1998 CLASS C UNIT OPTION PLAN
                                       FOR
                         HALLWOOD ENERGY PARTNERS, L.P.


     Section 1. Purpose. The purpose of this 1998 Class C Unit Option Plan (this
"Plan") for Hallwood Energy Partners,  L.P., a Delaware limited partnership (the
"Partnership"),  is to advance the interests of the  Partnership by providing an
additional  incentive to attract and retain  qualified and competent  directors,
employees and  consultants for the  Partnership,  its general  partner,  and the
subsidiaries of each of them, upon whose efforts and judgment the success of the
Partnership is largely dependent,  through the encouragement of ownership in the
Partnership by such persons.

     Section 2. Definitions.  As used herein, the following terms shall have the
meaning indicated:

          (a) "Act" shall mean the Securities Exchange Act of 1934, as amended

          (b) "Board" shall mean the Board of Directors of the General Partner.

          (c)  "Business  Day"  shall  mean (i) if the Class C Units  trade on a
     national securities exchange, any day that the national securities exchange
     on which  the  Class C Units  trade is open or (ii) if the Class C Units do
     not trade on a national securities exchange,  any day that commercial banks
     in the City of New York are open.

          (d) "Class C Unit(s)"  shall mean Class C Units  representing  limited
     partner interests in the Partnership.

          (e) "Committee" shall mean the Compensation  Committee of the Board or
     other  committee,  if any,  appointed  by the Board  pursuant to Section 13
     hereof.

          (f)  "Continuing  Director"  shall mean (i) any member of the Board on
     the  effective  date of this  Plan  and (ii) any  person  who  subsequently
     becomes a member of the Board if such person's  nomination  for election or
     election  to the Board is  recommended  or  approved  by a majority  of the
     Continuing Directors.

          (g) "Date of Grant" shall mean the date on which the  Committee  takes
     formal  action to grant an Option to an  Eligible  Person,  provided  it is
     followed, as soon as reasonably possible, by written notice to the Eligible
     Person of the grant.

          (h) "Director" shall mean a member of the Board.

          (i) "Eligible Person(s)" shall mean those persons who are Directors or
     are employees of, or consultants to, the  Partnership,  the General Partner
     or any Subsidiary.

          (j) "Fair  Market  Value"  of a Class C Unit on any date of  reference
     shall mean the Closing Price on the business day immediately preceding such
     date, unless the Committee in its sole discretion shall determine otherwise

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     in a fair and uniform  manner.  For this purpose,  the Closing Price of the
     Class C Units on any  business  day shall be:  (i) if the Class C Units are
     listed or admitted  for trading on any United  States  national  securities
     exchange  or  included  in the  National  Market  System  of  the  National
     Association of Securities  Dealers Automated  Quotation System  ("NASDAQ"),
     the last  reported  sale price of Class C Units on such exchange or system,
     as reported in any newspaper of general circulation;  (ii) if Class C Units
     are quoted on NASDAQ,  or any similar system of automated  dissemination of
     quotations of securities prices in common use, the mean between the closing
     high  bid and low  asked  quotations  for such day of Class C Units on such
     system;  (iii)  if  neither  clause  (i) nor (ii) is  applicable,  the mean
     between the high bid and low asked quotations for Class C Units as reported
     by the National  Quotation Bureau,  Incorporated if at least two securities
     dealers have inserted both bid and asked quotations for Class C Units on at
     least five of the ten  preceding  days;  or, (iv) in lieu of the above,  if
     actual  transactions  in the Class C Units are  reported on a  consolidated
     transaction  reporting system, the last sale price of the Class C Units for
     such day and on such system.

          (k)  "General  Partner"  shall  mean  Hallwood  GP,  Inc.,  a Delaware
     corporation,  and HEPGP,  Ltd., a Delaware  corporation,  or any  successor
     thereof, as appropriate.

          (l)  "Nonqualified  Class C Unit Option"  shall mean an option that is
     not an  incentive  stock  option as defined in Section 422 of the  Internal
     Revenue Code.

          (m) "Option"  (when  capitalized)  shall mean any option granted under
     this Plan.

          (n) "Optionee" shall mean a person to whom an Option is granted or any
     successor to the rights of such Option under this Plan.

          (o)  "Partnership"  shall  mean  Hallwood  Energy  Partners,  L.P.,  a
     Delaware limited partnership.

          (p) "Person" shall mean any individual, corporation, limited liability
     company, partnership, joint venture or other legal entity.

          (q) "Plan"  shall mean this 1998 Class C Unit Option Plan for Hallwood
     Energy Partners, L.P.

          (r) "SAR" shall mean a stock  appreciation right as defined in Section
     9 hereof.

          (s) "Subsidiary" shall mean (i) any corporation of which a majority of
     the outstanding  stock having by the terms thereof ordinary voting power to
     elect a majority of the  directors  of such  corporation,  irrespective  of
     whether at the time stock of any other class or classes of such corporation
     shall have or might have  voting  power by reason of the  happening  of any
     contingency, is at the time, directly or indirectly, owned or controlled by
     the Partnership,  General Partner or by one or more Subsidiaries, or by the
     Partnership,  the General Partner and one or more  Subsidiaries or (ii) any
     partnership, joint venture or limited liability company of which at least a

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     majority  of the  equity  ownership,  whether  in the  form of  membership,
     general, special or limited partnership interests or otherwise, is directly
     or indirectly owned or controlled by the  Partnership,  the General Partner
     or by one or more  Subsidiaries or by the Partnership,  the General Partner
     and one or more Subsidiaries.

     Section 3. Class C Units and Options. The Partnership may grant to Eligible
Persons  from time to time Options to purchase an aggregate of up to One Hundred
Twenty  Thousand  (120,000)  Class C Units. If any Option granted under the Plan
shall terminate,  expire, or be canceled or surrendered as to any Class C Units,
new Options may  thereafter be granted  covering  such Class C Units.  An Option
granted hereunder shall be a Nonqualified Unit Option.

     Section 4. Conditions for Grant of Options.

          (a) Each Option  shall be evidenced  by an option  agreement  that may
     contain any term deemed  necessary or desirable by the Committee,  provided
     such  terms are not  inconsistent  with this  Plan or any  applicable  law.
     Optionees  shall be those persons  selected by the Committee  from Eligible
     Persons. Any Person who files with the Committee, in a form satisfactory to
     the Committee,  a written waiver of eligibility to receive any Option under
     this Plan shall not be eligible  to receive any Option  under this Plan for
     the duration of such waiver.

          (b) In granting Options,  the Committee shall take into  consideration
     the  contribution  the  Person  has made or may make to the  success of the
     Partnership  or its  Subsidiaries  and such other  factors as the Committee
     shall  determine.  The  Committee  shall also have the authority to consult
     with and receive  recommendations  from officers and other personnel of the
     General  Partner,  the  Partnership  and a Subsidiary  with regard to these
     matters.  The Committee may from time to time in granting Options under the
     Plan prescribe such other terms and conditions  concerning  such Options as
     it deems appropriate,  including, without limitation, relating an Option to
     achievement of specific goals established by the Committee or the continued
     employment  of the Optionee for a specified  period of time,  provided that
     such terms and  conditions are not more favorable to an Optionee than those
     expressly permitted herein.

          (c) The Committee in its sole discretion  shall determine in each case
     whether  periods of military  or  government  service  shall  constitute  a
     continuation of employment for the purposes of this Plan or any Option.

     Section 5. Exercise Price.  The exercise price per Unit of any Option shall
be any price determined by the Committee.

     Section 6. Exercise of Options.  An Option shall be deemed  exercised  when
(i) the Partnership  has received  written notice of such exercise in accordance
with the terms of the Option,  (ii) full payment of the aggregate exercise price
of the Class C Units as to which the  Option is  exercised  has been  made,  and
(iii) arrangements that are satisfactory to the Committee in its sole discretion
have been made for the Optionee's  payment to the Partnership of the amount,  if
any,  that the  Committee  determines  to be  necessary  for the employer of the
Optionee to withhold in accordance with applicable federal or state income tax

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withholding requirements. Unless further limited by the Committee in any Option,
the  option  price of any  Class C Units  purchased  shall  be paid in cash,  by
certified or cashier's  check,  by money order,  with Class C Units owned by the
Optionee  for at least six months  (provided  that at the time of  exercise  the
Committee  in its sole  discretion  does not  prohibit  the  exercise of Options
through the delivery of already-owned  Class C Units) or by a combination of the
above; provided, however, that the Committee in its sole discretion may accept a
personal check in full or partial  payment of any Class C Units. If the exercise
price is paid in whole or in part with  Class C Units,  the value of the Class C
Units  surrendered shall be their Fair Market Value. The Partnership in its sole
discretion,  and on  such  terms  as it may  determine,  may  lend  money  to an
Optionee,  guarantee a loan to an Optionee,  or otherwise  assist an Optionee to
obtain the cash  necessary  to  exercise  all or a portion of an Option  granted
hereunder  or to pay any tax  liability  of the  Optionee  attributable  to such
exercise.

     Section 7. Exercisability of Options.

          (a) Any Option  shall become  exercisable  in such amounts and at such
     intervals as the Committee shall provide in any Option, except as otherwise
     provided in this  Section 7;  provided in each case that the Option has not
     expired on the date of exercise.

          (b) The  expiration  date of an  Option  shall  be  determined  by the
     Committee  at the  Date of  Grant,  but in no  event  shall  an  Option  be
     exercisable after the expiration of ten (10) years from the Date of Grant.

          (c) The Committee may in its sole  discretion  accelerate  the date on
     which any Option may be exercised.

          (d) Unless otherwise  provided in any Option,  each outstanding Option
     shall become fully exercisable  immediately upon any of the following dates
     unless, in each case, the applicable  transaction is approved in advance by
     Continuing Directors:

               (i) ten (10)  days  prior to the date of any  transaction  (which
          shall  include a series of  transactions  occurring  within 60 days or
          occurring  pursuant to a plan),  which has the result that unitholders
          of the Partnership  immediately before such transaction would cease to
          own  at  least  662/3%  of  the  voting  ownership  interests  of  the
          Partnership  or of any entity that results from the  participation  of
          the   Partnership   in  a   reorganization,   consolidation,   merger,
          liquidation, dissolution or any other comparable form of transaction;

               (ii) ten (10) days  preceding the record date for the approval by
          the  unitholders  of  the  Partnership  of a plan  of  reorganization,
          consolidation,  merger,  liquidation,  dissolution or other comparable
          form of transaction in which the Partnership  does not survive or as a
          result of which the unitholders of the Partnership  immediately before
          such  transaction  would  cease to own at least  662/3% of the  voting
          ownership interests of the Partnership;


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               (iii) ten (10) days preceding the record date for the approval by
          the  unitholders  of the  Partnership  of a plan for the sale,  lease,
          exchange  or  other  disposition  of 50% or more of the  property  and
          assets of the Partnership;

               (iv) ten (10) days  preceding the record date for the approval by
          the  unitholders  of the  Partnership  of the  removal of the  General
          Partner as general partner of the Partnership;

               (v) ten (10) days  preceding  the record date for the approval by
          the   unitholders   of  the   Partnership  of  the  amendment  of  the
          Partnership's  or any  operating  partnership's  agreement  of limited
          partnership; or

               (vi) the date any tender  offer or exchange  offer is made by any
          person, which, if successfully completed,  would result in such person
          beneficially  owning  (within  the  meaning of Rule 13d-3  promulgated
          under the Act) either 331/3% or more of the Partnership's  outstanding
          Class C Units or interests in the Partnership having 331/3% or more of
          the combined voting power of the Partnership's then outstanding voting
          interests.

          (e)  Notwithstanding  any  provisions  hereof to the contrary,  if any
     Option is  accelerated  under  Subsection  7(c) or (d), the portion of such
     Option that may be  exercised  to acquire  Class C Units that the  Optionee
     would  not  be  entitled  to  acquire  but  for  such   acceleration   (the
     "Acceleration  Class C Units"),  is limited to that number of  Acceleration
     Class C Units that can be acquired  without causing the Optionee to have an
     "excess parachute payment" under Section 280G of the Internal Revenue Code,
     determined  by  taking  into  account  all  of  the  Optionee's  "parachute
     payments" determined under Section 280G of the Code. If as a result of this
     Subsection 7(e), the Optionee may not acquire all of the Acceleration Class
     C Units, then the Acceleration  Class C Units that the Optionee may acquire
     shall be the last Class C Units that the Optionee  would have been entitled
     to acquire had this Option not been accelerated.

     Section 8. Termination of Option Period.

          (a) Unless otherwise provided in any Option,  the unexercised  portion
     of an Option shall  automatically  and without notice  terminate and become
     null and void at the time of the earliest to occur of the following:

               (i) the date on which the  Optionee's  employment  by the General
          Partner or a  Subsidiary  is  terminated  for any reason other than by
          reason of: (A)  retirement  (which,  for purposes of this Plan,  shall
          mean any  termination of employment  after an Optionee has reached the
          age of  sixty-five  (65));  (B) a mental  or  physical  disability  as
          determined by a medical  doctor  satisfactory  to the  Committee;  (C)
          death; or (D) termination  resulting from any transaction described in
          Section 7(d) hereof;


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               (ii)  three (3)  months  after  the date on which the  Optionee's
          employment  by the General  Partner or a Subsidiary  is  terminated by
          reason of retirement;

               (iii) twelve (12) months  after the date on which the  Optionee's
          employment  by the General  Partner or a Subsidiary  is  terminated by
          reason of a mental or physical  disability  as determined by a medical
          doctor satisfactory to the Committee;

               (iv) ten (10) years after the date of grant of such Option;

               (v) (A) twelve (12) months after the date of  termination  of the
          Optionee's employment by the General Partner or a Subsidiary by reason
          of death of the Optionee; (B) three (3) months after the date on which
          the  Optionee   shall  die  if  such  death  shall  occur  during  the
          three-month  period  specified  in  Section  8(a)(ii)  hereof  or  the
          twelve-month  period  specified in Section  8(a)(iii)  hereof;  or (C)
          three (3) years after the termination of the employee's  employment by
          the  General  Partner  or a  Subsidiary  by  reason  of a  transaction
          specified in Section 7(d) hereof.

                    (b) If  provided  in an Option,  the  Committee  in its sole
          discretion  shall  have the power to cancel,  effective  upon the date
          determined by the Committee in its sole discretion, all or any portion
          of any Option that is then exercisable  (whether or not accelerated by
          the Committee) upon payment to the Optionee of cash in an amount that,
          in the absolute discretion of the Committee, is determined to be equal
          to the excess of (i) the  aggregate  Fair Market  Value of the Class C
          Units subject to such Option on the effective date of the cancellation
          over (ii) the aggregate exercise price of such Option.

     9. Stock Appreciation Rights and Limited Stock Appreciation Rights.

               (a) The Board shall have  authority  to grant an SAR or a Limited
          SAR with  respect  to all or some of the Class C Units  covered by any
          Option ("Related Option").  An SAR or Limited SAR may be granted on or
          after the Date of Grant of such Related Option.

               (b) For the purposes of this Section 9, the following definitions
          shall apply:

                    (i) The term "Offer" shall mean any tender offer or exchange
               offer for twenty- five percent  (25%) or more of the  outstanding
               Class C Units  of the  Partnership,  other  than  one made by the
               Partnership;  provided  that  the  corporation,  person  or other
               entity making the Offer  acquires  Class C Units pursuant to such
               Offer.

                    (ii) The term "Offer  Price Per Unit" shall mean the highest
               price per Unit  paid in any  Offer  that is in effect at any time
               during  the  period  beginning  on the 60th day prior to the date
               that a Limited SAR is  exercised  and ending on the date that the
               Limited SAR is exercised. Any securities or properties that are a
               part or all of the  consideration  paid or to be paid for Class C
               Units in the Offer shall be valued in determining the Offer Price

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               Per  Unit at the  higher  of (1)  the  valuation  placed  on such
               securities or properties by the person making such Offer,  or (2)
               the  valuation  placed on such  securities  or  properties by the
               Board.

                    (iii) The term  "Limited  SAR"  shall  mean a right  granted
               under  this Plan that  shall  entitle  the Holder to an amount in
               cash equal to the Offer Spread in the event an Offer is made.

                    (iv) The term "Offer  Spread"  shall mean,  with  respect to
               each  Limited  SAR, an amount  equal to the  product  obtained by
               multiplying  (1) the  excess  of (A) the  Offer  Price  Per  Unit
               immediately  preceding  the date of exercise  over (B) the Option
               Price per Unit of the Related Option multiplied by (2) the number
               of Class C Units with  respect to which such Limited SAR is being
               exercised.

                    (v) The term  "SAR"  shall mean a right  granted  under this
               Plan that shall  entitle the Holder  thereof to an amount in cash
               equal to the SAR Spread.

                    (vi) The term "SAR  Spread"  shall mean with respect to each
               SAR an amount  equal to the  product of (1) the excess of (A) the
               Fair Market  Value per Unit on the date of exercise  over (B) the
               Option Price per Unit of the Related Option multiplied by (2) the
               number of Class C Units  with  respect to which such SAR is being
               exercised.

          (c) To exercise the SAR or Limited SAR, the Holder shall:

                    (i)  Give  written  notice   thereof  to  the   Partnership,
               specifying the SAR or Limited SAR being  exercised and the number
               or Class C Units with respect to which such SAR or Limited SAR is
               being exercised, and

                    (ii) If  requested  by the  Partnership,  deliver  within  a
               reasonable  time the agreement  evidencing the SAR or Limited SAR
               being  exercised,   and  the  Related  Option  agreement  to  the
               Secretary of the General Partner who shall endorse or cause to be
               endorsed  thereon a  notation  of such  exercise  and  return all
               agreements to the Holder.

          (d) As soon as  practicable  after the  exercise  of an SAR or Limited
     SAR, the Partnership  shall pay to the Holder (i) cash, (ii) at the request
     of the Holder and the  approval  of the Board,  or in  accordance  with the
     terms of the Related Option,  Class C Units, or (iii) a combination of cash
     and Class C Units,  having a Fair  Market  Value  equal to  either  the SAR
     Spread, or to the Offer Spread, as the case may be; provided, however, that
     the Partnership may, in its sole discretion, withhold from such payment any
     amount necessary to satisfy the Partnership's or a Subsidiary's  obligation
     for federal and state withholding taxes with respect to such exercise.

          (e) An SAR or Limited SAR may be  exercised  only if and to the extent
     that the Related Option is eligible to be exercised;  provided,  however, a
     Limited SAR may be exercised only during the period  beginning on the first
     day  following  the date of  expiration of the Offer and ending on the 30th
     day following such date.

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          (f) Upon the  exercise  of an SAR or  Limited  SAR,  the Class C Units
     under the Related  Option to that such  exercised SAR or Limited SAR relate
     shall be  released,  but such  released  Class C Units shall never again be
     Class C Units available for grant.

          (g) Upon the exercise or termination of a Related  Option,  the SAR or
     Limited SAR with respect to such Related Option likewise shall terminate.

          (h) An SAR or Limited SAR shall be transferable only to the extent, if
     any,  that  the  Related  Option  is  transferable,   and  under  the  same
     conditions.

          (i) Each SAR or Limited SAR shall be on such terms and  conditions not
     inconsistent  with  this  Plan as the  Board  may  determine  and  shall be
     evidenced by a written agreement.

          (j) The Holder  shall have no rights as a  unitholder  with respect to
     the  related  Class C Units as a result of the  grant of an SAR or  Limited
     SAR.

     Section 10. Adjustment of Class C Units.

          (a) If at any time while the Plan is in effect or unexercised  Options
     are  outstanding,  there shall be any increase or decrease in the number of
     issued and  outstanding  Class C Units  through the  declaration  of a unit
     dividend or through  any  recapitalization  resulting  in a unit split- up,
     combination or exchange of Class C Units, then and in such event.

               (i) appropriate adjustment shall be made in the maximum number of
          Class C Units then subject to being  optioned  under the Plan, so that
          the same proportion of the Partnership's  issued and outstanding Class
          C Units shall continue to be subject to being so optioned; and

               (ii) appropriate  adjustment shall be made in the number of Class
          C Units and the  exercise  price per Class C Unit thereof then subject
          to  outstanding   Options,   so  that  the  same   proportion  of  the
          Partnership's  issued  and  outstanding  Class  C Units  shall  remain
          subject to purchase at the same aggregate exercise price.

          (b) The  Committee may change the terms of Options  outstanding  under
     this  Plan,  with  respect to the  exercise  price or the number of Class C
     Units  subject to the  Options,  or both,  when,  in the  Committee's  sole
     discretion,   such  adjustments   become   appropriate  by  reason  of  any
     transaction.

          (c) Except as otherwise expressly provided herein, the issuance by the
     Partnership  of  any  class,  or  securities   convertible  into  ownership
     interests of any class,  either in connection  with direct sale or upon the
     exercise of rights or warrants to subscribe therefor, or upon conversion of
     shares or obligations of the  Partnership  convertible  into such ownership
     interests  or other  securities,  shall not affect,  and no  adjustment  by
     reason  thereof  shall be made with  respect to the number of Class C Units
     reserved for issuance  under the Plan or the number of or exercise price of
     Class C Units then subject to outstanding Options granted under the Plan.

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          (d) Without limiting the generality of the foregoing, the existence of
     outstanding  Options  granted under the Plan shall not affect in any manner
     the right or power of the Partnership to make,  authorize or consummate (1)
     any or all adjustments, recapitalizations, reorganizations or other changes
     in the Partnership's  capital structure or its business;  (2) any merger or
     consolidation of the Partnership;  (3) any issue by the Partnership of debt
     securities,  or  partnership  interests  that  would rank above the Class C
     Units subject to outstanding Options; (4) the dissolution or liquidation of
     the Partnership; (5) any sale, transfer or assignment of all or any part of
     the assets or business of the Partnership; or (6) any other partnership act
     or proceeding, whether of a similar character or otherwise.

     Section 11.  Transferability of Options.  Each Option may provide that such
Option may be transferrable by the Optionee in the Optionee's discretion.

     Section 12.  Issuance of Class C Units.  No person shall be, or have any of
the rights or privileges of, a unitholder of the Partnership with respect to any
of the  Class C  Units  subject  to an  Option  unless  and  until  certificates
representing  such Class C Units  shall have been issued and  delivered  to such
person. As a condition of any transfer of the certificate for Class C Units, the
Committee  may obtain such  agreements or  undertakings,  if any, as it may deem
necessary or advisable to assure  compliance with any provision of the Plan, the
agreement  evidencing  the Option or any law or  regulation  including,  but not
limited to, the following:

               (i) A  representation,  warranty or  agreement by the Optionee to
          the  Partnership at the time any Option is exercised that he or she is
          acquiring the Class C Units to be issued to him or her for  investment
          and  not  with  a view  to,  or  for  sale  in  connection  with,  the
          distribution of any such Class C Units; and

               (ii) A  representation,  warranty or agreement to be bound by any
          legends  that are,  in the  opinion  of the  Committee,  necessary  or
          appropriate  to comply  with the  provisions  of any  securities  laws
          deemed by the  Committee to be applicable to the issuance of the Class
          C Units and that are endorsed upon the Class C Unit certificates.

     Section 13. Administration of the Plan.

          (a) The Plan may be administered by the Compensation  Committee of the
     Board or other  committee  thereof as appointed by the Board (herein called
     the "Committee");  or, if the Board so determines, by the Board and in such
     case all  references to the  Committee  shall be deemed to be references to
     the Board.  Except for the  powers set forth in Section  16, the  Committee
     shall  have all of the powers of the Board  with  respect to the Plan.  Any
     member of the Committee may be removed at any time,  with or without cause,
     by resolution of the Board and any vacancy  occurring in the  membership of
     the Committee may be filled by appointment by the Board.

          (b) The Committee,  from time to time, may adopt rules and regulations
     for  carrying  out the  purposes of the Plan.  The  determinations  and the
     interpretation  and  construction  of  any  provision  of the  Plan  by the
     Committee shall be final and conclusive.

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          (c) Any and all decisions or  determinations of the Committee shall be
     made  either (i) by a majority  vote of the members of the  Committee  at a
     meeting or (ii) without a meeting by the written  approval of a majority of
     the members of the Committee.

          (d)  Subject to the express  provisions  of this Plan,  the  Committee
     shall have the authority, in its sole and absolute discretion (i) to adopt,
     amend, and rescind  administrative  and interpretive  rules and regulations
     relating  to this Plan or any Option;  (ii) to  construe  the terms of this
     Plan or any Option;  (iii) as provided in  Subsection  10(a),  upon certain
     events to make appropriate  adjustments to the exercise price and number of
     Class C Units  subject to this Plan and Option;  and (iv) to make all other
     determinations  and  perform  all other acts  necessary  or  advisable  for
     administering this Plan,  including the delegation of such ministerial acts
     and responsibilities as the Committee deems appropriate.  The Committee may
     correct any defect or supply any omission or reconcile any inconsistency in
     this  Plan or any  Option in the  manner  and to the  extent it shall  deem
     expedient to carry it into effect, and it shall be the sole and final judge
     of such  expediency.  The Committee  shall have full discretion to make all
     determinations  on the matters  referred to in this Subsection  13(d),  and
     such determinations shall be final, binding and conclusive.


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     Section 14. Government Regulations.

     This Plan,  Options  and the  obligations  of the  Partnership  to sell and
deliver  Class C Units  under any  Options,  shall be subject to all  applicable
laws, rules and regulations,  and to such approvals by any governmental agencies
or national securities exchanges as may be required.

     Section 15. Miscellaneous.

          (a)  The  grant  of an  Option  shall  be in  addition  to  any  other
     compensation  paid to the Optionee or other  employee  benefit plans of the
     General  Partner  or  a  Subsidiary  or  other  benefits  with  respect  to
     Optionee's position with the General Partner or a Subsidiary.  The grant of
     an Option  shall not confer upon the  Optionee the right to continue in the
     Optionee's  employment position, or interfere in any way with the rights of
     the Optionee's employer to terminate his or her status as an employee.

          (b) Neither  the members of the Board nor any member of the  Committee
     shall be liable for any act,  omission,  or determination  taken or made in
     good faith  with  respect to this Plan or any  Option,  and  members of the
     Board  and  the  Committee  shall,  in  addition  to all  other  rights  of
     indemnification  and  reimbursement,  be  entitled to  indemnification  and
     reimbursement by the Partnership in respect of any claim,  loss, damage, or
     expense  (including  attorneys'  fees,  the  costs of  settling  any  suit,
     provided such settlement is approved by independent  legal counsel selected
     by the Partnership,  and amounts paid in satisfaction of a judgment, except
     a judgment based on a finding of bad faith) arising from such claim,  loss,
     damage,  or  expense  to the full  extent  permitted  by law and  under any
     directors' and officers'  liability or similar insurance  coverage that may
     from time to time be in effect.

          (c) Any  issuance or transfer of Class C Units to an  Optionee,  or to
     his legal  representative,  heir,  legatee,  distributee  or  assignee,  in
     accordance  with the  provisions  of this  Plan or the  applicable  Option,
     shall, to the extent thereof, be in full satisfaction of all claims of such
     persons  under the Plan.  The  Committee  may require any  Optionee,  legal
     representative,  heir,  legatee,  distributee  or  assignee  as a condition
     precedent  to such  payment or issuance  or  transfer of Class C Units,  to
     execute a release and  receipt for such  payment or issuance or transfer of
     Class C Units in such form as it shall determine.

          (d) Neither the Committee nor the Partnership guarantees Class C Units
     from loss or depreciation.

          (e) All  expenses  incident  to the  administration,  termination,  or
     protection of this Plan or any Option, including, but not limited to, legal
     and accounting fees, shall be paid by the Partnership;  provided,  however,
     the Partnership may recover any and all damages,  fees,  expenses and costs
     arising out of any actions taken by the  Partnership  to enforce its rights
     under this Plan or any Option.

          (f) Records of the  Partnership  shall be conclusive  for all purposes
     under this Plan or any Option,  unless  determined  by the  Committee to be
     incorrect.

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<PAGE>



          (g) The  Partnership  shall,  upon  request or as may be  specifically
     required  under this Plan or any Option,  furnish or cause to be  furnished
     all of the  information or  documentation  that is necessary or required by
     the  Committee to perform its duties and  functions  under this Plan or any
     Option.

          (h) The Partnership  assumes no liability to any Optionee or his legal
     representatives, heirs, legatees or distributees for any act of, or failure
     to act on the part of, the Committee.

          (i) If any  provision of this Plan or any Option is held to be illegal
     or invalid for any reason,  the  illegality or invalidity  shall not affect
     the  remaining  provisions of this Plan or any Option,  but such  provision
     shall be fully severable,  and the Plan or Option, as applicable,  shall be
     construed  and  enforced as if the illegal or invalid  provision  had never
     been included in the Plan or Option, as applicable.

          (j) Whenever any notice is required or permitted under this Plan, such
     notice  must be in  writing  and  personally  delivered  or sent by mail or
     delivery by a nationally recognized courier service. Any notice required or
     permitted to be  delivered  under this Plan shall be deemed to be delivered
     on the date on which it is  personally  delivered,  or, if mailed,  whether
     actually  received or not, on the third  Business Day after it is deposited
     in the United  States  mail,  certified  or  registered,  postage  prepaid,
     addressed  to the  person who is to  receive  it at the  address  that such
     person has previously  specified by written notice  delivered in accordance
     with this Subsection 15(j) or, if by courier,  seventy-two (72) hours after
     it  is  sent,   addressed  as  described  in  this  Subsection  15(j).  The
     Partnership or the Optionee may change,  at any time and from time to time,
     by written  notice to the other,  the address that it or he had  previously
     specified for  receiving  notices.  Until  changed in accordance  with this
     Plan, the address of the  Partnership is 4582 South Ulster Street  Parkway,
     Suite 1700,  Denver,  Colorado 80237 and the address of the Optionee is the
     Optionee's address in the records of the Optionee's employer.

          (k) Any  person  entitled  to notice  under  this Plan may waive  such
     notice.

          (l)  Each  Option  shall  be  binding  upon the  Optionee,  his  legal
     representatives, heirs, legatees and distributees and upon the Partnership,
     its  successors,  and assigns,  and upon the Board,  the  Committee and its
     successors.

          (m) The titles and headings of Sections  are included for  convenience
     of reference  only and are not to be  considered  in  construction  of this
     Plan's provisions.

          (n) Words used in the  masculine  shall  apply to the  feminine  where
     applicable,  and  wherever  the context of this Plan  dictates,  the plural
     shall be read as the singular and the singular as the plural.

     Section 16.  Amendment and  Discontinuation  of the Plan. The Committee may
from time to time amend the Plan or any Option; provided,  however, that, except
to the extent  provided in Section 8, no amendment or  suspension of the Plan or
any Option issued hereunder shall, except as specifically permitted in any

                                       12

<PAGE>



Option,  substantially  impair any  Option  previously  granted to any  Optionee
without the consent of such Optionee.

     Section 17. Effective Date and Termination  Date. The effective date of the
Plan is May 5, 1998,  which is the date the Board  adopted  this Plan.  The Plan
shall terminate on the tenth anniversary of the effective date.


     Executed to evidence the 1998 Unit Option Plan of Hallwood Energy Partners,
L.P. adopted by the Board on May 5, 1998.

                              HALLWOOD ENERGY PARTNERS, L.P.

                              By: HEPGP,  Ltd., its general  partner
                              By: Hallwood GP, Inc., its general partner



                              By:
                              Name:
                              Title:



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