For 25 years, the Texas Observer has been the mouse that roared, a mom-and-pop haven of common sense, progressive politics and rapier reporting. So it is perhaps surprising to find that in a time when everything else is booming in the Lone Star State, the Observer has fallen on hard times.

The Observer is one of the noble experiments in American journalism, an underfunded, understaffed biweekly that has been a beacon for endangered liberals in Texas and the scourge of a state legislature that has more often that not acted with cavilier disregard for the citizenry. Over the years it has produced not only memorable writers: Willie Morris, Bill Brammer, Larry L. King, Ronnie Dugger and others.

Today it is adrift, a victim less of the hard-scrabble conservatism that dominates this state than of the fecundity of journalism on the rise. Quite simply, it seems to have lost its way. And its problems spilled embarrassingly into public view recently when the editor quit in protest, rather than follow orders from owner-publisher Dugger to fire the associate editor, whose politics Dugger disagreed with. Dugger believed the two editors were planning to move the Observer to the far left, away from the particular brand of liberalism Dugger had preached with the Observer.

"One former editor told me I might be the last editor of the Observer," said Rod Davis. "I don't think that will be the case, but I am concerned about how the Observer is going to keep going. I would have to question why any person who should be an Observer editor would want to take the job under the circumstances [that exist] now."

Dugger's answer to all this is anything but retreat. "My job, as owner and publisher, is not to censor," he said. "But when I come to a fundmental disagreement with the editor, I have to do whatever is necessary to maintain correct and good editorial direction and identity."

Dugger has decided to retake the editorial helm for a time, and he has set into motion what are potentially the most significant changes in the magazine's history. After several years of discussions, he has decided to incorporate and expand the Observer into what he envisions as a regional -- and eventually perhaps national -- publication, an enormous risk that will almost certainly decide the salvation or death of this often revered little journal.

"With Ronald Reagan in power, it seems that we're all looking to what resources are in place to keep the First Amendment vital and compassionate programs in place," Dugger said. "One of the resources is the Texas Observer, and I'm responsible for that. So with the policy difficulties that were troubling me resolved to my satisfaction, I'm ready to go with it.

"What I'm visualizing is an expansion, one-by-one, into contiguous states on a line east and west of here," he added. "We're responding to the fact that the Sun Belt needs a humanist voice."

Only a few months ago, Dugger's song was more mournful. "This is the critical crossroads so far in the . . . history of the Observer, and I write in urgency," he told loyal subscribers in a four-page plea for contributions and new subscriptions that he said were needed to pay off current debts.

But the debt squeeze may have been less severe that the pinch of other publications, which have begun to rob the Observer of writers and its readers of their attention. It was not that many years ago that the Observer was the only publication of its kind in Texas. Today it is surrounded by magazines and newspapers that are increasingly paying attention to issues once reserved for the Observer -- corruption in government; the mix of power and money; liberal ideas; and the state's downtrodden.

The Texas Monthly, a neighbor of the Observer here in Austin, has been winning journalistic awards nearly as fast as new advertisers, and is now both an editorial and commercial success, symbolized by its offices in the high-rise Austin National Bank Tower. The poor Observer, housed a few blocks away in an old house, still gets by paying its editor less than $12,000 a year, and Dugger expects the writers to sleep at the homes of loyal subscribers while on assignment out of town. Increasingly, those writers have turned to the Texas Monthly, or city magazines in Houston and Dallas, for their outlets.

"When the Observer began, the other publications in the state were unspeakably bad," said former editor Jim Hightower. "The Observer blazed the trail. There was nothing like it. Now the other publications are doing an improved job."

Said ousted editor Rod Davis, "I think people still read and respect the Observer, but I don't think it has the clout it had 10 years ago. But what the Observer offers is a different point of view."

Just what that view is has become the source of confusion among longtime readers. Some say it's moralistic and preachy, others call it "a tunnel into the past," still others complain that it has no real direction at all: They point to an article mourning the death of John Lennon, and the Valentine's Day issue devoted to love and sex in Texas, as the most recent examples. Much of that criticism falls on the shoulders of Davis, who as editor has moved away from the political coverage that has been the Observer trademark. But more fundamentally, editorial responsibility is Dugger's.

"Dugger is the life of the Observer and he is the death of the Observer," said one reader who has in the past written for the magazine. "He's the reason there are 11,000 loyal subscribers and the reason there aren't 40,000."

"You have to understand that Ronnie's an old-line liberal, said Davis. "He believes the Observer must remain committed to reform within the system." "

Dugger and Davis, who say there is nothing personal in their parting, clashed last fall over a column Davis wrote speculating on the possibility of violent revolution in the United States. "Ronnie said it was a danger to the Observer's editorial continuum," Davis said.

"I thought it was an abberation," Dugger said. Later he concluded it wasn't.

But the real split occurred when Davis picked Dick Reavis as associate editor of the Observer, the No. 2 editorial position. In the 1960s, Reavis was a civil rights activist and radical communist who was eventually tossed out of the party. Lately he has written for a number of Texas Magazines, including the Monthly. "Ronnie objected to him on political grounds," Davis said. "He thought it signified that the Observer is no longer interested in reformist politics."

Recently, Dugger ordered Davis to fire Reavis. When Davis refused, he and Dugger agreed that he should leave the magazine.

Davis said he and Dugger also had fought over expanding the magazine, but Dugger said the disagreement was over "when I should do what." Since getting rid of Davis, Dugger has contacted lawyers to begin the process of incorporating and expanding the magazine, although he says he has no idea how long all that might take. His first goal is to move into Louisiana, and he plans to boost staff budget to make it work. "If you look south of the St. Louis Post-Dispatch, west of the Atlantic papers and The Miami Herald and east of the Los Angeles Times, there's a vacuum, a great unmet need for serious journalism of a humanist kind.

"The social situation in this country has deteriorated. As a nation we're in much deeper trouble. The media [in Texas] are better, that's true, but our situation is genuinely a human emergency that was not so true 25 years ago."

To transform the Observer -- indeed to save it -- will require lots of money and a steady hand. Dugger will try to provide the latter, while his lawyers help in the former. "Committees never get anything done," he said. "So I'm just going to do it."