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 Quarterly Period Ended June 30, 1998

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

                         Commission File Number 0-19931


                   HALLWOOD CONSOLIDATED RESOURCES CORPORATION
             (Exact name of registrant as specified in its charter)


              Delaware                                                84-1176750
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                            Identification Number)

  4582 South Ulster Street Parkway
                    Suite 1700
               Denver, Colorado                                            80237
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (303) 850-7373

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 for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [x] No [ ]

Shares of Common Stock outstanding at August 14, 1998                  3,007,852













                                  Page 1 of 22
<TABLE>
<CAPTION>

PART I.    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

                                    HALLWOOD CONSOLIDATED RESOURCES CORPORATION
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)
                                                  (In thousands)


                                                                       June 30,                December 31,
                                                                        1998                       1997

CURRENT ASSETS
<S>                                                                 <C>                        <C>       
    Cash and cash equivalents                                       $    1,745                 $    4,492
    Accrued oil and gas revenue                                          3,248                      4,266
    Due from affiliates                                                  3,726                      2,418
    Prepaid and other assets                                             1,143                        844
    Current assets of affiliates                                         3,728                      3,854
                                                                     ---------                  ---------
             Total current assets                                       13,590                     15,874
                                                                      --------                   --------

PROPERTY, PLANT AND EQUIPMENT, at cost
    Oil and gas properties (full cost method)
        Proved oil and gas properties                                  318,396                    294,922
        Unproved mineral interests - domestic                            2,781                      2,250
                                                                     ---------                  ---------
             Total                                                     321,177                    297,172

    Less - accumulated depreciation,
      depletion, amortization and impairment                          (236,885)                  (221,141)
                                                                       -------                    -------
             Net property, plant and equipment                          84,292                     76,031
                                                                      --------                   --------

OTHER ASSETS
     Deferred tax asset                                                    450                        450
     Noncurrent assets of affiliate                                          6                         16
                                                                   -----------                 ----------
             Total other assets                                            456                        466
                                                                     ---------                  ---------

TOTAL ASSETS                                                         $  98,338                  $  92,371
                                                                      ========                   ========


















<FN>

                                         (Continued on the following page)
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                    HALLWOOD CONSOLIDATED RESOURCES CORPORATION
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)
                                           (In thousands except Shares)


                                                                                   June 30,         December 31,
                                                                                     1998               1997

CURRENT LIABILITIES
<S>                                                                               <C>               <C>       
    Accounts payable and accrued liabilities                                      $    2,584        $    3,087
    Current portion of long-term debt                                                  1,063
    Current portion of contract settlement obligation                                                    1,039
    Current liabilities of affiliates                                                  7,362             6,881
                                                                                   ---------         ---------
         Total current liabilities                                                    11,009            11,007
                                                                                    --------           -------

NONCURRENT LIABILITIES
    Long-term debt                                                                    39,948            25,000
    Long-term obligations of affiliates                                                7,652             7,589
    Deferred liability                                                                    75                89
                                                                                 -----------       -----------
         Total noncurrent liabilities                                                 47,675            32,678
                                                                                    --------          --------

         Total liabilities                                                            58,684            43,685
                                                                                    --------          --------

COMMITMENTS AND CONTINGENCIES (NOTE 9)

STOCKHOLDERS' EQUITY
    Common stock par value $.01; 10,000,000 shares
       authorized; 3,007,852 shares issued in 1998 and
       2,986,812 shares issued in 1997                                                    30                30
    Additional paid-in-capital                                                        81,283            80,111
    Accumulated deficit                                                              (37,795)          (27,581)
    Treasury stock - 258,395 shares in 1998 and 259,278 shares in 1997                (3,864)           (3,874)
                                                                                   ---------         ---------
         Stockholders' equity - Net                                                   39,654            48,686
                                                                                    --------          --------

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $  98,338         $  92,371
                                                                                    ========          ========


















<FN>

               The accompanying notes are an integral part of the
                             financial statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                                    HALLWOOD CONSOLIDATED RESOURCES CORPORATION
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (Unaudited)
                                       (In thousands except per Share data)


                                                                                For the Three Months Ended
                                                                                         June 30,
                                                                              1998                      1997

REVENUES:
<S>                                                                        <C>                         <C>     
   Gas revenue                                                             $  4,568                    $  3,360
   Oil revenue                                                                2,369                       2,951
   Pipeline and other                                                           564                         636
   Interest income                                                               60                          77
                                                                          ---------                   ---------
                                                                              7,561                       7,024
                                                                            -------                     -------

EXPENSES:
   Production operating                                                       2,754                       2,432
   General and administrative                                                   993                         884
   Interest                                                                     913                         566
   Depreciation, depletion and amortization                                   2,213                       1,934
   Impairment of oil and gas properties                                      11,000
   Litigation settlement of affiliate                                           113
                                                                          ---------
                                                                             17,986                       5,816
                                                                            -------                     -------

INCOME (LOSS) BEFORE INCOME TAXES                                           (10,425)                      1,208
                                                                            -------                     -------

PROVISION FOR INCOME TAXES:
   Current                                                                      104                          56
                                                                          ---------                   ---------

NET INCOME (LOSS)                                                          $(10,529)                   $  1,152
                                                                            =======                     =======

NET INCOME (LOSS) PER SHARE - BASIC                                      $    (3.83)                $       .42
                                                                          =========                  ==========

NET INCOME (LOSS) PER SHARE - DILUTED                                    $    (3.83)                $       .41
                                                                          =========                  ==========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
                                                                              2,749                       2,718
                                                                            =======                     =======















<FN>

               The accompanying notes are an integral part of the
                             financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                    HALLWOOD CONSOLIDATED RESOURCES CORPORATION
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (Unaudited)
                                       (In thousands except per Share data)


                                                                                 For the Six Months Ended
                                                                                         June 30,
                                                                              1998                      1997

REVENUES:
<S>                                                                        <C>                         <C>     
   Gas revenue                                                             $  8,880                    $  8,134
   Oil revenue                                                                5,114                       6,865
   Pipeline and other                                                           884                       1,043
   Interest income                                                              145                         117
                                                                          ---------                   ---------
                                                                             15,023                      16,159
                                                                            -------                     -------

EXPENSES:
   Production operating                                                       5,517                       4,947
   General and administrative                                                 1,902                       1,785
   Interest                                                                   1,734                       1,162
   Depreciation, depletion and amortization                                   4,744                       4,001
   Impairment of oil and gas properties                                      11,000
   Litigation settlement of affiliate                                           113
                                                                          ---------
                                                                             25,010                      11,895
                                                                            -------                     -------

INCOME (LOSS) BEFORE INCOME TAXES                                            (9,987)                      4,264
                                                                            -------                     -------

PROVISION FOR INCOME TAXES:
   Current                                                                      227                         147
                                                                          ---------                    --------

NET INCOME (LOSS)                                                          $(10,214)                   $  4,117
                                                                            =======                     =======

NET INCOME (LOSS) PER SHARE - BASIC                                      $    (3.72)                  $    1.51
                                                                          =========                    ========

NET INCOME (LOSS) PER SHARE - DILUTED                                    $    (3.72)                  $    1.45
                                                                          =========                    ========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
                                                                              2,744                       2,718
                                                                            =======                     =======















<FN>

               The accompanying notes are an integral part of the
                             financial statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                                    HALLWOOD CONSOLIDATED RESOURCES CORPORATION
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (Unaudited)
                                                  (In thousands)


                                                                            For the Six Months Ended
                                                                                    June 30,
                                                                         1998                      1997

OPERATING ACTIVITIES:
<S>                                                                    <C>                       <C>     
    Net income (loss)                                                  $(10,214)                 $  4,117
    Adjustments to reconcile net income (loss)
      to net cash provided by operating activities:
        Depreciation, depletion and amortization                          4,744                     4,001
        Impairment of oil and gas properties                             11,000
        Amortization of deferred loan costs and warrants                     43
        Noncash interest expense                                              6                        44
        Undistributed earnings of affiliates                             (1,572)                   (2,131)
        Recoupment of take-or-pay liability                                 (14)                      (15)

    Changes in  assets  and  liabilities  provided  (used)  cash net of  noncash
      activity:
        Accrued oil and gas sales                                         1,018                     1,590
        Due from affiliates                                              (1,041)                     (870)
        Prepaid and other assets                                           (299)                      373
        Accounts payable and accrued liabilities                           (503)                      263
                                                                       --------                  --------
                Net cash provided by operating activities                 3,168                     7,372
                                                                        -------                   -------

INVESTING ACTIVITIES:
    Additions to oil and gas properties                                  (17,990)                  (1,498)
    Exploration and development costs incurred                            (4,692)                  (3,102)
    Proceeds from oil and gas property sales                                  90                       26
    Distributions received from affiliates                                   572                      572
    Other                                                                                             (11)
                                                                    ------------                ---------
                Net cash used in investing activities                    (22,020)                  (4,013)
                                                                         -------                  -------

FINANCING ACTIVITIES:
    Exercise of stock options                                                150
    Proceeds from long-term debt                                          17,000
    Payments on long-term debt                                                                      (3,000)
    Payments on contract settlement obligation                            (1,045)
                                                                        --------
                Net cash provided by (used in)
                    financing activities                                  16,105                    (3,000)
                                                                         -------                   -------

NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                            (2,747)                      359

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                        4,492                       628
                                                                         -------                   -------

END OF PERIOD                                                           $  1,745                  $    987
                                                                         =======                   =======

<FN>

               The accompanying notes are an integral part of the
                             financial statements.
</FN>
</TABLE>


<PAGE>


                   HALLWOOD CONSOLIDATED RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)



NOTE 1    -  ORGANIZATION AND BASIS OF PRESENTATION

Hallwood  Consolidated  Resources  Corporation  ("HCRC" or the  "Company")  is a
Delaware   corporation  engaged  in  the  development,   production,   sale  and
transportation of oil and gas, and in the acquisition,  exploration, development
and operation of oil and gas properties.  The Company's properties are primarily
located in the Rocky  Mountain,  Mid-Continent,  Greater  Permian and Gulf Coast
regions of the United  States.  The  principal  objective  of the  Company is to
maximize shareholder value by increasing its reserves,  production and cash flow
through  a  balanced  program  of  development  and high  potential  exploration
drilling, as well as selective acquisitions.

The  interim  financial  data  in  the  accompanying  financial  statements  are
unaudited;  however, in the opinion of management,  the interim data include all
adjustments,  consisting only of normal recurring  adjustments,  necessary for a
fair  presentation  of the  results  for the interim  periods.  These  financial
statements  should be read in  conjunction  with the  financial  statements  and
accompanying  notes included in the Company's December 31, 1997 Annual Report on
Form 10-K.


NOTE 2    -   ACCOUNTING POLICIES

Consolidation

The Company accounts for its interest in affiliated oil and gas partnerships and
limited  liability  companies using the  proportionate  consolidation  method of
accounting.  The accompanying financial statements include the activities of the
Company and its pro rata share of the  activities of Hallwood  Energy  Partners,
L.P. ("HEP").

Treasury Stock

At June 30, 1998 and December 31, 1997, the Company owned  approximately  19% of
the  outstanding  units of HEP which  owns  approximately  46% of the  Company's
common stock;  consequently,  the Company had an interest in 258,395 and 259,278
of its own shares at June 30, 1998 and December 31,  1997,  respectively.  These
shares are treated as treasury stock in the accompanying financial statements.

Computation of Net Income (Loss) Per Share

During February 1997, the Financial  Accounting Standards Board issued Statement
of Financial  Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related  interpretations.  It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution,  and  requires  dual  presentation  of basic and  diluted  EPS for all
entities with complex capital  structures.  Diluted EPS is computed similarly to
fully  diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending  after  December  15,  1997,  including  interim  periods,  and  requires
restatement  of all prior  period  EPS data  presented.  HCRC  adopted  SFAS 128
effective  December  31,  1997,  and has  restated  all  prior  period  EPS data
presented to give retroactive effect to the new accounting standard.


<PAGE>


Basic income  (loss) per share is computed by dividing net income  (loss) by the
weighted average number of common shares outstanding during the periods. Diluted
income (loss) per share  includes the  potential  dilution that could occur upon
exercise of outstanding  options to acquire common stock, and the effects of the
warrants  described in Note 3,  computed  using the treasury  stock method which
assumes  that the  increase  in the number of shares is reduced by the number of
shares which could have been  repurchased  by the Company with the proceeds from
the exercise of the options (which were assumed to have been made at the average
market price of the common shares during the  reporting  period).  All share and
per share information has been restated to reflect the three-for-one stock split
described in Note 5.

The following  table  reconciles  the number of shares  outstanding  used in the
calculation  of basic  and  diluted  income  (loss)  per  share.  The  warrants,
described in Note 3, have been ignored in the  computation of diluted net income
(loss) per share in all periods and the stock  options  have been ignored in the
computation of diluted loss per share in 1998 because their  inclusion  would be
anti-dilutive.
<TABLE>
<CAPTION>

                                                                 Income (Loss)
                                                                                        Shares         Per Share
                                                                           (In thousands except per Share)

For the Three Months Ended June 30, 1998
<S>                                                                  <C>                 <C>             <C>    
   Net loss per share - basic                                        $(10,529)           2,749           $(3.83)
                                                                      -------            -----            =====
     Net Loss per share - diluted                                    $(10,529)           2,749           $(3.83)
                                                                      =======            =====            =====

For the Six Months Ended June 30, 1998
   Net loss per share - basic                                        $(10,214)           2,744           $(3.72)
                                                                      -------            -----            =====
     Net Loss per share - diluted                                    $(10,214)           2,744           $(3.72)
                                                                      =======            =====            =====

For the Three Months Ended June 30, 1997
   Net income per share - basic                                      $  1,152            2,718          $    .42
                                                                                                         =======
   Effect of Options                                                                       113
                                                                 ------------           ------
     Net Income per share - diluted                                  $  1,152            2,831          $    .41
                                                                      =======            =====           =======

For the Six Months Ended June 30, 1997
   Net income per share - basic                                     $  4,117             2,718           $  1.51
                                                                                                          ======
   Effect of Options                                                                       117
                                                                 ------------           ------
     Net Income per share - diluted                                 $  4,117             2,835           $  1.45
                                                                     =======             =====            ======
</TABLE>

Recently Issued Accounting Pronouncements

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130 "Reporting  Comprehensive  Income" ("SFAS
130"). SFAS 130 established standards for reporting and display of comprehensive
income and its components (revenues,  expenses, gains, and losses) in a full set
of general-purpose  financial statements.  SFAS 130 requires that all items that
are  required to be  recognized  under  accounting  standards as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods  provided for  comparative  purposes is required.
The Company  adopted SFAS 130 on January 1, 1998.  The Company does not have any
items of other  comprehensive  income for the three and six month  periods ended
June 30, 1998 and 1997.  Therefore,  total  comprehensive  income (loss) was the
same as net income (loss) for those periods.

During June 1998, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 133 "Accounting for Derivative  Instruments
and  Hedging  Activities"  ("SFAS  133").  SFAS 133  establishes  standards  for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts  (collectively  referred  to as  derivatives)  and for  hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities  in the statement of financial  position and measure those
instruments  at fair value.  If certain  conditions are met, a derivative may be
specifically  designated  as (a) a hedge of the  exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted  transaction,  or
(c) a hedge of the foreign  currency  exposure of a net  investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign- currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the  derivative  and the  resulting  designation.  The Company is required to
adopt SFAS 133 on January 1, 2000.  The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 133.

Reclassifications

Certain  reclassifications have been made to the prior amounts to conform to the
classifications used in the current period.


NOTE 3     -  DEBT

On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior  Subordinated Notes
("Subordinated  Notes") due December 23, 2007 to a financial  institution.  HCRC
also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an
exercise price of $28.99 per share. The Subordinated  Notes bear interest at the
rate of 10.32%  per  annum on the  unpaid  balance,  payable  quarterly.  Annual
principal  payments of  $5,000,000  are due on each of December 23, 2003 through
December 23, 2007.

The proceeds  from the  Subordinated  Notes were  allocated to the  Subordinated
Notes  and  to  the  Warrants  based  upon  the  relative  fair  values  of  the
Subordinated  Notes  without the Warrants and of the Warrants  themselves at the
time of issuance. The allocated value of the Warrants of $1,032,000 was recorded
as  paid-in-capital.  The discount on the  Subordinated  Notes will be amortized
over  the  term  of  the  Subordinated   Notes  using  the  interest  method  of
amortization.

During 1997, the Company and its banks amended the Company's Credit Agreement to
extend the term date to May 31,  1999.  Under the Credit  Agreement,  HCRC has a
borrowing  base  of  $22,000,000.   The  Company  had  amounts   outstanding  of
$17,000,000 as of June 30, 1998. HCRC's unused borrowing base totaled $5,000,000
at August 14, 1998.

Borrowings against the credit line bear interest,  at the option of the Company,
at either (i) the banks'  Certificate of Deposit rate plus from 1.375% to1.875%,
(ii) the  Euro-Dollar  rate plus from  1.25% to 1.75% or (iii) the higher of the
prime  rate of  Morgan  Guaranty  Trust  or the sum of  one-half  of 1% plus the
Federal funds rate, plus .75%. The applicable interest rate was 7.2% at June 30,
1998.  Interest is payable at least quarterly,  and quarterly principal payments
of $1,063,000  commence May 31, 1999. The credit  facility is secured by a first
lien on approximately 80% in value of the Company's oil and gas properties.

HCRC entered into  contracts to hedge its interest rate payments on  $10,000,000
of its debt for 1998 and $5,000,000 for each of 1999 and 2000. HCRC does not use
the hedges for  trading  purposes,  but rather for the  purpose of  providing  a
measure of  predictability  for a portion of HCRC's interest  payments under its
Credit Agreement,  which has a floating interest rate. In general,  it is HCRC's
goal to hedge 50% of the principal amount of its debt under the Credit Agreement
for the next two years and 25% for each year of the remaining  term of the debt.
HCRC has  entered  into four  hedges,  one of which is an  interest  rate collar
pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85%, and
the others are interest rate swaps with fixed rates ranging from 5.75% to 6.57%.
The  amounts  received  or  paid  upon  settlement  of  these  transactions  are
recognized as interest expense at the time the interest payments are due.


NOTE 4     -  STATEMENTS OF CASH FLOWS

Cash paid for  interest  during the six months  ended June 30, 1998 and 1997 was
$1,635,000 and $772,000, respectively.



<PAGE>


NOTE 5       -    STOCK SPLIT

During July 1997, the stockholders of HCRC approved an increase in the number of
authorized  shares of its  Common  Stock  from  2,000,000  shares to  10,000,000
shares.  HCRC also  declared a  three-for-one  split of its  outstanding  Common
Stock.  The stock  split was  effected  by  issuing,  as a stock  dividend,  two
additional shares of Common Stock for each share outstanding. The stock dividend
was paid on August 11,  1997 to  shareholders  of record on August 4, 1997.  All
share and per share  information has been restated to reflect the  three-for-one
stock split.


NOTE 6     -  ACQUISITION

In July 1996, HCRC and its affiliate, HEP acquired interests in 38 wells located
primarily  in  LaPlata  County,  Colorado.  An  unaffiliated  large  East  Coast
financial institution formed an entity to utilize the tax credits generated from
the wells.  The project was financed by an  affiliate  of Enron Corp.  through a
volumetric  production  payment.  During May 1998, a limited  liability  company
owned equally by HCRC and HEP purchased the volumetric  production  payment from
Enron. HCRC funded its $17,257,000 share of the acquisition price from operating
cash flow and borrowings under its Credit Agreement.


NOTE 7     -  IMPAIRMENT OF OIL AND GAS PROPERTIES

During the second quarter of 1998, HEP recorded an impairment of its oil and gas
properties because capitalized costs at June 30, 1998 exceeded the present value
(discounted  at 10%) of estimated  future net  revenues  from proved oil and gas
reserves, based on prices at that date of $13.00 per barrel of oil and $1.90 per
mcf of gas.


NOTE 8     -  STOCK OPTION GRANT

On May 5, 1998,  HCRC  granted  options for 9,540  shares of Common  Stock at an
exercise price of $15.75 per share. These options were not granted pursuant to a
previously  existing plan, but are subject to terms and conditions  identical to
those  in  HCRC's  1995  Stock  Option  Plan.  One-third  of  the  options  vest
immediately,  and the remainder  vest one-half on the first  anniversary  of the
date of grant and one-half on the second anniversary of the date of grant.

On May 5, 1998, HCRC also granted options for 9,540 shares of Common Stock under
its 1997 Stock  Option Plan at an  exercise  price of $15.75.  One-third  of the
options  vest  immediately,  and  the  remainder  vest  one-half  on  the  first
anniversary  of the date of grant and one-half on the second  anniversary of the
date of grant.


NOTE 9     -  LEGAL PROCEEDINGS

On December 3, 1997,  Arcadia  Exploration  and Production  Company  ("Arcadia")
filed a Demand for Arbitration with the American Arbitration Association against
Hallwood Consolidated  Resources  Corporation,  Hallwood Energy Partners,  L.P.,
E.M.  Nominee  Partnership  Company and  Hallwood  Consolidated  Partners,  L.P.
(collectively referred to herein as "Hallwood"), claiming that Hallwood breached
a Purchase and Sale Agreement  dated August 25, 1997,  between  Arcadia and HCRC
and HEP.  Arcadia's  Demand for  Arbitration  seeks specific  performance of the
agreement  which  Arcadia  claims  requires  Hallwood  to  purchase  oil and gas
properties from Arcadia for approximately  $27 million.  HCRC and HEP terminated
the agreement  because of environmental  and title problems with the properties.
Additionally, Arcadia seeks incidental and special damages, prejudgment interest
and  attorneys'  fees and costs.  Hallwood  filed its  Answering  Statement  and
Counterclaim   asserting  that  it  properly  terminated  and/or  rescinded  the
Agreement and seeking refund of Hallwood's  earnest money  deposit,  prejudgment
interest,  attorneys'  fees and costs.  This matter was heard by the arbitrators
during May and July 1998. The arbitrators have not yet rendered a decision.


<PAGE>


On April 23,  1992,  a lawsuit  was filed in the  Chancery  Court for New Castle
County,  Delaware,  styled Tappe v. Hallwood Consolidated Resources Corporation,
Hallwood  Consolidated  Partners,  L. P.,  Hallwood Oil and Gas, Inc.,  Hallwood
Energy  Partners,  L. P., and Hallwood  Petroleum,  Inc.  (C. A. No 12536).  The
lawsuit seeks to rescind the conversion of Hallwood Consolidated Partners,  L.P.
("HCP") into the Company  ("Conversion")  and to recover  damages in unspecified
amounts.  The plaintiff also seeks class  certification  to represent  similarly
situated HCP  unitholders.  In general,  the suit  alleges  that the  defendants
breached  fiduciary duties to HCP unitholders by, among other things,  proposing
allocation  of common  stock in the  Conversion  on a basis  that the  plaintiff
alleges is unfair,  failing to require  that the  allocation  be  approved by an
independent  third party,  causing the costs of proposing  the  Conversion to be
borne  indirectly  by the  partners  of HCP  whether or not the  Conversion  was
completed,   and   failing  to   disclose   certain   matters  in  the   Consent
Statement/Prospectus  soliciting  consents  to the  Conversion.  The  defendants
believe that they fully  considered  and disclosed all material  information  in
connection with the Conversion, and they believe that the suit is without merit.
HCRC plans to  vigorously  defend this case,  but  because of its early  stages,
cannot  predict  the outcome of this  matter or any  possible  effect an adverse
outcome might have.

The Company is involved in other legal  proceedings and claims which have arisen
in the ordinary  course of its  business and have not been finally  adjudicated.
The Company believes that its liability, if any, as a result of such proceedings
and claims will not materially affect its financial condition or operations.


ITEM 2     -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

Liquidity and Capital Resources

Cash Flow

The Company generated  $3,168,000 of cash flow from operating  activities during
the first six months of 1998. The other primary cash inflows were $17,000,000 in
proceeds  from  long-term  debt and  $572,000  in  distributions  received  from
affiliates.  Cash was primarily  used for additions to property and  exploration
and  development  costs of $22,682,000  and for payments on contract  settlement
obligation of $1,045,000 for the six months ended June 30, 1998,  resulting in a
$2,747,000  decrease in cash from  $4,492,000 at December 31, 1997 to $1,745,000
at June 30, 1998.

Exploration and Development Projects and Acquisitions


Through June 30, 1998, HCRC incurred  $22,682,000 in direct property  additions,
development,  exploitation,  and exploration  costs. The costs were comprised of
$17,990,000 for property acquisitions and approximately  $4,692,000 for domestic
exploration  and  development  expenditures.  The  expenditures  resulted in the
drilling,  recompletion  or workover of 26 development  wells and 22 exploration
wells.  Twenty-four  development wells (92%) and 14 exploration wells (64%) were
successfully completed as producers,  for an overall success rate of 79%. HCRC's
1998  capital  budget was  initially  set at  $21,426,000  but was  increased to
$33,426,000  to allow for the  purchase  of the  volumetric  production  payment
discussed  below.  The remaining  budget for 1998 includes 39 future projects in
more than 21 areas.  Significant  acquisition,  exploration,  exploitation,  and
development projects for 1998 are discussed below.

Rocky Mountain Region

HCRC  expended  approximately  $18,610,000  of its  capital  budget in the Rocky
Mountain Region located in Colorado, Montana, North Dakota, Northwest New Mexico
and Wyoming. Of this amount,  approximately  $17,257,000 was for the purchase of
the  volumetric   production  payment  discussed  below.  In  1998,  HCRC  spent
approximately  $1,070,000  successfully  recompleting five operated  development
wells,  drilling one unsuccessful  operated exploration well, and drilling three
additional  operated wells which are still  underway.  A discussion of the major
projects in the Region follows.

San Juan Basin  Project - Colorado.  In July 1996,  HCRC and its  affiliate  HEP
acquired interests in 38 wells located primarily in LaPlata County, Colorado. An
unaffiliated large East Coast financial  institution formed an entity to utilize
tax credits  generated from the wells.  The project was financed by an affiliate
of Enron Corp.  through a  volumetric  production  payment.  During May 1998,  a
limited  liability  company,  owned equally by HCRC and HEP purchased from Enron
the volumetric  production  payment.  HCRC funded its  $17,257,000  share of the
acquisition  price  from  operating  cash flow and  borrowings  under its Credit
Agreement.  At the time of the purchase,  HCRC entered into a financial contract
to hedge the volumes  subject to the  production  payment at an average price of
$2.11 per mmbtu.  Under the terms of the  original  1996  transaction,  HCRC was
already responsible for all costs associated with the wells. HPI has managed and
operated the wells since July 1996, and has increased the wells' production from
14 to 26 mmcf per day through successful  workover and gas gathering  facilities
improvement programs. The acquisition has increased HCRC's current average daily
production by 6.75 mmcf per day.

Colorado  Western  Slope  Project.  HCRC is in the process of drilling two 5,500
foot Dakota  Formation  wells in the Piceance  Basin in Colorado and Utah.  Both
wells  are  presently  being  completed,  and HCRC  expects  to  begin  sales of
production  in the third  quarter of 1998.  Currently,  HCRC owns an average 46%
working interest in the wells. In 1998, HCRC also  successfully  recompleted one
well in the Basin.  Total  costs for the three wells  through  June 30, 1998 are
approximately $517,000. HCRC has plans to drill two more wells in 1998 depending
upon  drilling  rig  availability.  Increased  natural  gas prices and  improved
stimulation technology make the Basin an attractive area for HCRC.

West Sioux Pass Prospect.  In the West Sioux area of Richland  County,  Montana,
HCRC  drilled  one  unsuccessful   12,405  foot  operated  Red  River  Formation
exploration  well  for a cost  of  approximately  $252,000.  HCRC  continues  to
evaluate the project using the  additional  data  obtained from the  exploratory
well.

East Kevin  Field  Project.  Drilling is  currently  underway  for one  operated
development  well in the Horizontal  Nisku  Formation in Toole County,  Montana.
HCRC has a 50%  working  interest  in the  project  and has spent  approximately
$170,000 in 1998. HCRC plans to drill two additional  wells in the third quarter
of 1998. HCRC will consider drilling additional locations after it evaluates the
results of the first three wells.

Greater Permian Region

During the first six months of 1998, HCRC expended  approximately  $2,555,000 of
its capital budget in the Greater  Permian Region located in Texas and Southeast
New Mexico. HCRC spent approximately $1,765,000 for drilling,  recompletion,  or
workover of 17 development  wells,  drilling 17 exploration wells, and acquiring
undeveloped acreage and geological and geophysical data. Twenty-six (76%) of the
wells drilled or recompleted  were  successful.  The major  projects  within the
Region are discussed below.

Catclaw   Draw/Carlsbad  Area  Projects.   HCRC  spent  approximately   $141,000
successfully  recompleting six operated wells in the Carlsbad/Catclaw Draw areas
in Lea,  Eddy and Chaves  Counties,  New Mexico.  HCRC  incurred  an  additional
$250,000 in 1998 for  drilling  costs  associated  with an  operated  8,300 foot
Delaware  development well which is currently being tested.  Several  additional
drilling  locations exist in the area. HCRC plans to apply for drilling  permits
in 1998 and to drill the wells in 1999.

Merkle  Project.  In 1997,  HCRC  acquired 74 square  miles of  proprietary  3-D
seismic  data in Jones,  Taylor and Nolan  Counties,  Texas,  in a project  area
originated in 1995.  Target zones in this area include the Canyon Reef,  Strawn,
Flippan,  Tannehill, and Ellenberger Formations ranging in depth from 2,500 feet
to 6,000 feet. In 1998,  HCRC drilled 11 exploration  wells,  nine of which were
successful.  Costs  incurred  by HCRC in 1998  for  the 11  wells  drilled  were
approximately  $905,000. HCRC owns an average 30% working interest in the wells.
Four wells are  currently  underway,  and HCRC has 33  potential  locations  for
future  drilling.  HCRC  anticipates  drilling only four additional wells in the
remainder of 1998 because of present low crude oil prices.

Griffin  Project.  In  1998,  HCRC  purchased  land  for  $95,000  and  incurred
approximately $443,000 to drill three exploration wells and one development well
in Gaines County, Texas. None of the four nonoperated 7,500 foot Leonardian Sand
wells were  successful.  HCRC is still  evaluating  five  prospects  within this
project. HCRC owns an average 25% working interest in the wells.

Gulf Coast Region

During the first six months of 1998, HCRC expended approximately $835,000 of its
capital  budget in the Gulf Coast Region in Louisiana  and South and East Texas.
The following are major projects within the Region.

Mirasoles Project. In 1998, HCRC incurred  approximately $430,000 for land costs
related to the Mirasoles  project in Kenedy County,  Texas. In the third quarter
of 1998,  HCRC  plans  to test the Frio  Formation  by  drilling  a 17,000  foot
exploration  well.  HCRC has a 17.5% working  interest in this large  structural
prospect defined by 63 square miles of proprietary 3-D seismic data.

Bell Project. HCRC has a 30% working interest in an operated project to evaluate
the Buda, Carrizo,  Woodbine,  and Dexter sands in Houston County, Texas. HCRC's
drilling  costs in 1998 for a 9,200  foot  horizontal  well  were  approximately
$350,000. The well found the shallower reservoirs to be non-productive, and HCRC
is presently drilling in the Buda section.  In 1998, HCRC incurred an additional
$70,000 for the purchase of land.

Mid-Continent Region

HCRC expended  approximately $485,000 of its capital budget in the Mid-Continent
Region  located in Oklahoma  and Kansas.  Major  projects  within the Region are
discussed below.

Stealth Project.  HCRC is participating in an Arkoma Basin exploration  prospect
in Carter  County,  Oklahoma.  This  nonoperated  project is a 19,000  feet deep
multi-formation  structural test of the Hunton,  Viola,  Sycamore,  and Springer
Formations and is currently in the completion  phase. The operator was unable to
test the  targeted  Hunton  and Viola  Formation  objectives  and found that the
Sycamore  produced at  subcommercial  gas rates.  The  operator is  evaluating a
Springer  recompletion.  1998 year to date  drilling  costs  were  approximately
$165,000 for HCRC's 5% working interest.

El Reno Project.  HCRC incurred  approximately  $135,000 in 1998 to complete one
successful exploration well in Canadian County, Oklahoma. The well was completed
in the Red Fork Formation, and HCRC has a 35% working interest.

Kansas Area. HCRC successfully  recompleted two development wells in Kansas at a
cost of $46,000 during 1998.  Due to sustained  weak crude oil prices,  however,
eight development projects have been deferred.

Other

The  remaining  $197,000  of  HCRC's  1998  capital   expenditures  was  devoted
principally  to  drilling  one  unsuccessful  exploration  well in Yolo  County,
California and to other  miscellaneous  projects.  HCRC is also participating in
two  nonoperated  3-D projects  underway in nearby  Solano and Colusa  Counties,
California.

Peru Block Z-3  Project.  HCRC's  partner  on the  Peruvian  offshore  Z-3 Block
completed 1,200 miles of seismic data acquisition to supplement existing seismic
data. Data processing is currently underway. HCRC has a 7.5% working interest in
this project,  but will not incur capital costs until actual drilling operations
begin. The production-sharing contract calls for drilling operations to begin no
later than January 2001.

Financing

On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior  Subordinated Notes
("Subordinated  Notes") due December 23, 2007 to a financial  institution.  HCRC
also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an
exercise price of $28.99 per share. The Subordinated  Notes bear interest at the
rate of 10.32%  per  annum on the  unpaid  balance,  payable  quarterly.  Annual
principal  payments of  $5,000,000  are due on each of December 23, 2003 through
December 23, 2007.


<PAGE>


The proceeds  from the  Subordinated  Notes were  allocated to the  Subordinated
Notes  and  to  the  Warrants  based  upon  the  relative  fair  values  of  the
Subordinated  Notes  without the Warrants and of the Warrants  themselves at the
time of issuance. The allocated value of the Warrants of $1,032,000 was recorded
as  paid-in-capital.  The discount on the  Subordinated  Notes will be amortized
over  the  term  of  the  Subordinated   Notes  using  the  interest  method  of
amortization.

During 1997, the Company and its banks amended the Company's Credit Agreement to
extend the term date to May 31,  1999.  Under the Credit  Agreement,  HCRC has a
borrowing  base  of  $22,000,000.   The  Company  had  amounts   outstanding  of
$17,000,000 as of June 30, 1998. HCRC's unused borrowing base totaled $5,000,000
at August 14, 1998.

Borrowings against the credit line bear interest,  at the option of the Company,
at either (i) the banks'  Certificate of Deposit rate plus from 1.375% to1.875%,
(ii) the  Euro-Dollar  rate plus from  1.25% to 1.75% or (iii) the higher of the
prime  rate of  Morgan  Guaranty  Trust  or the sum of  one-half  of 1% plus the
Federal funds rate, plus .75%. The applicable interest rate was 7.2% at June 30,
1998. Interest is payable at least quarterly and quarterly principal payments of
$1,063,000 commence May 31, 1999. The credit facility is secured by a first lien
on approximately 80% in value of the Company's oil and gas properties.

HCRC entered into  contracts to hedge its interest rate payments on  $10,000,000
of its debt for 1998 and $5,000,000 for each of 1999 and 2000. HCRC does not use
the hedges for  trading  purposes,  but rather for the  purpose of  providing  a
measure of  predictability  for a portion of HCRC's interest  payments under its
Credit Agreement,  which has a floating interest rate. In general,  it is HCRC's
goal to hedge 50% of the principal amount of its debt under its Credit Agreement
for the next two years and 25% for each year of the remaining  term of the debt.
HCRC has  entered  into four  hedges,  one of which is an  interest  rate collar
pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85%, and
the others are interest rate swaps with fixed rates ranging from 5.75% to 6.57%.
The  amounts  received  or  paid  upon  settlement  of  these  transactions  are
recognized as interest expense at the time the interest payments are due.

Cautionary Statement Regarding Forward Looking Statements

In the interest of providing the Company's  stockholders and potential investors
with certain  information  regarding the Company's  future plans and operations,
certain  statements  set forth in this Form 10-Q relate to  management's  future
plans and objectives.  Such statements are  "forward-looking  statements" within
the  meaning of Section  27A of the  Securities  Act of 1933,  as  amended,  and
Section 21E of the  Securities  Exchange Act of 1934,  as amended.  Although any
forward-looking statements contained in this Form 10-Q or otherwise expressed by
or on behalf of the Company  are, to the  knowledge  and in the  judgment of the
officers and  directors  of the  Company,  expected to prove true and to come to
pass,  management  is not able to predict  the future with  absolute  certainty.
Forward-looking  statements  involve known and unknown  risks and  uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas operations,
the  inexact  nature of  interpretation  of  seismic  and other  geological  and
geophysical  data,  imprecision of reserve  estimates,  the Company's ability to
replace and expand oil and gas reserves,  and such other risks and uncertainties
described from time to time in the Company's  periodic  reports and filings with
the Securities and Exchange Commission. Accordingly,  stockholders and potential
investors are cautioned that certain events or circumstances  could cause actual
results to differ materially from those projected, estimated or predicted.



<PAGE>


Inflation and Changing Prices

Prices

Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of the Company,  including the extent of domestic and foreign
production,  imports of foreign  oil,  market  demand,  domestic  and  worldwide
economic and political  conditions,  and  government  regulations  and tax laws.
Prices for both oil and gas fluctuated significantly throughout 1997 and through
the second quarter of 1998. The following table sets forth the weighted  average
price  received  each  quarter by the  Company  and the  effects of the  hedging
transactions described below:



<PAGE>


<TABLE>
<CAPTION>


                                            Oil                  Oil                  Gas                   Gas
                                      (excluding the       (including the        (excluding the       (including the
                                        effects of           effects of            effects of           effects of
                                          hedging              hedging              hedging               hedging
                                       transactions)        transactions)        transactions)         transactions)
                                         (per bbl)            (per bbl)            (per mcf)             (per mcf)

<S>           <C>                          <C>                  <C>                    <C>                  <C>  
First quarter 1997                         $23.56               $20.49                 $2.64                $2.41
Second quarter 1997                         17.85                17.88                  1.91                 1.87
Third quarter 1997                          18.20                18.31                  2.09                 1.96
Fourth quarter 1997                         18.60                18.60                  2.72                 2.38
First quarter 1998                          14.92                15.08                  1.98                 1.93
Second quarter 1998                         13.06                13.38                  1.90                 1.89
</TABLE>

The Company has entered into numerous financial  contracts to hedge the price of
its oil and  natural  gas.  The  purpose of the hedges is to provide  protection
against  price  decreases  and to provide a measure of stability in the volatile
environment  of oil and natural gas spot  pricing.  The amounts paid or received
upon  settlement of these  contracts are recognized as oil or gas revenue at the
time the hedged volumes are sold.

The following  table provides a summary of the Company's  outstanding  financial
contracts:
<TABLE>
<CAPTION>

                                                      Oil
                                               Percent of Direct                Contract
              Period                           Production Hedged               Floor Price
                                                                                (per bbl)

<S>                                                     <C>                      <C>   
Last six months of 1998                                 14%                      $14.57
1999                                                     5%                       15.38
</TABLE>

Between  30% and 100% of the oil  volumes  hedged in each year are  subject to a
participating  hedge whereby HCRC will receive the contract  price if the posted
futures  price is lower than the contract  price,  and will receive the contract
price  plus 25% of the  difference  between  the  contract  price and the posted
futures price if the posted  futures  price is greater than the contract  price.
All of the volumes hedged in each year are subject to a collar agreement whereby
HCRC  will  receive  the  contract  price  if the spot  price is lower  than the
contract  price,  the cap price if the spot price is higher  than the cap price,
and the spot  price if that  price is  between  the  contract  price and the cap
price. The cap prices range from $17.00 to $18.85 per barrel.


<PAGE>
<TABLE>
<CAPTION>



                                                      Gas
                                               Percent of Direct                Contract
              Period                           Production Hedged               Floor Price
                                                                                (per mcf)

<S>                                                     <C>                       <C>  
Last six months of 1998                                 51%                       $2.03
1999                                                    42%                        1.97
2000                                                    40%                        2.02
2001                                                    39%                        2.00
2002                                                    38%                        2.06
</TABLE>

Between  0% and 16% of the gas  volumes  hedged  in each year are  subject  to a
collar agreement  whereby HCRC will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price,  and the spot price if that price is between the  contract  price
and the cap price. The cap price is $2.93 per mcf.

During the third quarter through August 2, 1998, the weighted  average oil price
(for  barrels not hedged) was  approximately  $12.50 per barrel and the weighted
average  price of natural gas (for mcf not hedged) was  approximately  $2.05 per
mcf.

Inflation

Inflation is not anticipated to have a material impact on the Company in 1998.

Results of Operations

The  following  tables are  presented to contrast  HCRC's  revenue,  expense and
earnings for discussion purposes.  Significant fluctuations are discussed in the
accompanying narrative.

The "direct owned" column represents HCRC's direct royalty and working interests
in oil and gas  properties.  The "HEP"  column  represents  HCRC's  share of the
results of operations of HEP; HCRC owned  approximately  19% of the  outstanding
limited partner units of HEP during 1997 and 1998.


<PAGE>

<TABLE>
<CAPTION>

                TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
                           (In thousands except price)




<PAGE>


                                           For the Quarter Ended June 30, 1998         For the Quarter Ended June 30, 1997
                                           -----------------------------------          -----------------------------------
                                             Direct                                    Direct
                                             Owned         HEP       Total             Owned             HEP              Total

<S>                                            <C>           <C>       <C>              <C>                <C>            <C>  
Gas production (mcf)                           1,835         583       2,418            1,365              433            1,798
Oil production (bbl)                             143          34         177              134               31              165

Average gas price (per mcf)                  $  1.87     $  1.96     $  1.89          $  1.84          $  1.96          $  1.87
Average oil price (per bbl)                   $13.27      $13.88      $13.38           $17.96           $17.58           $17.88

Gas revenue                                $   3,427   $   1,141   $   4,568         $  2,513        $     847         $  3,360
Oil revenue                                    1,897         472       2,369            2,406              545            2,951
Pipeline and other                               385         179         564              442              194              636
Interest income                                   26          34          60               53               24               77
                                           ---------   ---------   ---------        ---------        ---------        ---------

         Total revenue                         5,735       1,826       7,561            5,414            1,610            7,024
                                            --------     -------    --------          -------          -------          -------

Production operating expense                   2,196         558       2,754            1,941              491            2,432
General and administrative expense               795         198         993              696              188              884
Interest expense                                 810         103         913              414              152              566
Depreciation, depletion and amortization       1,714         499       2,213            1,661              273            1,934
Impairment of oil and gas properties          11,000                  11,000
Litigation settlement of affiliate                           113         113
                                         -----------   ---------   ---------

         Total expense                        16,515       1,471      17,986            4,712            1,104            5,816
                                             -------     -------     -------          -------          -------          -------

Income (loss) before income taxes             (10,780)       355      (10,425)            702              506            1,208
                                              -------   --------      -------        --------         --------          -------

Provision for income taxes:
     Current                                     104                     104               56                                56
                                            --------               ---------        ---------                         ---------

         Net income (loss)                   $(10,884) $     355     $(10,529)       $    646        $     506         $  1,152
                                              =======   ========      =======         =======         ========          =======

</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
                           (In thousands except price)




<PAGE>


                                            For the Six Months Ended June 30, 1998           For the Six Months Ended June 30, 1997
                                            --------------------------------------           --------------------------------------
                                             Direct                                     Direct
                                             Owned         HEP         Total             Owned             HEP              Total

<S>                                            <C>         <C>           <C>              <C>                <C>            <C>  
Gas production (mcf)                           3,508       1,150         4,658            2,835              942            3,777
Oil production (bbl)                             289          70           359              287               69              356

Average gas price (per mcf)                  $  1.88     $  2.00       $  1.91          $  2.13          $  2.22          $  2.15
Average oil price (per bbl)                   $14.16      $14.61        $14.25           $19.29           $19.26           $19.28

Gas revenue                                $   6,578    $  2,302     $   8,880         $  6,044         $  2,090         $  8,134
Oil revenue                                    4,091       1,023         5,114            5,536            1,329            6,865
Pipeline and other                               568         316           884              709              334            1,043
Interest income                                   86          59           145               71               46              117
                                          ----------   ---------      --------         --------         --------         --------

         Total revenue                        11,323       3,700        15,023           12,360            3,799           16,159
                                             -------     -------       -------          -------          -------          -------

Production operating expense                   4,378       1,139         5,517            3,918            1,029            4,947
General and administrative expense             1,494         408         1,902            1,375              410            1,785
Interest expense                               1,509         225         1,734              860              302            1,162
Depreciation, depletion and amortization       3,653       1,091         4,744            3,240              761            4,001
Impairment of oil and gas properties          11,000                    11,000
Litigation settlement of affiliate                           113           113
                                           ---------   ---------     ---------

         Total expense                        22,034       2,976        25,010            9,393            2,502           11,895
                                             -------     -------       -------          -------          -------          -------

Income (loss) before income taxes             (10,711)       724         (9,987)          2,967            1,297            4,264
                                              -------  ---------       --------         -------          -------          -------

Provision for income taxes:
     Current                                     227                       227              147                               147
                                           ---------                 ---------        ---------                         ---------

         Net income (loss)                   $(10,938)$      724       $(10,214)       $  2,820         $  1,297         $  4,117
                                              =======  =========        =======         =======          =======          =======
</TABLE>



<PAGE>


Second Quarter of 1998 Compared to the Second Quarter of 1997

Gas Revenue

Gas revenue  increased  $1,208,000 during the second quarter of 1998 as compared
with the second  quarter of 1997.  The  increase is  comprised of an increase in
price from $1.87 per mcf in 1997 to $1.89 per mcf in 1998 and an increase in gas
production  from 1,798,000 mcf in 1997 to 2,418,000 mcf in 1998. The increase in
production is primarily  due to the temporary  shut-in of two wells in Louisiana
during the second quarter of 1997 while workover procedures were performed.

The effect of the Company's hedging transactions,  as described under "Inflation
and  Changing  Prices,"  during the second  quarter of 1998 was to decrease  the
Company's average gas price from $1.90 to $1.89 per mcf,  resulting in a $24,000
decrease in revenue.

Oil Revenue

Oil revenue  decreased  $582,000  during the second  quarter of 1998 as compared
with the second  quarter of 1997.  The  decrease  in revenue is  comprised  of a
decrease  in the  average oil price from $17.88 per barrel in 1997 to $13.38 per
barrel in 1998,  partially  offset by an increase  in  production  from  165,000
barrels in 1997 to 177,000  barrels  in 1998.  The  increase  in  production  is
primarily  due to the  temporary  shut-in of two wells in  Louisiana  during the
second quarter of 1997 while workover procedures were performed.

The effect of HCRC's hedging transactions during the second quarter of 1998, was
to increase the Company's average oil price from $13.06 per barrel to $13.38 per
barrel, resulting in a $57,000 increase in revenue.

Pipeline and Other

Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive and tax credit  payments from certain coal bed methane wells and other
miscellaneous  items.  Pipeline and other revenue  decreased  $72,000 during the
second  quarter  of 1998 as  compared  with the  second  quarter  of 1997 due to
fluctuations in numerous  miscellaneous  items,  none of which are  individually
significant.

Interest Income

Interest income decreased  $17,000 during the second quarter of 1998 as compared
with the second quarter of 1997 due to a lower average cash balance during 1998.

Production Operating Expense

Production  operating  expense  increased  $322,000 during the second quarter of
1998 as  compared  with the  second  quarter of 1997,  primarily  as a result of
increased  production  taxes due to the  increase in oil and gas  production  as
discussed above.

General and Administrative

General  and   administrative   expense   includes  costs  incurred  for  direct
administrative  services  such as legal,  audit and  reserve  reports as well as
allocated  internal overhead incurred by Hallwood  Petroleum,  Inc. ("HPI"),  an
affiliate of HCRC,  which manages and operates certain oil and gas properties on
behalf of the Company.  These costs increased $109,000 during the second quarter
of 1998 as compared with the second quarter of 1997 primarily due to an increase
in salaries expense.

Interest Expense

Interest  expense  increased  $347,000  during  the  second  quarter  of 1998 as
compared  with the  second  quarter  of 1997 due to a  higher  outstanding  debt
balance during 1998.

Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense increased  $279,000 primarily
due to a higher  depletion  rate in 1998  resulting from the increase in oil and
gas production previously discussed.

Impairment of Oil and Gas Properties

Impairment  of oil  and  gas  properties  during  the  second  quarter  of  1998
represents the impairment  recorded because  capitalized  costs at June 30, 1998
exceeded the present value  (discounted at 10%) of estimated future net revenues
from proved oil and gas reserves, based on prices at that date of $13.00 per bbl
of oil and $1.90 per mcf of gas.

Litigation Settlement of Affiliate

Litigation  settlement  of  affiliate  during  the  second  quarter  of  1998 is
comprised  of  HCRC's  pro rata  share of HEP's  litigation  settlement  expense
accrued for the settlement of a property related lawsuit.

First Six Months of 1998 compared to the First Six Months of 1997

The  comparisons  for the first six  months of 1998 and the first six  months of
1997 are consistent  with those discussed in the second quarter of 1998 compared
to the second quarter 1997 except for the following:

Gas Revenue

Gas revenue  increased  $746,000 during the first six months of 1998 as compared
with the first six months of 1997.  The  increase is comprised of an increase in
production from 3,777,000 mcf in 1997 to 4,658,000 mcf in 1998, partially offset
by a decrease  in the  average  price  from $2.15 per mcf to $1.91 per mcf.  The
production  increase is due to the  temporary  shut-in of two wells in Louisiana
while workover procedures were performed during the second quarter of 1997.

The effect of HCRC's  hedging  transactions  was to decrease  HCRC's average gas
price from $1.94 per mcf to $1.91 per mcf,  representing a $140,000 reduction in
revenue from hedging transactions.

Oil Revenue

Oil revenue decreased $1,751,000 during the first six months of 1998 as compared
with the first six months of 1997.  The  decrease is  comprised of a decrease in
the  average  oil price  from  $19.28 per barrel in 1997 to $14.25 per barrel in
1998, partially offset by an increase in production from 356,000 barrels in 1997
to 359,000  barrels in 1998.  The  production  increase is due to the  temporary
shut-in of two wells in  Louisiana  while  workover  procedures  were  performed
during the second quarter of 1997.

The effect of HCRC's  hedging  transactions  was to increase  HCRC's average oil
price  from  $13.97 per barrel to $14.25  per  barrel,  representing  a $101,000
increase in revenues.


<PAGE>


PART II   -   OTHER INFORMATION


ITEM 1    -   LEGAL PROCEEDINGS

              Reference  is made to Item 8 - Note 14 of Form  10-K  for the year
              ended December 31, 1997 and Note 9 of this Form 10-Q.


ITEM 2    -   CHANGES IN SECURITIES

              None.


ITEM 3    -   DEFAULTS UPON SENIOR SECURITIES

              None.


ITEM 4    -   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              None.


ITEM 5    -   OTHER INFORMATION

              None.


ITEM 6    -   EXHIBITS AND REPORTS ON FORM 8-K

              a)  Exhibits

10.19         Option Letter to Thomas Jung dated May 5, 1998
10.20         Extension of Management Agreement between Hallwood Petroleum, Inc.
                and HEP dated May 5, 1998
27            Financial Data Schedule

              b)   Reports on Form 8-K

                  None.



<PAGE>


SIGNATURE

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


                               HALLWOOD CONSOLIDATED RESOURCES CORPORATION




Date:  August 14,1998                 By: /s/Thomas J. Jung
                                          Thomas J. Jung, Vice President
                                           (Chief Financial Officer)