical well in south Texas subsequent to June 30, 2006.

     Our future natural gas and crude oil production, and therefore our success,
is highly  dependent  upon our ability to find,  acquire and develop  additional
reserves that are profitable to produce. The rate of production from our natural
gas and crude  oil  properties  and our  proved  reserves  will  decline  as our
reserves are produced unless we acquire additional  properties containing proved
reserves,   conduct   successful   development,   exploitation  and  exploration
activities or, through  engineering  studies,  identify  additional  behind-pipe
zones or secondary recovery reserves. We cannot assure you that our exploration,
exploitation  and development  activities will result in increases in our proved
reserves. In addition,  approximately 52% of our total estimated proved reserves
at December 31, 2005 were undeveloped. By their nature, estimates of undeveloped
reserves are less certain.  Recovery of such  reserves will require  significant
capital expenditures and successful drilling operations.

     Borrowings  and  Interest.  At  August  1,  2006,  we had  indebtedness  of
approximately  $125.0  million  under  the notes  and  $12.2  million  under the
revolving credit facility and  availability of $2.8 million.  Unlike the 11 1/2%
secured  notes due 2007 (which were redeemed in October  2004),  interest on the
notes is payable in cash.

     Outlook for 2006. As a result of final 2005  financial  results and current
market conditions, our operating and financial guidance for 2006 is as follows:

          Production:
             BCFE (approximately 80% gas).......................       7.5 - 8.5
          Exit Rate (Mmcfe/d)...................................       22 - 24
          Price Differentials (Pre Hedge):
             Gas (% Mcf)........................................       15%
             Oil ($/Bbl)........................................       2.00
          Production taxes (% of Revenue).......................       10%
          Direct Lease Operating Expenses ($/ Mcfe).............       1.10
          G&A ($/ Mcfe).........................................       0.55
          Interest ($/Mcfe).....................................       2.00
          DD&A ($/Mcfe).........................................       1.80
          Capital Expenditures ($ Millions).....................       40.0 (1)
          (1) Our  capital  expenditures  are  subject to adequate
          cash flow from  operations  and  availability  under our
          revolving credit facility. For more information,  please
          see    "Liquidity    Capital    Resources    -   Capital
          Expenditures" below.

Results of Operations

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

                                       15



                                                           Three Months Ended                      Six Months Ended
                                                                  June 30,                             June 30,
                                                    ----------------------------------    ------------------------------------
                                                           2006               2005               2006                2005
                                                    ----------------------------------    ------------------------------------
                                                                                                   
Operating Revenue (1):
Crude Oil Sales...................................  $       3,359      $       2,407      $         6,142      $         4,844
Natural Gas Sales ................................          9,510              6,929               19,653               12,017
Rig Operations....................................            429                283                  805                  579
Other.............................................              6                  8                    9                    9
                                                       -----------        ------------       -------------        ------------
                                                    $      13,304      $       9,627      $        26,609      $        17,449
                                                       ===========        ============       =============        ============

Operating Income in thousands.....................  $       5,496      $       4,008      $        11,083      $         6,665
Crude Oil Production (MBbls)......................             51                 49                   98                  100
Natural Gas Production (MMcfs)....................          1,645              1,094                3,201                2,061
Average Crude Oil Sales Price ($/Bbl).............  $       66.09      $       49.43      $         62.97      $         48.25
Average Natural Gas Sales Price ($/Mcf)...........  $        5.78      $        6.33      $          6.14      $          5.83



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

Comparison  of Three  Months  Ended June 30, 2006 to Three Months Ended June 30,
2005

     Operating Revenue.  During the three months ended June 30, 2006,  operating
revenue from natural gas and crude oil sales increased to $12.9 million compared
to $9.3  million in the three months ended June 30, 2005 The increase in revenue
was primarily due to higher  production  volumes as well as increased  crude oil
prices realized during the period. Increased production volumes contributed $3.4
million to revenue while increased crude oil prices contributed $0.2 million for
the quarter ended June 30, 2006. The increase in revenue realized from the price
received  for crude oil during the  quarter  ended June 30,  2006 was  partially
offset by the decline in the natural gas price from the price  realized  for the
quarter ended June 30, 2005.

     Average sales prices,  net of hedging cost,  for the quarter ended June 30,
2006 were:

         o  $ 66.09 per Bbl of crude oil, and
         o  $ 5.78 per Mcf of natural gas

 Average sales prices, net of hedging cost, for the quarter ended June 30, 2005
were:

         o  $ 49.43 per Bbl of crude oil, and
         o  $ 6.33 per Mcf of natural gas

Crude oil production  volumes increased from 48.7 MBbls during the quarter ended
June 30, 2005 to 50.8 MBbls for the same period of 2006.  The  increase in crude
oil production volumes was primarily due to production from new wells in Wyoming
which was partially  offset by natural field  declines.  Natural gas  production
volumes  increased  from 1,094 MMcf for the three  months ended June 30, 2005 to
1,645 MMcf for the same period of 2006.  The increase in natural gas  production
was primarily due to new production  brought on line since the second quarter of
2005. New production  contributed  629.7 MMcf during the second quarter of 2006.
The increase in production  attributable  to new wells was  partially  offset by
natural field declines.  A single well in west Texas  contributed  574.0 MMcf of
the new production for the quarter.

     Lease Operating  Expenses ("LOE").  LOE for the three months ended June 30,
2006  increased  to $2.7  million from $2.5 million for the same period in 2005.
The increase in LOE was primarily due to higher production taxes associated with
increased  production  volumes and higher crude oil prices for the quarter ended
June 30,  2006 as  compared  to the  same  period  of 2005 as well as a  general
increase in the cost of field services and the amount of services required by us
as we increased our drilling  activity during 2006 as compared to 2005. LOE on a
per Mcfe  basis  for the three  months  ended  June 30,  2006 was $1.39 per Mcfe
compared  to $1.82 for the same  period  of 2005.  The  decline  in the per Mcfe
amount was due to higher production volumes during the second quarter of 2006 as
compared to the same period of 2005.

     General  and  Administrative   Expenses  ("G&A").  G&A  expenses  excluding
stock-based  compensation  decreased  slightly to $938,000 for the quarter ended
June 30, 2006 from $1.1  million  for the same period of 2005.  G&A expense on a
per Mcfe basis was $0.48 for the second  quarter of 2006  compared  to $0.79 for
the same period of 2005.  G&A expense  for the second  quarter of 2005  included
performance bonuses for the year ended December 31, 2004, which were paid during


                                       16


the second quarter of 2005.  Performance bonuses for the year ended December 31,
2005 were accrued at year end and  accordingly  not reflected in G&A expense for
the  second  quarter  of 2006 when they were  paid.  The per Mcfe  decrease  was
attributable  to lower G&A expense as well as higher  production  volumes during
the second quarter of 2006 as compared to the same period of 2005.

     Stock-based Compensation.  In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payment".  SFAS No. 123R is a revision of SFAS No. 123, "Accounting
for Stock Based  Compensation",  and supersedes APB 25. Among other items,  SFAS
123R  eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires  companies to recognize the cost of employee  services  received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements.

     The  Company  adopted  SFAS 123R in the  fourth  quarter  of 2005 using the
"modified  retrospective  method."  Under the "modified  retrospective"  method,
entities are permitted to restate financial statements of previous periods based
on proforma disclosures made in accordance with SFAS 123. This standard requires
the cost of all share-based payments, including stock options, to be measured at
fair value on the grant date and recognized in the statement of  operations.  In
accordance  with  this  standard,  all  periods  prior to  January  1, 2005 were
restated  to reflect  the impact of the  standard  as if it had been  adopted on
January 1, 1995, the original  effective date of SFAS No. 123,  "Accounting  for
Stock-Based  Compensation".  Also in accordance  with the standard,  the amounts
that are reported in the  statement of operations  for the restated  periods are
the pro forma amounts previously disclosed under SFAS No. 123.

     As a result  of the  retrospective  adoption  of SFAS  123R,  the  expenses
previously recognized under the rules of variable accounting were reversed and a
compensation expense measured according to SFAS 123R was recorded.  As a result,
we recognized  stock-based  compensation  expense of $199,000  during the second
quarter of 2006 as a result of the adoption of this  accounting  change compared
to $16,000 in 2005, as adjusted. Stock-based compensation expense is included as
a  component  of G&A  expense  in the  accompanying  financial  statements.  The
increase in stock-based compensation expense for the three months ended June 30,
2006 over the same  period of 2005 was due to new  options  granted  during  the
latter  part of 2005 and the first six  months of 2006 and the  increase  in the
calculated fair value of these grants due to higher option prices as a result of
the increase in the price of our Common stock over previous options.

     We currently utilize a standard option pricing model (i.e.,  Black-Scholes)
to measure the fair value of stock options granted to employees. While SFAS 123R
permits  entities to continue to use such a model, the standard also permits the
use of a more complex binomial,  or "lattice" model. Based upon research done by
us  on  the  alternative  models  available  to  value  option  grants,  and  in
conjunction  with the type and number of stock options  expected to be issued in
the future,  we have determined  that we will continue to use the  Black-Scholes
model for option valuation as of the current time.

     Depreciation,  Depletion and Amortization  Expenses ("DD&A").  DD&A expense
increased  to $3.7  million for the three months ended June 30, 2006 as compared
to $1.8 million for the three  months ended June 30, 2005.  The increase in DD&A
was primarily due to increased  production volumes in the second quarter of 2006
as  compared  to the same  period of 2005 as well as an  increase  in  projected
future  development  cost in 2006 as  compared  to 2005.  Our DD&A on a per Mcfe
basis for the three  months  ended June 30, 2006 was $1.92 per Mcfe  compared to
$1.31 per Mcfe in 2005.

     Interest Expense. Interest expense increased to $4.1 million for the second
quarter  of 2006  compared  to $3.4  million  for the same  period of 2005.  The
increase in interest  expense was due to an increase in our interest rate on our
floating rate senior secured notes and our senior  revolving  credit facility as
well as an increase in the amount borrowed under our revolving credit facility.

     Income taxes. There is no current or deferred income tax expense or benefit
due to losses  or loss  carryforwards  and  valuation  allowance  which has been
recorded against such benefits.

Comparison of Six Months Ended June 30, 2006 to Six Months Ended June 30, 2005

     Operating  Revenue.  During the six months ended June 30,  2006,  operating
revenue from natural  gas,  natural gas liquid and crude oil sales  increased to
$25.8  million  compared to $16.9 million in the six months ended June 30, 2005.
The  increase  in revenue was  primarily  due to higher  natural gas  production
volumes for the six months  ended June 30,  2006  compared to the same period of
2005 as well as an  increase in realized  commodity  prices  received in 2006 as


                                       17


compared to 2005.  Increased  production  volumes  contributed  $6.8  million to
natural gas and crude oil production  revenues while increased  commodity prices
contributed $2.1 million.

    Average sales prices, net of hedging cost, for the six months ended June 30,
2006 were:

          o     $ 62.97 per Bbl of crude oil, and
          o     $   6.14 per Mcf of natural gas

 Average sales prices net, of hedging cost, for the six months ended June 30,
2005 were:

          o     $48.25 per Bbl of crude oil, and
          o     $  5.83 per Mcf of natural gas

Crude oil production volumes decreased from 100.4 MBbls during the six months
ended June 30, 2005 to 97.5 MBbls for the same period of 2006. The decrease in
crude oil production volumes was primarily due to natural field declines.
Natural gas production volumes increased to 3,201 MMcf for the six months ended
June 30, 2006 from 2,061 MMcf for the same period of 2005. The increase in
natural gas production was primarily due to new production brought on line since
the second quarter of 2005. New production contributed 1,320.8 MMcf during the
first six months of 2006. The increase in production attributable to new wells
was partially offset by natural field declines. A single well in west Texas
contributed 1,088.7 of the new production for the six months ended June 30,
2006.

     Lease  Operating  Expenses.  LOE for the six  months  ended  June 30,  2006
increased to $5.5  million  from $4.8  million for the same period in 2005.  The
increase in LOE was primarily due to increased  production  taxes as a result of
higher  commodity  prices  as well as a  general  increase  in the cost of field
services and the amount of services  required by us as we increased our drilling
activity  during 2006 as  compared to 2005.  LOE on a per Mcfe basis for the six
months  ended June 30,  2006 was $1.46  compared to $1.80 for the same period of
2005.  The  decrease  in the  per  Mcfe  cost  was  primarily  due to  increased
production  volumes  for the six months  ended June 30,  2006 as compared to the
same period of 2005.

     General and Administrative  Expenses.  G&A expenses  excluding  stock-based
compensation  expense  increased  slightly  from $2.0  million for the first six
months of 2005 to $2.1 million for the same period of 2006.  The increase in G&A
expense  was  primarily  due  to  increased  cost  relating  to  Sarbanes  Oxley
compliance.  G&A  expense on a per Mcfe basis was $0.54 for the first six months
of 2006 compared to $0.77 for the same period of 2005. The per Mcfe decrease was
attributable  to increased  production  volumes during the six months ended June
30, 2006 as compared to the same period in 2005.

     Stock-based Compensation.  In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payment".  SFAS No. 123R is a revision of SFAS No. 123, "Accounting
for Stock Based  Compensation",  and supersedes APB 25. Among other items,  SFAS
123R  eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires  companies to recognize the cost of employee  services  received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements.

     The  Company  adopted  SFAS 123R in the  fourth  quarter  of 2005 using the
"modified  prospective  method".  Under  the  "modified  retrospective"  method,
entities are permitted to restate financial statements of previous periods based
on proforma disclosures made in accordance with SFAS 123. This standard requires
the cost of all share-based payments, including stock options, to be measured at
fair value on the grant date and recognized in the statement of  operations.  In
accordance  with  this  standard,  all  periods  prior to  January  1, 2005 were
restated  to reflect  the impact of the  standard  as if it had been  adopted on
January 1, 1995, the original  effective date of SFAS No. 123,  "Accounting  for
Stock-Based  Compensation".  Also in accordance  with the standard,  the amounts
that are reported in the  statement of operations  for the restated  periods are
the pro forma amounts previously disclosed under SFAS No. 123.

     As a result  of the  retrospective  adoption  of SFAS  123R,  the  expenses
previously recognized under the rules of variable accounting were reversed and a
compensation expense measured according to SFAS 123R was recorded.  As a result,
we recognized stock-based compensation expense of $370,000 during the six months
ended  June 30,  2006 as a result  of the  adoption  of this  accounting  change
compared to $41,000 in 2005, as adjusted.  Stock-based  compensation  expense is
included as a component of G&A expense in the accompanying financial statements.
The increase in stock-based  compensation  expense for the six months ended June
30, 2006 over the same period of 2005 was due to new options  granted during the
latter  part of 2005 and the first six  months of 2006 and the  increase  in the


                                       18


calculated fair value of these grants due to higher option prices as a result of
the increase in the price of our Common stock over previous options.

     We currently utilize a standard option pricing model (i.e.,  Black-Scholes)
to measure the fair value of stock options granted to employees. While SFAS 123R
permits  entities to continue to use such a model, the standard also permits the
use of a more complex binomial,  or "lattice" model. Based upon research done by
us  on  the  alternative  models  available  to  value  option  grants,  and  in
conjunction  with the type and number of stock options  expected to be issued in
the future,  we have determined  that we will continue to use the  Black-Scholes
model for option valuation as of the current time.

     Depreciation,  Depletion and Amortization Expenses.  DD&A expense increased
to $7.1 million for the six months ended June 30, 2006 from $3.5 million for the
same  period  of 2005.  The  increase  in DD&A was  primarily  due to  increased
production  volumes in the first half of 2006 as  compared to the same period of
2005 as well as an  increase in  projected  future  development  cost in 2006 as
compared to 2005. Our DD&A on a per Mcfe basis for the six months ended June 30,
2006 was $1.88 per Mcfe compared to $1.32 per Mcfe in 2005.

     Interest Expense.  Interest expense increased to $8.1 million for the first
six months of 2006  compared to $6.5  million  for the same period of 2005.  The
increase in interest  expense was due to an increase in our interest rate on our
floating  rate senior  secured  notes and our senior  secured  revolving  credit
facility  as well as an  increase  in the amount  borrowed  under our  revolving
credit facility.

     Income taxes. There is no current or deferred income tax expense or benefit
due to losses  or loss  carryforwards  and  valuation  allowance  which has been
recorded against such benefits.

Liquidity and Capital Resources

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

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

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

         o  production and transportation facilities.

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

     Our sources of capital going forward will  primarily be cash from operating
activities, funding under our revolving credit facility, cash on hand, and if an
appropriate  opportunity presents itself,  proceeds from the sale of properties.
However,  under the terms of the notes, proceeds of optional sales of our assets
that are not timely  reinvested  in new natural gas and crude oil assets will be
required to be used to reduce  indebtedness and proceeds of mandatory sales must
be used to repay or redeem indebtedness.

     Working Capital (Deficit).  At June 30, 2006, we had current assets of $9.4
million and current  liabilities of $14.8 million resulting in a working capital
deficit of  approximately  $5.4  million.  This  compares  to a working  capital
deficit of $4.9 million at December 31, 2005.  Current  liabilities  at June 30,
2006 consisted of trade payables of $9.8 million,  revenues due third parties of
$2.6 million,  accrued interest of $1.4 million and other accrued liabilities of
$1.0 million.

     Capital  expenditures.  The table  below sets forth the  components  of our
capital  expenditures  on a  historical  basis for the six months ended June 30,
2006 and 2005.

                                                     Six Months Ended
                                                         June 30,
                                            ------------------------------------
                                               2006                  2005
                                            -------------       ----------------
Expenditure category (in thousands):
  Development............................ $      18,443       $         17,326
  Facilities and other...................           106                    114
                                            ---------------       --------------
      Total.............................. $      18,549       $         17,440
                                            ===============       ==============

                                       19



     We have no material long-term capital commitments and are consequently able
to adjust the level of our expenditures as circumstances  dictate.  The level of
capital  expenditures  will  vary  during  future  periods  depending  on market
conditions and other related economic factors.

     At the start of 2006, we anticipated making capital expenditures, primarily
for the development of our current  properties,  of approximately  $40.0 million
which was based upon the anticipated amount of our cash flow from operations and
availability  under our revolving  credit  facility.  As natural gas prices have
decreased during the first six months of 2006, our cash flow from operations has
not  reached  the levels  that we had  anticipated.  If  availability  under our
revolving  credit  facility  and cash  flow from  operations  do not prove to be
sufficient to allow us to make all of our anticipated capital  expenditures,  we
could  fund  our  capital   expenditures  by  selling  producing  properties  if
appropriate opportunities present themselves or we could issue additional shares
of equity  securities  although we may not be able to complete equity financings
on terms acceptable to us, if at all. Due to these uncertainties we may elect to
spend less than the original budget of $40.0 million. Our ability to make all of
our  budgeted  capital  expenditures  will also be  subject to  availability  of
drilling rigs and other field equipment and services.  Our capital  expenditures
could also include  expenditures for acquisition of producing properties if such
opportunities  arise,  but we  currently  have no  agreements,  arrangements  or
undertakings regarding any material  acquisitions.  Should the prices of natural
gas  continue to  decline,  crude oil prices  begin to decline,  if our costs of
operations  increase  as a result of the  scarcity  of  drilling  rigs or if our
production  volumes decrease,  our cash flow from operations will decrease which
may result in a reduction of the capital expenditures budget. If we decrease our
capital  expenditures budget, we may not be able to offset natural gas and crude
oil production  volume  decreases  caused by natural field declines and sales of
producing properties, if any.


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

                                                       Six Months Ended
                                                          June 30,
                                                -----------------------------
                                                     2006           2005
                                                -----------------------------
                                                     (dollars in thousands)
                                                -------------- --------------
Net cash provided by operating activities     $    10,887      $    6,846
Net cash used in investing activities             (18,549)        (16,474)
Net cash provided by financing activities           7,672          10,164
                                                --------------  -------------
Total                                         $        10      $     536
                                                ==============  =============

     Operating  activities during the six months ended June 30, 2006 provided us
$10.9 million of cash  compared to providing  $6.8 million in the same period in
2005.  Net income  plus  non-cash  expense  items  during  2006 and 2005 and net
changes in operating  assets and liabilities  accounted for most of these funds.
Financing  activities  provided  $7.6  million  for the first six months of 2006
compared to  providing  $10.2  million for the same period of 2005.  Most of the
funds  provided in 2006 and 2005 were net proceeds  from our  revolving  line of
credit and  proceeds  from the  exercise of employee  stock  options.  Investing
activities used $18.5 million during the six months ended June 30, 2006 compared
to using $16.5 million for the same period of 2005.

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

         o  incur additional indebtedness;

         o  grant liens;

         o  pay dividends or make certain other restricted payments;

         o  merge or consolidate with any other person; or

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

                                       20


     Our cash flow from operations  depends heavily on the prevailing  prices of
natural  gas and crude oil and our  production  volumes of natural gas and crude
oil.  Although  we have  hedged a  portion  of our  natural  gas and  crude  oil
production and will continue this practice as required pursuant to the revolving
credit  facility,  future  natural gas and crude oil price declines would have a
material  adverse effect on our overall results,  and therefore,  our liquidity.
Falling  natural  gas and crude oil  prices  could  also  negatively  affect our
ability to raise capital on terms favorable to us or at all.

     Our cash flow from  operations  will also depend upon the volume of natural
gas and crude oil that we produce.  Unless we  otherwise  expand  reserves,  our
production  volumes  may  decline  as  reserves  are  produced.  Due to sales of
properties  in 2002 and 2003,  the  divestiture  of Grey Wolf  during  the first
quarter of 2005, and restrictions on capital expenditures under the terms of our
11 1/2% secured notes due 2007 (which were  refinanced in October 2004),  we now
have  significantly  reduced  reserves and  production as compared with pre-2003
levels.  In the future,  if an appropriate  opportunity  presents itself, we may
sell additional  properties,  which could further reduce our production volumes.
To offset the loss in production  volumes  resulting from natural field declines
and sales of producing  properties,  we must conduct  successful,  exploitation,
exploration and development activities,  acquire additional producing properties
or identify  additional  behind-pipe zones or secondary  recovery  reserves.  We
believe  our  numerous  drilling  opportunities  will allow us to  increase  our
production  volumes;  however,  our drilling  activities are subject to numerous
risks,  including the risk that no commercially  productive natural gas or crude
oil reservoirs will be found.  The risk of not finding  commercially  productive
reservoirs will be compounded by the fact that 52% of our total estimated proved
reserves at December 31, 2005 were  undeveloped.  During the first six months of
2006, we expended  approximately  $18.4  million for wells in south Texas,  west
Texas and Wyoming. We are currently  completing and/or testing Woodford,  Atoka,
Wolfcamp and Devonian  wells in west Texas and  continue to  recomplete  various
wells in south Texas. We have successfully  completed one vertical well in south
Texas  subsequent  to the end of the second  quarter.  On four wells  drilled in
Wyoming in late 2005,  testing has been  completed  this year and all four wells
have gone on production at a combined initial rate of 80-100 barrels per day. In
addition, approximately 29% of our production at June 30, 2006 was from a single
well in west Texas. If production  from this well  decreases,  the volume of our
production  would also decrease which, in turn, would likely cause our cash flow
from operations to decrease.

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

Contractual Obligations

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

     o   Long-term debt
     o   Operating leases for office facilities

We have no  off-balance  sheet debt or  unrecorded  obligations  and we have not
guaranteed  the debt of any  other  party.  Below is a  schedule  of the  future
payments  that we are  obligated to make based on agreements in place as of June
30, 2006:



                                                 Payments due in twelve month Periods ended:
 ----------------------------------------------------------------------------------------------------------
   Contractual Obligations (dollars                  June 30,      June 30,      June 30,
    in thousands)                      Total           2007       2008-2009      2010-2011     Thereafter
---------------------------------- --------------- ------------- ------------- -------------- -------------
                                                                               
Long-Term Debt (1)                 $   136,633     $        -    $   11,633    $  125,000     $        -
Interest on long-term debt (2)          57,263         17,101        33,485         6,677              -
Operating Leases (3)                       653            255           398             -              -
                                   --------------- ------------- ------------- -------------- -------------
    Total                          $   194,549     $   17,356    $   45,516    $  131,677     $        -
                                   =============== ============= ============= ============== =============


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

                                       21


     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.


Long-Term Indebtedness



                                                                              June 30,        December 31,
                                                                           -----------------------------------
                                                                                2006               2005
                                                                           ----------------  -----------------
                                                                                     (In thousands)
                                                                                          
Floating rate senior secured notes due 2009............................      $    125,000       $   125,000
Senior secured revolving credit facility...............................            11,633             4,527
                                                                           ----------------  -----------------
                                                                                  136,633           129,527
Less current maturities ...............................................                 -                 -
                                                                           ----------------  -----------------
                                                                              $    136,633      $   129,527
                                                                           ================  =================


     Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in principal aggregate
amount of Floating Rate Senior  Secured Notes due 2009. The notes will mature on
December 1, 2009 and began accruing interest from the date of issuance,  October
28, 2004 at a per annum floating rate of six-month LIBOR plus 7.50%. The current
interest rate is 12.82% per annum.  The interest rate is reset  semi-annually on
each June 1 and December 1. Interest is payable semi-annually in arrears on June
1 and December 1 of each year.

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

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

     The notes and the Subsidiary Guarantors' guarantees thereof,  together with
our credit  facility and the  Subsidiary  Guarantors'  guarantees  thereof,  are
secured  by shared  first  priority  perfected  security  interests,  subject to
certain  permitted  encumbrances,  in all  of our  and  each  of our  restricted
subsidiaries' material property and assets,  including  substantially all of our
and their natural gas and crude oil  properties and all of the capital stock (or
in  the  case  of  an  unrestricted  subsidiary  that  is a  controlled  foreign
corporation, up to 65% of the outstanding capital stock) of any entity, owned by
us and our restricted subsidiaries (collectively, the "Collateral").

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

                     Year                                Percentage
 ------------------------------------------- ---------------------------------
    From April 29, 2007 to April 28, 2008                   104.00%
    From April 29, 2008 to April 28, 2009                   102.00%
    After April 28, 2009                                    100.00%

Prior to April  28,  2007,  we may  redeem up to 35% of the  aggregate  original
principal  amount of the  notes  using the net  proceeds  of one or more  equity
offerings,  in each case at the redemption price equal to the product of (i) the
principal  amount of the notes being so  redeemed  and (ii) a  redemption  price
factor of 1.00 plus the per annum  interest  rate on the notes  (expressed  as a
decimal) on the applicable  redemption  date plus accrued and unpaid interest to
the applicable redemption date, provided certain conditions are also met.

                                       22


     If we experience specific kinds of change of control events, each holder of
notes may require us to repurchase  all or any portion of such holder's notes at
a  purchase  price  equal to 101% of the  principal  amount of the  notes,  plus
accrued and unpaid interest to the date of repurchase.

         The indenture  governing the notes contains covenants that, among other
things, limit our ability to:

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

         o  transfer or sell assets;

         o  create liens on assets;

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

         o  engage in transactions with affiliates;

         o  guarantee other indebtedness;

         o  permit restrictions on the ability of our subsidiaries to distribute
            or lend money to us;

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

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

The indenture also contains customary events of default, including nonpayment of
principal  or  interest,  violations  of  covenants,  cross  default  and  cross
acceleration  to certain  other  indebtedness,  including  our credit  facility,
bankruptcy, and material judgments and liabilities.

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

     Outstanding  amounts under the revolving  credit  facility bear interest at
the prime rate announced by Wells Fargo Bank,  National  Association plus 1.00%.
The current  interest  rate is 9.25% per annum.  Subject to earlier  termination
rights  and events of  default,  the stated  maturity  date under the  revolving
credit facility is October 28, 2008.

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


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

     Each of our current  subsidiaries  has  guaranteed,  and each of our future
restricted  subsidiaries  will guarantee,  our  obligations  under the revolving
credit facility on a senior secured basis. In addition,  any other subsidiary or
affiliate of ours, that in the future  guarantees any of our other  indebtedness
or of our restricted  subsidiaries will be required to guarantee our obligations
under the revolving  credit  facility.  Obligations  under the revolving  credit
facility  are  secured,  together  with the notes,  by a shared  first  priority
perfected security interest,  subject to certain permitted encumbrances,  in all


                                       23


of our and each of our restricted  subsidiaries'  material  property and assets,
including  substantially  all of  our  and  their  natural  gas  and  crude  oil
properties  and all of the  capital  stock  (or in the  case of an  unrestricted
subsidiary  that  is  a  controlled  foreign  corporation,  up  to  65%  of  the
outstanding  capital  stock)  in any  entity,  owned  by us and  our  restricted
subsidiaries.

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

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

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

         o  transfer or sell assets;

         o  create liens on assets;

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

         o  engage in transactions with affiliates;

         o  guarantee other indebtedness;

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

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

         o  permit a change of control;

         o  directly or indirectly make or acquire any investment;


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

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

     The revolving  credit facility also contains  customary  events of default,
including  nonpayment of principal or interest,  violations of covenants,  cross
default and cross  acceleration  to certain other  indebtedness,  bankruptcy and
material judgments and liabilities, and is subject to an Intercreditor, Security
and  Collateral  Agency  Agreement,  which  specifies  the rights of the parties
thereto to the proceeds from the Collateral.

     Intercreditor  Agreement.  The  holders  of the  notes,  together  with the
lenders under our credit facility, are subject to an Intercreditor, Security and
Collateral Agency  Agreement,  which specifies the rights of the parties thereto
to the proceeds from the Collateral.  The Intercreditor  Agreement,  among other
things,  (i)  creates  security  interests  in  the  Collateral  in  favor  of a
collateral  agent for the  benefit  of the  holders  of the notes and the credit
facility  lenders and (ii) governs the  priority of payments  among such parties
upon notice of an event of default under the Indenture or the credit facility.

     So long as no such event of default exists,  the collateral  agent will not
collect  payments  under the new  credit  facility  documents  or the  indenture
governing  the  notes and  other  note  documents  (collectively,  the  "Secured
Documents"),  and all payments will be made directly to the respective  creditor
under the applicable  Secured  Document.  Upon notice of an event of default and
for so long as an event of default  exists,  payments  to each  credit  facility
lender and holder of the notes from us and our current subsidiaries and proceeds
from any disposition of any collateral,  will, subject to limited exceptions, be
collected by the collateral agent for deposit into a collateral account and then
distributed as provided in the following paragraph.

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

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

                                       24


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

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

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

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

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

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

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

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

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

     The  collateral  agent  will  act  in  accordance  with  the  Intercreditor
Agreement  and as  directed by the  "Control  Party"  which for  purposes of the
Intercreditor  Agreement  is the  holders of the notes and the  credit  facility
lenders,  acting as a single class,  by vote of the holders of a majority of the
aggregate  principal amount of outstanding  obligations  under the notes and the
credit facility.

     The  Intercreditor   Agreement   provides  that  the  lien  on  the  assets
constituting  part of the  Collateral  that is sold or otherwise  disposed of in
accordance  with the terms of each  Secured  Document  may be released if (i) no
default or event of default exists under any of the Secured  Documents,  (ii) we
have delivered an officers'  certificate to each of the  collateral  agent,  the
trustee,  the credit facility  administrative agent certifying that the proposed
sale or other  disposition of assets is either  permitted or required by, and is
in accordance with the provisions of, the applicable Secured Documents and (iii)
the collateral agent has acknowledged such certificate.

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

Hedging Activities.

     Our results of operations are  significantly  affected by  fluctuations  in
commodity  prices  and we seek to reduce our  exposure  to price  volatility  by
hedging our  production  through  commodity  derivative  instruments.  Under the
revolving  credit  facility,  we are required to maintain hedge positions on not
less than 25% nor more than 75% of our  projected oil and gas  production  for a
rolling six month period.

Net Operating Loss Carryforwards.

     At  December  31,  2005,  we  had  $190.0  million  of net  operating  loss
carryforwards  for U.S.  tax  purposes.  These loss  carryforwards  will  expire
through 2025 if not utilized.

    Uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, we have established a valuation allowance of $67.0 million for
deferred tax assets at June 30, 2006.

                                       25


Item 3. Quantitative and Qualitative Disclosures about Market Risk.
-------------------------------------------------------------------
Commodity Price Risk

     As an  independent  natural gas and crude oil producer,  our revenue,  cash
flow from operations, other income and profitability,  reserve values, access to
capital  and  future  rate  of  growth  are  substantially  dependent  upon  the
prevailing  prices of natural gas and crude oil.  Declines in  commodity  prices
will materially adversely affect our financial condition,  liquidity, ability to
obtain  financing and operating  results.  Lower commodity prices may reduce the
amount of natural gas and crude oil that we can produce economically. Prevailing
prices for such  commodities  are  subject to wide  fluctuation  in  response to
relatively  minor  changes in supply  and  demand  and a variety  of  additional
factors beyond our control,  such as global  political and economic  conditions.
Historically, prices received for natural gas and crude oil production have been
volatile and unpredictable, and such volatility is expected to continue. Most of
our production is sold at market  prices.  Generally,  if the commodity  indexes
fall, the price that we receive for our production will also decline. Therefore,
the amount of revenue that we realize is partially  determined by factors beyond
our control.  Assuming the production  levels we attained  during the six months
ended June 30, 2006, a 10% decline in natural gas, natural gas liquids and crude
oil prices would have reduced our operating revenue, cash flow and net income by
approximately $2.6 million for the period.

Hedging Sensitivity

     On  January 1,  2001,  we adopted  SFAS 133 as amended by SFAS 137 and SFAS
138.  Under SFAS 133,  all  derivative  instruments  are recorded on the balance
sheet at fair  value.  If the  derivative  does not qualify as a hedge or is not
designated  as a  hedge,  the  gain  or  loss on the  derivative  is  recognized
currently in earnings.  To qualify for hedge  accounting,  the  derivative  must
qualify either as a fair value hedge, cash flow hedge or foreign currency hedge.
None of the  derivatives  in place as of June 30, 2006 are designated as hedges.
Accordingly,  the change in the market value of the  instrument  is reflected in
current oil and gas revenue.

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

     See "General - Commodity  Prices and Hedging  Activities"  for a summary of
our current hedge positions.

Interest Rate Risk

     At June 30, 2006 we had $125.0  million in outstanding  indebtedness  under
the floating rate senior  secured  notes due 2009.  The notes bear interest at a
per annum rate of six-month  LIBOR plus 7.5%. The rate is redetermined on June 1
and  December 1 of each year,  beginning  June 1, 2005.  The current rate on the
notes is 12.82%.  For every  percentage  point that the LIBOR  rate  rises,  our
interest  expense  would  increase by  approximately  $1.3  million on an annual
basis. At June 30, 2006, we had $11.6 million of outstanding  indebtedness under
our revolving  credit  facility.  Interest on this facility accrues at the prime
rate  announced  by Wells  Fargo Bank plus  1.00%.  For every  percentage  point
increase in the announced  prime rate,  our interest  expense would  increase by
approximately $116,000 on an annual basis.

Item 4. Controls and Procedures.
-------------------------------

     As of the end of the period  covered by this  report,  our Chief  Executive
Officer  and  Chief   Financial   Officer  carried  out  an  evaluation  of  the
effectiveness  of Abraxas'  "disclosure  controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e)and  15d-15(e)) and concluded
that the  disclosure  controls and  procedures  were  effective  and designed to
ensure  that  material  information  relating  to Abraxas  and our  consolidated
subsidiaries  which is required to be included in our  periodic  Securities  and
Exchange  Commission  filings would be made known to them by others within those
entities.  There  were  no  changes  in our  internal  controls  over  financial
reporting during the period covered by this report that could materially affect,
or are reasonably likely to materially affect, our financial reporting.


                                       26


                          ABRAXAS PETROLEUM CORPORATION

                                     PART II
                                OTHER INFORMATION

Item 1.    Legal Proceedings.

     There have been no changes in legal  proceedings from that described in the
Company's  Annual Report of Form 10-K for the year ended  December 31, 2005, and
in Note 7 in the Notes to Condensed  Consolidated Financial Statements contained
in Part I of this report on Form 10-Q.

Item 1A.   Risk Factors.

     In addition to the other  information set forth in this report,  you should
carefully  consider the factors  discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The risks
described  in our  Annual  Report  on Form  10-K are not the only  risks  facing
Abraxas. Additional risks and uncertainties not currently known to us or that we
currently  deem to be  immaterial  also  may  materially  adversely  affect  our
business, financial condition and/or operating results.

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

            None


Item 3.    Defaults Upon Senior Securities.

           None

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

     At the Annual  Meeting of  Shareholders  held on May 25, 2006 the following
proposals were adopted by the margins indicated:

     1.  Election of two  directors  for a term of three  years,  to hold office
until the  expiration  of his term in 2009 or until a successor  shall have been
elected and qualified.

                                                   Number of Shares
                                   ---------------------------------------------
                                               For               Withheld
                                   ---------------------- ----------------------
      Franklin A. Burke                     36,397,699                764,668
      Paul A. Powell Jr.                    36,874,216                288,151

     In  addition,  the terms of office of C.  Scott  Bartlett,  Jr.,  Harold D.
Carter, Ralph F. Cox, Barry J. Galt, Dennis E. Logue, Joseph A. Wagda and Robert
L. G. Watson continued after the meeting.


     2.  Approval  of the  appointment  of  BDO  Seidman,  LLP as the  Company's
auditors.

                                           Number of Shares
                                 --------------------------------------
                                     For       Against      Abstain
                                 --------------------------------------
                                  36,912,929   171,466       78,472


     3. Approval of 2005 Employee Long-Term Equity Incentive Plan.

                                            Number of Shares
                                  -------------------------------------
                                     For        Against       Abstain
                                  -------------------------------------
                                   12,598,761   1,728,980      256,659




                                       27




Item 5.    Other Information.

           None

Item 6.    Exhibits.

           (a) Exhibits

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



                                       28




                          ABRAXAS PETROLEUM CORPORATION

                                   SIGNATURES



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




    Date:  August 9, 2006                  By:/s/ Robert L.G. Watson
                                          --------------------------
                                           ROBERT L.G. WATSON,
                                           President and Chief
                                           Executive Officer


    Date:  August 9, 2006                  By:/s/ Chris E. Williford
                                           ---------------------------
                                           CHRIS E. WILLIFORD,
                                           Executive Vice President and
                                           Principal Accounting Officer



                                       29