AMENDED AND RESTATED
                            PHANTOM WORKING INTEREST
                                 INCENTIVE PLAN
                                       OF
                           HALLWOOD ENERGY CORPORATION

         Hallwood Energy  Corporation,  a Delaware  corporation (the "Company"),
hereby  establishes  the following  Incentive  Plan, in order to provide greater
incentive and  motivation to the  Company's  key  personnel and  consultants  to
increase  the total oil and gas  reserves  of the  Company  and to  enhance  the
Company's ability to attract,  motivate and retain key employees and consultants
upon whom, in large measure, the success of the Company depends.

                                    ARTICLE I
                                   Definitions

         The following  words and phrases shall have the meaning set forth below
unless the context clearly indicates otherwise:

     "Affiliates"  means the  affiliates  of the Company  which hold  title,  on
behalf, of the Company,  to the Company oil and gas assets,  including,  but not
limited  to,  HEC  Acquisition  Corp.,  EM  Nominee  Partnership  Company,  HCRC
Acquisition  Corp.,  Hallwood  Consolidated  Partners L.P.,  Hallwood San Juan I
Limited Partnership and La Plata Associates LLC.

         "Beneficiary" means a Beneficiary designated pursuant to Section 2.2.

         "Board" means the Board of Directors of the Company or any committee of
the Board of Directors  to which the Board may delegate its  authority to act in
connection with this Plan from time to time.

         "Buy-Out  Value" shall mean that percentage of the net present value of
the then remaining  proven reserves of an Eligible  Domestic Well, as determined
by the Board at the time any award is made under the Plan. The net present value
of the then  remaining  proven  reserves of an Eligible  Domestic  Well shall be
determined  based on the Reserve Report.  If the net present value of the proven
reserves of an Eligible Domestic Well is less than zero, the Buy-Out Value shall
be zero.


<PAGE>


             "Cash Flow" means, as to an Eligible  Domestic Well, with regard to
the  period  in  question,  (i) all  revenues  received  by the  Company  or its
Affiliates  from the sale of production or  monetization of tax credits from the
Eligible  Domestic Well, plus all proceeds received from the sale or transfer of
all or part of an  interest  in the  Eligible  Domestic  Well to  other  than an
Affiliate,  less in each case (A) all operating  expenses paid by the Company or
its Affiliates and normally attributable to a working interest;  (B) all amounts
paid by the Company or its  Affiliates  to improve,  recomplete  or maintain the
production  from  an  Eligible  Domestic  Well  (other  than  amounts  spent  in
connection  with the initial  spudding,  drilling  and first  Completion  of the
Eligible  Domestic  Well  or  recompletion  of a  Marginal  Well);  and  (C) all
severance,  production or other production related taxes paid by the Company and
its Affiliates and applicable to the Eligible Domestic Well; Cash Flow means, as
to a  Non-Domestic  Project,  with regard to the period in question (i) revenues
received by the Company or its  Affiliates in  connection  with services for the
operation of such Non-Domestic Project,  including fees received for the lifting
of oil or gas,  plus all cash  received from the sale or transfer of all or part
of an interest in a Non-Domestic  Project or, if the consideration for such sale
is not in cash, then a cash amount equal to the value received by the Company or
its Affiliates for such Non-Domestic Project (if no allocation of value for such
Non-Domestic Project is provided or if the consideration received by the Company
or its Affiliates  cannot be readily  valued,  the Company and a majority of the
affected  Participants  may agree on an allocation,  which  allocation  shall be
binding on all Participants,  or a third party appraisal may be obtained, at the
Company's  cost),  less in each  case  (A) all  operating  expenses  paid by the
Company  or  its  Affiliates  and  normally  attributable  to an  interest  in a
Non-Domestic  Project,  (B) all amounts paid by the Company or its Affiliates to
improve,  recomplete or maintain  production from a Non-Domestic  Project (other
than  amounts  spent in  connection  with the  initial  spudding,  drilling  and
completion  of wells within a  Non-Domestic  Project or the signing  bonuses and
costs typically associated with the acquisition of an interest in a Non-Domestic
Project) and (C) all severance,  production,  excise or other production related
taxes paid by the Company and its Affiliates and applicable to the  Non-Domestic
Project. In the event that Eligible Domestic Wells or Non-Domestic  Projects are
transferred in connection  with an exchange of  properties,  then at the Board's
discretion,  the  new  property  or  properties  received  in  exchange  for the
transferred  Eligible  Domestic  Wells  or  the  non-Domestic  Projects  may  be
substituted into a Plan,  rather than  considering  their value as cash received
from the transfer of such properties.

         "Change of Control" shall mean the occurrence of:

         a.  An acquisition of any voting securities of the Company (the "Voting
             Securities")  by any  Person"  (as the  term  person  is  used  for
             purposes of Section 13(d) or 14(d) of the  Securities  Exchange Act
             of 1934  (the  "Exchange  Act"),  other  than  The  Hallwood  Group
             Incorporated  and its  affiliates,  immediately  after  which  such
             Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
             promulgated under the Exchange Act) of thirty percent (30%) or more
             of the combined  voting  power of the  Company's  then  outstanding
             Voting Securities;

         b.  The  individuals  who, as of the effective date of this  Agreement,
             are  members  of  the  Board  of  Directors  of  the  Company  (the
             "Incumbent  Board"),  cease for any reason to constitute at least a
             majority  of the members of the Board of  Directors  of the Company
             (the  "Board");   provided,  however,  that  if  the  election,  or
             nomination for election by the Company's  common  stockholders,  or
             any new  director  was approved by a vote of at least a majority of
             the Incumbent Board,  such new director shall, for purposes of this
             Agreement,  be  considered  as a  member  of the  Incumbent  Board;
             provided further, however, that no individual shall be considered a
             member of the Incumbent Board if such individual  initially assumed
             office as a result of  either  an  actual or  threatened  "election
             contest"  (as  described  in  Rule  14A-11  promulgated  under  the
             Exchange Act) or other actual or threatened solicitation of proxies
             or  consents  by or on behalf of a Person  other  than the Board (a
             "Proxy Contest")  including by reason of any agreement  intended to
             avoid or settle any Election Contest or Proxy Contest; or

         c.  Approval by stockholders of the Company of:

               i.  A  merger,  consolidation  or  reorganization  involving  the
          Company, unless:

                  1.       The stockholders of the Company,  immediately  before
                           such merger,  consolidation  or  reorganization,  own
                           directly or  indirectly  immediately  following  such
                           merger,  consolidation  or  reorganization,  at least
                           fifty percent  (50%) of the combined  voting power of
                           the outstanding  voting securities of the corporation
                           resulting  from  such  merger  or   consolidation  or
                           reorganization   (the  "Surviving   Corporation")  in
                           substantially  the same proportion as their ownership
                           of the  Voting  Securities  immediately  before  such
                           merger, consolidation or reorganization; and

                  2.       The individuals who were members of the Incumbent
                           Board  immediately prior to the execution of the
                           agreement providing for such merger,  consolidation
                           or reorganization constitute at least a majority of
                           the members of the board of directors of the
                           Surviving Corporation; or

             ii.  A complete liquidation or dissolution of the Company; or

             iii. An  agreement  for the  sale or  other  disposition  of all or
                  substantially  all of the assets of the  Company to any Person
                  (other than a transfer to a wholly owned subsidiary.

         d.  Notwithstanding  the  foregoing,  a Change of Control  shall not be
             deemed to occur solely  because any Person (the  "Subject  Person")
             acquired beneficial ownership of more than the permitted percent of
             the outstanding Voting Securities as a result of the acquisition of
             Voting  Securities by the Company which,  by reducing the number of
             Voting Securities outstanding, increases the proportional number of
             shares beneficially owned by the Subject Person, provided that if a
             Change  of  Control  would  occur  (but for the  operation  of this
             sentence) as a result of the  acquisition  of Voting  Securities by
             the Company,  and after such share acquisition by the Company,  the
             Subject  Person  becomes  the  beneficial  owner of any  additional
             Voting  Securities  which  increases  the  percentage  of the  then
             outstanding  Voting  Securities  beneficially  owned by the Subject
             Person, then a Change of Control shall occur.

         "Company" means Hallwood Energy Corporation and any successor thereto.

         "Completion"  of an Eligible  Domestic Well or a  "Completed"  Eligible
Domestic Well means (i) with regard to an initial  drilling,  the date such well
is spud; (ii) with regard to the  recompletion of a Marginal Well, the date when
a completion,  workover or drilling rig is moved in and rigged up in preparation
of  imminent  work  initiation  or (iii) with  regard to  secondary  or tertiary
recovery  operations,  the  date of  first  injection  of any  fluids  used  for
secondary or tertiary recovery.

         "Effective Date" means June 8, 1999.

         "Eligible  Domestic  Well"  means any well  located in the  continental
United States and Completed within the Plan Year, any recompleted  Marginal Well
and any secondary or tertiary recovery  operation (in which case the value to be
assigned to such secondary or tertiary  recovery wells not already included in a
Plan,  shall be calculated by holding  constant the proven  developed  producing
reserve rate at the time of first injection,  and only considering the cash flow
from production above that rate as Cash Flow to the Plan).

         "Key  Employee"  means an employee or  consultant of the Company or its
affiliate,  Hallwood  Petroleum,  Inc., whom the Board, in its sole  discretion,
determines has or may substantially benefit the Company.

         "Marginal  Well" means any Eligible  Domestic Well having a net present
value, in the Reserve Report of less than or equal to $25,000.


<PAGE>


         "Non-Domestic  Project" means any project  undertaken by the Company or
its  Affiliates  in which the  properties  owned,  operated  or  serviced by the
Company or its Affiliates  are outside of the  continental  United  States.  The
timing of inclusion  of a  Non-Domestic  Project in the Plan and the  properties
and/or contracts which would be considered to constitute a Non-Domestic  Project
shall be as  determined  and  described  by the Board at the time of the  annual
determination of Participants and awards, and may include Non-Domestic  Projects
which were commenced in prior years.

         "Participant"  means a Key  Employee  who is  selected  by the Board to
participate in the Plan for any Plan Year.

         "Participation  Point"  means one percent of the Plan Cash Flow for any
Plan Year; 100 Participation Points shall be awarded to Participants in any Plan
Year during which any awards are made.

         "Plan" means this Incentive Plan of Hallwood Energy Corporation.

         "Plan Cash Flow"  means the  aggregate  percentage  of the  Affiliates'
collective  interest  in the Cash Flow of the  Eligible  Domestic  Wells and the
Non-Domestic Projects that the Board determines for any Plan Year to allocate to
the  Plan,  and  which  is  to  be  divided  among  the  Participants  based  on
Participation  Points.  In the Board's  discretion,  it may  allocate  different
percentages of Cash Flow for Eligible Domestic Wells and Non-Domestic Projects.

         "Plan  Distributions"  attributable to any Participant's  Participation
Points means (i) the Plan Cash Flow  attributable  to the  Participation  Points
(ii) the  Buy-Out  Value of Eligible  Domestic  Wells upon  buy-out  pursuant to
Section 3.2 and (iii) any payments made to a Participant  because of termination
of employment as described in Article V herein, or termination of all of part of
the Plan as described in Article VII herein.

         "Plan Year" means the twelve-month calendar year.

         "Reserve  Report"  means the most  recent  regularly  prepared  reserve
report which applies the rules and  regulations  of the  Securities and Exchange
Commission, except that the five-year average prices used by the Company for its
then current planning purposes, rather than year-end prices, shall be used.

         "Termination  for Cause"  means  termination  which is initiated by the
Company for either serious misconduct or sub-standard performance.

         "Termination Value" is defined in Section 5.3.

                                   ARTICLE II
                            Participation in the Plan


<PAGE>


         2.1  Eligibility.  Any Key Employee of the Company shall be eligible to
be  selected  as a  Participant  in the  Plan.  A Key  Employee  shall  become a
Participant upon receiving an award of Participation  Points by the Board, which
may take into  consideration,  among other factors,  the  recommendation  of the
Company's  executive  officers,   the  Key  Employee's  position,   salary,  and
individual contribution to the performance of the Company's Affiliates. Only Key
Employees  who are employed by or engaged as  consultants  to the Company on the
date of the award by the Board  shall be  eligible  to be awarded  Participation
Points.

         2.2 Enrollment  Procedure.  Each Participant shall complete,  sign, and
return to the Company's Human  Resources  department an enrollment form supplied
by the Company.  The enrollment form shall state, among other  information,  the
Participant's  address  and date of birth  and a  designation  of the  names and
addresses  of the  Participant's  beneficiaries.  The  Participant  will  not be
entitled to receive any payments with respect to the Plan until the  Participant
has properly returned the enrollment form.

         2.3  Determination of Participants and Awards.  The Board may determine
annually the Key Employees who are to be  Participants  in the Plan with respect
to the Plan Year,  the percentage of the total Plan Cash Flow to be allocated to
awards for the Plan Year, the Plan Buy-Out Value, the  Non-Domestic  Projects to
be  included  in the Plan and the  Participation  Points to be  awarded  to each
Participant. The Board may make these determinations in its sole discretion, and
may award all  Participation  Points for a Plan Year to one  Participant.  It is
anticipated that determinations of the Plan Cash Flow allocated for a Plan Year,
the Participants, the Plan Buy-Out Value and the Participation Points for a Plan
Year will be made in the first  quarter of each year.  The Board is not required
to allocate any Plan Cash Flow for a Plan Year.

                                   ARTICLE III
      Allocation and Distribution of Cash Flow from Eligible Domestic Wells

         3.1  Distributions.  On  all  outstanding  awards,  the  Company  shall
distribute to each  Participant  the portion of the Plan Cash Flow from Eligible
Domestic  Wells  attributable  to the  Participation  Points  then  held  by the
Participant  for each Plan Year.  The  distributions  shall be made quarterly to
each  Participant or his  Beneficiary  in the amount of such person's  allocable
share of the Plan Cash  Flow  from  Eligible  Domestic  Wells for the  preceding
quarter,  less any  applicable  withholding  of income  taxes or other  amounts.
Distributions shall be made within thirty days of the end of a quarter.

         3.2 Buy-Out.  Subject to Articles V and VII, in the sixth calendar year
after the award of Participation Points, a Participant shall receive the Buy-Out
Value of all Eligible  Domestic  Wells included in that Plan. All payments under
this  section  shall be made on or before  the end of the first  quarter  of the
sixth year.

                                   ARTICLE IV
      Allocation and Distribution of Net Income from Non-Domestic Projects


<PAGE>


         4.1 Distribution of Cash Flow from Non-Domestic  Projects.  In order to
recognize  that  Non-Domestic  Projects  are by their  nature  longer lived than
Eligible  Domestic Wells and that future  exploitation of Non-Domestic  Projects
needs to be  encouraged,  the  revenues  from a  Non-Domestic  Project  shall be
allocated  to  successive  Plan  Years,  commencing  in the first  year in which
revenues are received from a Non-Domestic Project. To the extent revenues from a
Non-Domestic  Project  are  allocated  to a  Plan  Year,  such  allocation  will
automatically  terminate  ten years  after the year in which net  revenues  were
first received from such  Non-Domestic  Project.  It is anticipated that no more
than five Plan Years will be associated  with any single  Non-Domestic  Project,
and that once a  Non-Domestic  Project is designated  for a Plan Year,  the next
four Plans will also include such Non-Domestic Project.  However, at the Board's
discretion,  more or less than  five  Plans may  include  the same  Non-Domestic
Project.  The  distributions  shall be made annually to each  Participant or his
Beneficiary in the amount of such person's allocable share of the Plan Cash Flow
from  Non-Domestic   Projects  for  the  preceding  year,  less  any  applicable
withholding of income taxes or other amounts.  Distributions shall be made on or
before the end of the first quarter following the end of the year.

         4.2  Allocation  of Cash Flow from  Non-Domestic  Projects  Among  Plan
Years.  To the extent Cash Flow from  Non-Domestic  Projects is allocated  among
more than one Plan Year,  such Cash Flow shall be allocated among the respective
Plan  Years in  accordance  with a  formula  based on a  fraction  in which  the
numerator  is one,  and the  denominator  is the  number  of  Plan  Years  which
participate  in Cash Flow  from the  Non-Domestic  Project.  For  example,  if a
Non-Domestic  Project is included in three separate Plan Years,  then the amount
of the total Plan Cash Flow (as  determined by the Board pursuant to Section 2.3
herein) to be allocated  among each Plan Year which  includes such  Non-Domestic
Project shall be determined based on a fraction, the numerator of which shall be
one, and the denominator of which shall be three (the number of Plan Years which
include  such  Non-Domestic  Project).  Further,  if the  total  Plan  Cash Flow
determined  by the Board to be  allocated  to a Plan Year in the first  year the
Non-Domestic  Project  is  included  is .04%,  and  there are  subsequently  two
additional Plan Years which include such Non-Domestic Project, then the Board in
its  discretion  may determine that the fraction used to allocate Cash Flow from
such Non-Domestic Project among the Plan Years should be 1/3; each Plan would be
allocated one-third of .04% of the Cash Flow from such Non-Domestic Project.

     4.3 No Buy-out of Participant's Interest in Non-Domestic Projects. There is
no buy out of a Participant's  interest in any Non-Domestic  Project,  except as
provided in Articles V and VII.


                                    ARTICLE V
                                     Vesting


<PAGE>


         5.1 Termination for Cause If a Participant's  employment or consultancy
with the Company or its Affiliates is terminated by the Company as a Termination
for Cause,  the Participant  shall cease,  effective as of the effective date of
such  termination,  to be a  Participant  in this Plan and shall have no further
rights under the Plan, and all  Participation  Points of the  Participant  under
this Plan shall be canceled  without payment of any  compensation and the former
Participant   shall  not  thereafter   receive  any  Plan   Distributions.   Any
Participation  Points  canceled  hereunder  and the related Plan Cash Flow shall
revert to the Company, and shall not be available to any other Participant.

         5.2 Termination Other Than for Cause. If a Participant's  employment or
consultancy  with the Company or its Affiliates is terminated by the Company for
any reason other than a Termination for Cause,  the Participant  shall receive a
cash  lump sum  payment  equal to the  Termination  Value of such  Participant's
interest in the Plan as of such termination,  calculated as described in Section
5.3.

         5.3  Determination of Termination  Value of  Participant's  Interest in
Plan. The Termination Value of a Participant's  interest in a Plan shall be 100%
of the fair market value of the Cash Flow from Non-Domestic  Projects  allocated
to the Plan,  plus (a) as  applied to  Section  5.2 or  7.1(a),  100% of the net
present value of the then remaining proven reserves of an eligible Domestic Well
determined  based on the  Reserve  Report,  but not less  than  zero;  or (b) as
applied to Section  7.1(b),  the greater of (i) 100% of the net present value of
the then remaining  proven reserves of all Eligible  Domestic Wells based on the
most  recently   prepared  Company  reserve  report,   applying  the  rules  and
regulations of the Securities and Exchange  Commission,  except that the average
of basis adjusted prices from the New York Mercantile Exchange for the preceding
three  months shall be used,  or (ii) 100% of the net present  value of the then
remaining  proven  reserves  of all  Eligible  Domestic  Wells based on the most
recently prepared Company reserve report,  applying the rules and regulations of
the Securities and Exchange Commission, except that the five-year average prices
used by the Company for its then current  planning  purposes  shall be used. The
Termination Value shall take into account the  Participation  Points held by the
Participant in the pertinent Plan Years at the date of termination of employment
or  consultancy,  or at the date of the termination of the Plan, as the case may
be.  In  determining  the fair  market  value  of Cash  Flow  from  Non-Domestic
Projects, the Participant and the Company shall mutually agree on such value, or
if they cannot,  then an independent  appraiser shall be jointly selected by the
Participant and the Company, and such independent appraiser's valuation shall be
binding on the Participant  and the Company.  The Company shall bear the expense
of any such appraiser.  Payment of the Termination  Value  determined under this
Section 5.3 shall be made as to Eligible Domestic Wells within sixty days of the
event triggering such  determination,  and as to Non Domestic  Projects,  within
thirty days of either the mutual  agreement  of such value or the receipt of the
independent appraisers' valuation, as the case may be.

         5.4 Resignation If a Participant's  employment or consultancy  with the
Company or its  Affiliates is terminated by the  Participant  as a result of the
Participant's  voluntary resignation,  the Participant shall cease, effective as
of the effective date of such resignation,  to be a Participant in this Plan and
shall have no further rights under the Plan, and all Participation Points of the
Participant   under  this  Plan  shall  be  canceled   without  payment  of  any
compensation and the former  Participant  shall not thereafter  receive any Plan
Distributions.  Any Participant  Points canceled  hereunder and the related Plan
Cash Flow shall revert to the Company and shall, at the discretion of the Board,
be available to any other Participant.

         5.5 Death or  Disability If a Participant  dies or is  permanently  and
totally disabled,  the Participant (or the Participant's  Beneficiary) shall, at
the option of the Company,  (a) continue to receive  Plan  Distributions  in the
same manner as though such  Participant  were still employed by the Company,  or
(b)  receive  a cash lump sum  payment  equal to the fair  market  value of such
Participant's  interest  in the  Plan or Plans  in  which  he  participates,  as
determined pursuant to Section 5.3.

                                   ARTICLE VI
                  Allocation of Administrative Responsibilities


<PAGE>


         6.1 The Company.  The Company shall be responsible for keeping accurate
books and accounts  with respect to all Eligible  Domestic  Wells,  Non-Domestic
Projects,  Plan Cash Flow and Plan Distributions and making the payments to Plan
Participants provided by the Plan.

         6.2 The Board.  The Board of the Company shall  administer the Plan and
shall have all powers necessary for that purpose, including, but not limited to,
the power to interpret the Plan, to determine the eligibility, status and rights
of all persons  under the Plan,  and to make all  determinations  required to be
made under the Plan.

         6.3 Others.  The Board of the Company may designate one or more persons
who may,  but need not be,  employees of the Company or an Affiliate , to assist
it in the  ministerial  tasks  required in  administering  the Plan. The Company
hereby  indemnifies  each person so  designated by the Board against any and all
claims, loss, damages,  expense and liability arising from any action or failure
to act with respect to the Plan,  except when the same is judicially  determined
to be due to the fraud, gross negligence or willful misconduct of such person.

                                   ARTICLE VII
                        Termination and Amendment of Plan

         7.1 (a) Termination of Plan Upon Notice . The Company presently intends
to  continue  the  Plan  indefinitely,  but the  continuance  of the Plan is not
assumed as a  contractual  obligation  and the Company may terminate the Plan at
any time by delivering  written notice of termination  to each  Participant  and
Beneficiary  then entitled to receive  distributions  pursuant to the Plan. Upon
such  termination,  all  affected  Participants  shall  receive  a cash lump sum
payment equal to the Termination  Value of each such  Participant's  interest in
the terminated Plans, calculated as described in section 5.3.

                  (b) Termination of Plan Upon Change of Control.  Upon a Change
of  Control,  the Plan shall  terminate.  Upon such  termination,  all  affected
Participants  shall  receive a cash lump sum  payment  equal to the  Termination
Value of each such Participant's interest in the terminated Plans, calculated as
described in Section 5.3.

         7.2 Procedure Upon  Termination of a Plan. Upon termination of the Plan
under Section 7.1(a) or (b), the Company shall distribute to each Participant or
Beneficiary  then  participating  in the Plan, in one lump sum or in three equal
annual  installments  with  interest at the base rate required in order to avoid
the  imputation of interest  under section 483 of the Internal  Revenue Code, or
any  successor  provision,  the amount  determined  pursuant  to section 7.1 and
Section 5.3. The method of payment shall be as elected by a Participant.


<PAGE>


         7.3  Amendment  by the  Company.  The Company may at any time amend the
Plan in any respect by action of its Board,  but no amendment shall be made that
would  have the  effect of  materially  and  adversely  affecting  the  economic
interest  of any  person  under  the Plan with  respect  to  previously  awarded
Participation Points.

                                   ARTICLE VI
                                  Miscellaneous

     8.1 Right to Dismiss  Employees and Consultants.  The Company may terminate
the  employment  of any  employee  or  consultant  at any time for any reason as
freely as if this Plan  were not in  existence.

     8.2 Source of Benefits.  The  obligations  hereunder are  undertaken by the
Company and the  Affiliates,  and all benefits  payable  under the Plan shall be
paid solely from the general  assets of the Company and/or its  Affiliates,  and
shall be allocated  among the Company and its  Affiliates in proportion to their
ownership of Eligible  Domestic Wells and Non-Domestic  Projects included in the
Plan.  No  allocation  of interests or income on the books of the Company or the
Affiliates  shall be deemed to create a separate fund or any ownership  interest
on the part of any  Participant  in any  Eligible  Domestic  Wells being used to
measure Plan Distributions or in any production from properties.

     8.3 No Ownership of  Properties;  Other Rights.  Nothing  contained in this
Plan shall in any way  restrict  the right of the Company or the  Affiliates  in
their discretion to operate,  abandon,  sell,  transfer,  mortgage,  encumber or
otherwise deal with the Eligible Domestic Wells on Non-Domestic  Projects giving
rise to the revenues used to measure Plan Distributions.  Any rights accruing to
a  Participant  or other  person under the Plan are solely those of an unsecured
general  creditor of the  Company.  Nothing  contained in the Plan and no action
taken  pursuant to the  provisions  of the Plan will create or be  construed  to
create a trust of any kind, or a pledge, or an economic interest in the Eligible
Domestic Wells, the Non-Domestic  Projects or a fiduciary  relationship  between
the Company, an Affiliate, and a Participant or any other person. Nothing in the
Plan will be construed to require that any fund be  maintained  or any amount be
segregated for a Participant's benefit.

     8.4  Sale of  Eligible  Domestic  Wells  or  Non-Domestic  Projects.  If an
Eligible Domestic Well or Non-Domestic Project is sold or in any way transferred
to other than an Affiliate  during the time that such Eligible  Domestic Well or
Non-Domestic  Project  is subject  to the Plan,  the value of the  consideration
received in connection with the transfer will be considered to be Cash Flow from
such Eligible  Domestic Well or Non-Domestic  Project and will be distributed as
Plan Cash Flow at the time and in the manner  required by Section 3.1 or 4.1, as
the case may be.

     8.5  Deductibility  under Internal Revenue Code. If the Company believes in
good faith that a Participant may receive total compensation from the Company in
one  calendar  year in excess of the amount which may be deducted by the Company
under  Internal  Revenue Code  section 162 (m),  then the Company may defer such
excess payments until the first year when they would be deductible.


<PAGE>


     8.6 Beneficiaries.  In the absence of an effective Beneficiary  designation
as  to  any  portion  of a  Participant's  interest  under  the  Plan  (if  such
Participant  is  a  natural  person),  pursuant  to  Section  2.2  hereof,  Plan
Distributions  attributable to such interest shall be paid to the  Participant's
personal  representative,  but  if the  Company  believes  that  none  had  been
appointed within six months after the Participant's death, the Company may elect
not to pay such income until a personal representative has been appointed or may
pay such  income  to the  Participant's  surviving  spouse,  or if none,  to his
surviving children and issue of deceased children by right of representation, or
if there be none, to his surviving parents.

     8.7  Non-Transferability  of Benefits. No Participant or other person shall
have  any  right  to  assign,  alienate,  transfer,  hypothecate,   encumber  or
anticipate any interest in any benefits under this Plan, nor shall such benefits
be subject to any legal  process to levy upon or attach the same for  payment of
any claim  against  any such  Participant  or other  person  through any process
whatsoever,  and any attempt to cause such rights to be so subjected will not be
recognized except to such extent as may be required by law.

     8.8 Payment Due Minor or Incapacitated Persons. If any person entitled to a
payment under the Plan is a minor,  or if the Company  determines  that any such
person is incapacitated by reason of physical or mental  disability,  whether or
not legally  adjudicated  as such, the Company shall have the power to cause the
payments  becoming due to such person to be made to his personal  representative
or to another for his benefit,  without  responsibility of the Company to see to
the application of such payments.  The Company shall have no  responsibility  to
investigate  the  physical  or  mental   condition  of  a  Participant  and  any
determination  of  disability  made  by the  Company  shall  be  binding  on the
Participant  and all other  persons.  Payments made pursuant to such power shall
operate as a complete discharge of the Plan and the Company.

     8.9  Disposition  of  Unclaimed  Payments.  Pursuant to Section  2.2,  each
Participant who is a natural person must file with the Company from time to time
in writing his address  and the  address of each of his  Beneficiaries  and each
change  of  address.  Any  communication,  statement  or notice  addressed  to a
Participant  or  Beneficiary  at his last post  office  address  filed  with the
Company, or if no address is filed with the Company then at his last post office
address as shown on the Company's  records,  will be binding on the  Participant
and his  Beneficiaries  for all purposes of the Plan.  The Company  shall not be
required to search for or locate a Participant  or  Beneficiary.  If the Company
notifies a Participant or Beneficiary  that he is entitled to a distribution and
also  notifies him of the  provisions of this section,  and the  Participant  or
Beneficiary fails to make his address known to the Company within three calendar
years  after the  notification,  the  Participation  Points  of the  Participant
Beneficiary  will be  forfeited  and  canceled  as of the end of the  Plan  Year
following the expiration of such three year period.

     8.10 Use of Term "Key  Employee".  The use herein of the defined  term "Key
Employee"  is a matter of  convenience  only,  and is not  intended to create an
employer/employee  relationship  between the Company or its  Affiliates  and any
consultant who may be a  Participant.  Nothing herein shall be construed to make
any  consultant  who  is a  Participant  the  employee  of  the  Company  or its
Affiliates.

     8.11 Governing Law. The construction and  interpretation of this Plan shall
be governed by the laws of the State of Colorado.


<PAGE>



     8.12  Pronouns;  Gender and Number.  Unless the context  clearly  indicates
otherwise,  words in any gender shall include the other genders and the singular
shall include the plural and vice versa.

Executed as of January 31, 2001

                              HALLWOOD ENERGY CORPORATION

                              William L. Guzzetti
                              President

                              HEC ACQUISITION CORP.


                              William L. Guzzetti
                              President

                              EM NOMINEE PARTNERSHIP COMPANY

                              By HEC Acquisition Corp., general partner

                              William L. Guzzetti
                              President

                              HCRC ACQUISITION CORP.
                              By Hallwood Consolidated Resources
                                       Corporation, its successor by merger


                              William L. Guzzetti
                              President

                              HALLWOOD CONSOLIDATED PARTNERS, L.P.
                              By Hallwood Consolidated Resources Corporation,
                                general partner


                              William L. Guzzetti
                              President