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| 14550      Torrey Chase Blvd. | Confidential/Settlement      Discussions |
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| Houston,      Texas 77014-1022 | April      3, 2008 |
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| Re: | In      re Eagle Domestic Drilling Operations, LLC vs. Hallwood Energy, LP and      Hallwood Petroleum, LLC (the“Proceeding”) |
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| 1.   | Hallwood      Energy, LP (“Hallwood Energy”) and Hallwood Petroleum, LLC (“HPL” and      collectively with Hallwood Energy, “Hallwood”) will immediately and      unconditionally release Eagle Domestic Drilling Operations, LLC (“EDDO”)      from any claims or liability relating to Hallwood’s claim in the      Proceeding for the forgiveness of a $1.67 million deposit owed by EDDO to      Hallwood. |
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| 2.   | Hallwood      Energy will (a) pay to EDDO $2.0 million in cash and (b) issue to EDDO      $2.75 million in equity of Hallwood Energy or the successor      entity.  Hallwood may defer the payment of the cash and issuance      of the equity until the later of (x) the completion of a major financing,      or (y) June 30, 2008. If the major financing is in the form of an IPO,      Hallwood will deliver to EDDO shares of stock.  Hallwood will      make best efforts to deliver registered shares.  If the shares      can not be registered, Hallwood will deliver shares that will be freely      tradeable in their principal market within 90 days of the delivery. If the      major financing is in the form of a private partnership or joint venture,      Hallwood will deliver partnership units toEDDO. |
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| 3.   | If      prior to June 30, 2008, Hallwood Energy or a successor entity has not      completed a major financing, but has received bridge financing in the      aggregate at least $20 million, then Hallwood Energy will pay to EDDO      $500,000 in cash.  The payment of $500,000 in cash will extend      the date referred to in paragraph 2(y) above to September 30, 2008 and      will be credited against any future cash payment pursuant to paragraph      2(a) above if the $2.0 million cash payment and 2.75 million in equity is      received no later than September 30, 2008.  If the $2.0 million      cash payment and 2.75 million in equity is not received by September 30,      2008, then the $500,000 cash will not be credited against any future      judgment or settlement of theProceeding. |
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| 4.   | The      trial setting will be continued until not earlier than September 30,      2008. |
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| 5.   | Upon      receipt of the amounts contemplated by paragraph 2, the parties and their      affiliates will be fully and finally mutually released from any and all      claims the other parties and their affiliates may have, on such terms and      conditions as are reasonable andcustomary. |
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| 6.   | The      forensic computer examination contemplated by the court order dated April      1, 2008 will be deferred.  Hallwood will provide the computers,      servers and back-up tapes contemplated by that order to David Greetham of      HSSK at 5:00 pm on April 3, 2008 and Mr. Greetham will take mirrored      images of those computers’ hard drives, servers and      tapes.  Hallwood may designate a representative to observe Mr.      Greetham’s activities in making the mirrored images.  The      original mirror images and any media containing any of the information      contained in the mirrored images will be deposited in escrow by Mr.      Greetham and Hallwood’s representative with an escrow agent in Dallas,      Texas on April 4, 2008.  Mr. Greetham will not keep any copies      of the same and will not share the contents of the same with anyone prior      to depositing the mirror images in escrow.  If the settlement      contemplated by this agreement fails to be consummated by September 30,      2008, subject to any rights of Hallwood to request reconsideration of or      to appeal the Order, Mr. Greetham shall have access to the mirror images      to complete the tasks contemplated by the Court’s April 1, 2008      Order.  If the settlement is completed by that date the contents      shall be released to Hallwood. |
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| 7.   | On      or before April 4, 2008, Hallwood shall supply the following information      for EDDO to rely upon in entering into this agreement (a) a copy of the      reserve reports for Hallwood’s interests in Texas and Arkansas, (b) a copy      of the Hallwood internal statements of cash position as of March 31, 2008,      (c) a copy of Hallwood's bank statements as of April 3, 2008, (d) a copy      of Hallwood’s most recent internal Financial  Statement. |
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| 8.   | If      necessary, attorneys for the parties will jointly draft a Motion for      Compromise between the parties, which will be subject to approval from      Judge Bohm in the US Bankruptcy Court in Houston, Texas. The attorneys      shall also seek a continuance of the Proceeding from Judge      Bohm. |
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| 9.   | This      agreement is subject to the approval of the Boards of Directors of each of      the parties. Each party will provide the other with a confirmation of the      written unanimous consent of its’ Board of  Directors. |
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| 10.   | The      confidentiality agreement entered into by both parties will remain in      effect. Hallwood agrees that after the date of this letter it will not      disclose any information concerning EDDO’s drilling rigs, provide any      evidence or expert testimony to Quicksilver or provide any assistance or      cooperation to Quicksilver in the ongoing dispute between EDDO and      Quicksilver, except as may be required by court order.  EDDO      agrees that after the date of this letter it will not disclose any      information concerning Hallwood, provide any evidence or expert testimony      to Eagle Drilling, LLC or provide any assistance or cooperation to Eagle      Drilling, LLC in the ongoing dispute between Hallwood and Eagle Drilling,      LLC, except as may be required by courtorder. |
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|   | Sincerely,                               |
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|   | Hallwood      Energy, LP                 |
|   | By:      Hallwood Energy Management, LLC |
|   |                                     |
|   |                                     |
|   | By:                                      | /s/William      L. Guzzetti |
|   | Name:                                    | William      L. Guzzetti |
|   | Title:                                   | President |

|   | Hallwood      Petroleum, LLC |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | /s/William      L. Guzzetti |
|   | Name:                        | William      L. Guzzetti |
|   | Title:                       | President |

| ACCEPTED      AND AGREED TO:                 |                       |
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| Eagle      Domestic Drilling Operations, LLC |                       |
|                                         |                       |
|                                         |                       |
| By:                                          | /s/John      O’Keefe |   |
| Name:                                        | John      O’Keefe    |   |
| Title:                                       | CEO                        |   |