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, 2000

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

                          Commission File Number 0-9579



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



              Delaware                                                84-1489099
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                            Identification Number)

         4610 South Ulster Street
                     Suite 200
             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  [  ]

Number of shares outstanding as of August 4, 2000

Common Stock                                                9,341,837
Series A Cumulative Preferred Stock                         2,263,568








                                  Page 1 of 25


<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

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



                                                                        June 30,             December 31,
                                                                          2000                   1999
                                                                    ----------------        ------------

CURRENT ASSETS
<S>                                                                   <C>                          <C>
   Cash and cash equivalents                                          $   8,424                    $  10,480
   Accounts receivable:
     Oil and gas revenues                                                16,047                       12,442
     Trade                                                                8,079                        4,918
   Due from affiliates                                                      930                          704
   Prepaid expenses and other current assets                              1,014                        1,209
                                                                      ---------                    ---------
         Total                                                           34,494                       29,753
                                                                       --------                     --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
   method):
     Proved mineral interests                                           748,078                      758,473
     Unproved mineral interests                                           4,373                        6,543
   Furniture, fixtures and other                                          2,049                        1,941
                                                                      ---------                    ---------
         Total                                                          754,500                      766,957

   Less accumulated depreciation, depletion,
     amortization and property impairment                              (598,062)                   (585,336)
                                                                        -------                     -------
         Total                                                          156,438                      181,621
                                                                        -------                      -------

OTHER ASSETS
   Deferred expenses and other assets                                     1,272                        1,400
                                                                      ---------                    ---------

TOTAL ASSETS                                                           $192,204                     $212,774
                                                                        =======                      =======
















<FN>

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


<PAGE>
<TABLE>
<CAPTION>


                           HALLWOOD ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                          (In thousands except shares)



                                                                               June 30,               December 31,
                                                                                 2000                     1999
                                                                            --------------             -----------

CURRENT LIABILITIES
<S>                                                                           <C>                       <C>
   Accounts payable and accrued liabilities                                   $  23,079                 $  26,382
   Current portion of long-term debt                                                200
                                                                             ----------
                                                                                 23,279                    26,382
                                                                               --------                  --------

NONCURRENT LIABILITIES
   Long-term debt                                                                89,269                   109,357
   Deferred revenue and other                                                     1,051                     1,066
                                                                              ---------                 ---------
         Total                                                                   90,320                   110,423
                                                                               --------                   -------

           Total liabilities                                                    113,599                   136,805
                                                                                -------                   -------

MINORITY INTEREST IN AFFILIATES                                                                               582
                                                                         --------------                 ---------

COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY
   Series A Cumulative Preferred Stock;  5,000,000 shares authorized;
     2,263,568 shares issued and outstanding
     in 2000 and 2,334,165 shares issued and outstanding in 1999                 20,873                    21,386
   Common Stock par value $.01 per share; 25,000,000
     shares authorized; 10,006,287 shares issued and 9,341,837
     outstanding in 2000 and  9,999,754 shares
     issued and outstanding in 1999                                                 100                       100
   Additional paid-in capital                                                    66,774                    67,883
   Accumulated deficit                                                           (5,395)                   (13,982)
   Less cost of treasury stock of 664,450 common shares at 2000                  (3,747)
                                                                              ---------
         Stockholders' equity - net                                              78,605                     75,387
                                                                               --------                   --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $192,204                   $212,774
                                                                                =======                    =======














<FN>

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


<PAGE>

<TABLE>
<CAPTION>

                           HALLWOOD ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                      (In thousands except per share data)


                                                                                   For the Three Months Ended
                                                                                            June 30,
                                                                                    --------------------------
                                                                                  2000                    1999
                                                                                  ----                    ----

REVENUES:
<S>                                                                             <C>                     <C>
   Gas revenue                                                                  $14,732                 $  7,546
   Oil revenue                                                                    3,035                    3,031
   Pipeline, facilities and other                                                 1,849                    1,430
   Interest                                                                         103                       61
                                                                               --------                 --------
                                                                                 19,719                   12,068
                                                                                 ------                   ------

EXPENSES:
   Production operating                                                           4,613                    3,432
   Facilities operating                                                              94                      152
   General and administrative                                                     2,133                    1,152
   Depreciation, depletion and amortization                                       6,192                    4,519
   Interest                                                                       2,155                    1,273
                                                                                -------                  -------
                                                                                 15,187                   10,528
                                                                                 ------                   ------

OTHER INCOME (EXPENSES):
   Equity in income of HCRC                                                                                   63
   Minority interest in net income of affiliates                                                            (64)
   Litigation                                                                       272                      100
                                                                               --------                 --------
                                                                                    272                       99
                                                                               --------                 --------

INCOME BEFORE INCOME TAXES                                                        4,804                    1,639
                                                                                -------                  -------

PROVISION (BENEFIT) FOR INCOME TAXES:
   Current                                                                          622                       26
   Deferred                                                                                                (100)
                                                                            -----------                --------
                                                                                    622                     (74)
                                                                               --------          -     --------

NET INCOME                                                                        4,182                    1,713

PREFERRED DIVIDENDS                                                                 566                      584
                                                                               --------                 --------

NET INCOME ATTRIBUTABLE TO
   COMMON SHAREHOLDERS                                                         $  3,616                 $  1,129
                                                                                =======                  =======

     NET INCOME PER SHARE - BASIC                                            $      .37               $      .17
                                                                              =========                =========

     NET INCOME PER SHARE - DILUTED                                          $      .37               $      .17
                                                                              =========                =========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                        9,724                    6,664
                                                                                =======                  =======

PRO FORMA INFORMATION ASSUMING PROVISION
   FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)

     Income before income taxes                                                                         $  1,639

     Provision for income taxes

     Net income                                                                                         $  1,639
                                                                                                         =======

     Net income attributable to common shareholders                                                     $  1,055
                                                                                                         =======

     Net income per share - basic                                                                     $      .16
                                                                                                       =========

     Net income per share - diluted                                                                   $      .16
                                                                                                       =========

<FN>

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

                           HALLWOOD ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                      (In thousands except per share data)


                                                                                    For the Six Months Ended
                                                                                            June 30,
                                                                                   --------------------------
                                                                                  2000                    1999
                                                                                  ----                    ----

REVENUES:
<S>                                                                             <C>                      <C>
   Gas revenue                                                                  $28,577                  $14,036
   Oil revenue                                                                    9,180                    5,198
   Pipeline, facilities and other                                                 3,515                    2,639
   Interest                                                                         256                      177
                                                                               --------                 --------
                                                                                 41,528                   22,050
                                                                                 ------                   ------

EXPENSES:
   Production operating                                                           9,863                    6,490
   Facilities operating                                                             326                      327
   General and administrative                                                     3,934                    2,494
   Depreciation, depletion and amortization                                      12,626                    8,812
   Interest                                                                       4,550                    2,091
                                                                                -------                  -------
                                                                                 31,299                   20,214
                                                                                 ------                   ------

OTHER INCOME (EXPENSES):
   Equity in loss of HCRC                                                                                  (419)
   Minority interest in net income of affiliates                                   (127)                   (196)
   Litigation                                                                      (345)                     100
                                                                               --------                 --------
                                                                                   (472)                   (515)
                                                                               --------                --------

INCOME BEFORE INCOME TAXES                                                        9,757                    1,321
                                                                                -------                  -------

PROVISION (BENEFIT) FOR INCOME TAXES:
   Current                                                                        1,170                       26
   Deferred                                                                                                (100)
                                                                            -----------                --------
                                                                                  1,170                     (74)
                                                                                -------               ---------

NET INCOME                                                                        8,587                    1,395

PREFERRED DIVIDENDS                                                               1,139                    1,200
                                                                                -------                  -------

NET INCOME ATTRIBUTABLE TO
   COMMON SHAREHOLDERS                                                         $  7,448                $     195
                                                                                =======                 ========

     NET INCOME PER SHARE - BASIC                                            $      .76               $      .03
                                                                              =========                =========

     NET INCOME PER SHARE - DILUTED                                          $      .75               $      .03
                                                                              =========                =========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                        9,862                    6,135
                                                                                =======                  =======

PRO FORMA INFORMATION ASSUMING PROVISION
   FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)

     Income before income taxes                                                                         $  1,321

     Provision for income taxes

     Net income                                                                                         $  1,321
                                                                                                         =======

     Net income attributable to common shareholders                                                    $     121
                                                                                                        ========

     Net income per share - basic                                                                     $      .02
                                                                                                       =========

     Net income per share - diluted                                                                   $      .02
                                                                                                       =========

<FN>

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


<PAGE>

<TABLE>
<CAPTION>

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

                                                                                  For the Six Months Ended
                                                                                          June 30,
                                                                                  -------------------------
                                                                                 2000                   1999
                                                                                 ----                   ----

OPERATING ACTIVITIES:
<S>                                                                             <C>                   <C>
    Net income                                                                  $  8,587              $  1,395
    Adjustments to reconcile net income to net cash provided
       by (used in) operating activities:
          Depreciation, depletion and amortization                                12,626                 8,812
          Depreciation charged to affiliates                                         100                   110
          Minority interest in net income of affiliates                              127                   196
          Amortization of deferred loan costs and debt discount                      222                    17
          Recoupment of take-or-pay liability                                        (52)                 (123)
          Equity in loss of HCRC                                                                           419
          Undistributed earnings of affiliates                                                          (1,176)
          Deferred tax benefit                                                                            (100)

    Changes in  operating  assets and  liabilities  provided  (used) cash net of
       noncash activity:
          Oil and gas revenues receivable                                         (4,076)               (1,454)
          Trade receivables                                                       (3,161)                  130
          Due from affiliates                                                       (137)               (3,638)
          Prepaid expenses and other current assets                                  213                (2,603)
          Deferred expenses and other                                                                    2,830
          Accounts payable and accrued liabilities                                (3,240)               (5,411)
                                                                                 -------               -------
                Net cash provided by (used in) operating activities               11,209                  (596)
                                                                                  ------              --------

INVESTING ACTIVITIES:
    Additions to property, plant and equipment                                    (2,951)               (1,182)
    Exploration and development costs incurred                                    (6,147)               (3,568)
    Proceeds from sales of property, plant and equipment                          21,202                   129
    Costs incurred in connection with the Consolidation                                                 (2,634)
    Distributions received from affiliate                                                                1,833
                                                                            ------------               -------
                Net cash provided by (used in) investing activities               12,104                (5,422)
                                                                                  ------               -------

FINANCING ACTIVITIES:
    Payments of long-term debt                                                   (21,000)
    Proceeds from long-term debt                                                   1,000                 6,000
    Dividends paid                                                                (1,139)               (2,893)
    Purchase of common shares held in treasury                                    (3,747)
    Purchase and cancellation of preferred shares                                   (513)
    Exercise of options                                                               30
    Distributions paid by consolidated affiliates to minority interest                                    (340)
    Syndication costs                                                                                      (47)
                                                                            ------------             ---------
                Net cash provided by (used in) financing activities              (25,369)                2,720
                                                                                  ------               -------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                         (2,056)               (3,298)

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                               10,480                11,874
                                                                                  ------                ------

END OF PERIOD                                                                   $  8,424              $  8,576
                                                                                 =======               =======
<FN>

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


<PAGE>


                           HALLWOOD ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



NOTE 1    -  GENERAL

Hallwood Energy Corporation  ("HEC" or the "Company") is a Delaware  corporation
engaged in the development,  exploration,  acquisition and production of oil and
gas  properties.  HEC began  operations  June 8, 1999,  in  connection  with the
consolidation  ("Consolidation")  of Hallwood Energy Partners,  L.P. ("HEP") and
Hallwood Consolidated  Resources Corporation ("HCRC") and the acquisition of the
direct energy interests of The Hallwood Group Incorporated  ("Hallwood  Group").
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy  interests of Hallwood  Group.
Accordingly,  the  assets and  liabilities  of HEP,  including  its 46% share of
assets and  liabilities  of HCRC  owned  prior to the  Consolidation,  have been
recorded at historical  cost, and the remaining  assets and  liabilities of HCRC
and the  direct  energy  interests  of  Hallwood  Group  have been  recorded  at
estimated fair values as of the date of purchase.  All information presented for
periods  prior to June 8, 1999  represents  the  historical  information  of HEP
because HEP is considered to be the acquiring  entity for  accounting  purposes.
The  financial   statements  for  periods  prior  to  June  8,  1999  have  been
retroactively  restated to reflect the corporate structure of HEC, and all share
and per  share  information  assumes  that the  shares  of HEC  issued to HEP in
connection with the Consolidation were outstanding for all periods prior to June
8, 1999. The Company's  properties are primarily  located in the Rocky Mountain,
Mid-Continent, Greater Permian and Gulf Coast regions of the United States.

The following pro forma information  presents the financial  information of HEP,
HCRC and the direct property interests of Hallwood Group as if the Consolidation
had taken  place on January 1, 1999.  Any  additional  provision  or benefit for
income  taxes  is  excluded   because  of  the  Company's  net  operating   loss
carryforwards and related valuation allowance.

<TABLE>
<CAPTION>

                               For the Three Months Ended June 30, 1999           For the Six Months Ended June 30, 1999
                               ----------------------------------------           --------------------------------------
                                 As            Acquired                            As            Acquired
                              Reported        Interests        Pro Forma        Reported        Interests        Pro Forma
                              --------        ---------        ---------        --------        ---------        ---------
                                                          (In thousands except per share data)

<S>                           <C>             <C>               <C>             <C>             <C>               <C>
Revenues                      $12,068         $ 5,431           $17,499         $22,050         $11,971           $34,021
Net income (loss)               1,713             (87)            1,626           1,395          (1,065)              330
Net income (loss)
   attributable to
   common
   shareholders                 1,129             (87)            1,042             195          (1,065)             (870)
Net income (loss)
   per share - basic         $    .17                          $    .10        $    .03                         $    (.09)
                              =======                           =======         =======                          ========
Net income (loss)
   per share - diluted       $    .17                          $    .10        $    .03                         $    (.09)
                              =======                           =======         =======                          ========

Production:
   Gas (mcf)                    3,960           1,756             5,716           7,540           4,097            11,637
   Oil (bbl)                      193             100               293             383             252               635
</TABLE>



<PAGE>


The interim financial data 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 HEC's 1999 Annual Report
on Form 10-K.

Accounting Policies

Consolidation

HEC  fully  consolidates  entities  in which it owns a greater  than 50%  equity
interest  and  reflects  a  minority  interest  in  the  consolidated  financial
statements.  The accompanying  financial  statements  include the majority owned
affiliates, the May Limited Partnerships 1984-1, 1984-2 and 1984-3 through March
31,  2000 when they were  liquidated  and the May Limited  Partnerships  1983-1,
1983-2 and 1983-3 through March 31, 1999 when they were liquidated.

Pro Forma Information

The pro forma  information  included in the  statements of  operations  has been
presented to reflect the provision for income taxes,  using statutory  rates, as
though the Company had been a taxable  corporation  during 1999.  Because of the
Company's net operating loss carryforwards, it is assumed that the Company would
have had a full valuation  allowance.  Accordingly,  no provision or benefit for
income taxes has been recorded in 1999 on a pro forma basis.

Computation of Net Income Per Share

Basic  income per share is computed by dividing net income  attributable  to the
common  shareholders by the weighted average number of common shares outstanding
during the  periods.  Diluted  income per common share  includes  the  potential
dilution that could occur upon exercise of options or warrants to acquire common
stock,  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 or
warrants  (which were  assumed to have been made at the average  market price of
the common shares during the reporting period). The warrants described in Note 2
and the Company's  outstanding  stock options have been ignored during 1999, and
the stock options  issued in June 1999 and the warrants have been ignored during
2000 in the  computation of diluted net income per share because their inclusion
would be antidilutive.


<PAGE>


The following  table  reconciles  the number of shares  outstanding  used in the
calculation of basic and diluted income per share.
<TABLE>
<CAPTION>

                                                                       Income
                                                                     to Common
                                                                    Shareholders           Shares        Per Share
                                                                    ------------           ------        ---------
                                                                       (In thousands except per share data)

For the Three Months Ended June 30, 2000
<S>                                                                 <C>                   <C>             <C>
   Net income per share - basic                                     $ 3,616               9,724           $  .37
                                                                                                           =====
  Effect of options                                                                          57
                                                                     -----------      ---------
  Net income per share - diluted                                    $ 3,616               9,781           $  .37
                                                                     ======              ======            =====

For the Six Months Ended June 30, 2000
   Net income per share- basic                                      $ 7,448               9,862           $  .76
                                                                                                           =====
  Effect of options                                                                          31
                                                                     -----------      ---------
  Net income per share- diluted                                     $ 7,448               9,893           $  .75
                                                                     ======              ======            =====

For the Three Months Ended June 30, 1999
   Net income per share - basic                                     $ 1,129               6,664          $   .17
                                                                     ------              ------           ======
  Net income per share - diluted                                    $ 1,129               6,664          $   .17
                                                                     ======              ======           ======

For the Six Months Ended June 30, 1999
   Net income per share- basic                                      $    195              6,135          $   .03
                                                                     -------             ------           ======
  Net income per share- diluted                                     $    195              6,135          $   .03
                                                                     =======             ======           ======
</TABLE>

Recently Issued Accounting Pronouncements

In 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, 2001.  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 period amounts to conform
to the classifications used in the current period.




<PAGE>


NOTE 2    -  DEBT

HEC's  long-term  debt at June 30, 2000 and December  31, 1999  consisted of the
following:

                                  June 30, 2000            December 31, 1999
                                  -------------            -----------------
                                               (In thousands)

Credit Agreement                     $  66,200                  $  86,200
Note Agreement                          25,000                     25,000
Debt discount                           (1,731)                    (1,843)
                                      --------                   --------
  Total                                 89,469                    109,357
Less current portion                      (200)
                                   -----------
  Total long-term debt               $  89,269                   $109,357
                                      ========                    =======

On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended,  the "Credit  Agreement")  to extend the term date of its
line of credit to May 31, 2002. The lenders were Morgan  Guaranty Trust Company,
First Union National Bank and Bank of America.  Effective  June 30, 2000,  Wells
Fargo Bank  replaced  Bank of America as one of HEC's  lenders  under its Credit
Agreement. Effective June 30, 2000, HEC's Credit Agreement was amended to reduce
HEC's  borrowing  base to  $70,000,000,  provided  that any amounts in excess of
$66,000,000 shall be applied to the purchase price of approved acquisitions. HEC
repaid  $200,000  of its  borrowings  on July  7,  2000,  to  comply  with  this
amendment.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 2.125%,  prime plus 1/2% or the
Euro-Dollar  rate plus from  1.25% to 2.0%.  The  applicable  interest  rate was
approximately  8.4% at June 30,  2000.  Interest is payable  monthly.  Quarterly
principal payments of $9,429,000 are scheduled to commence May 31, 2002.

The  borrowing  base  for  the  Credit   Agreement  is  typically   redetermined
semiannually,  although the lenders have the right to make a redetermination  at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas  properties.  Additionally,  total  expenditures  for
dividends  paid and stock  repurchased by HEC in any 12 month period are limited
to 50%  of  cash  flow  from  operations  before  working  capital  changes  and
distributions  received from affiliates,  if the principal amount of debt of HEC
is 50% or more of the borrowing base. Total  expenditures for dividends paid and
stock  repurchased by HEC are limited to 65% of cash flow from operations before
working  capital  changes and  distributions  received from  affiliates,  if the
principal amount of debt is less than 50% of the borrowing base.

At the  time  of the  Consolidation,  HCRC  had  $25,000,000  of  10.32%  Senior
Subordinated Notes ("Subordinated  Notes") due December 23, 2007 and warrants to
purchase  common stock which were held by The  Prudential  Insurance  Company of
America  ("Prudential").  On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase  Agreement (the "Note Agreement") was amended to issue
warrants to  Prudential to purchase  309,278  shares of HEC's common stock at an
exercise  price of $7.00 per share.  The Company has requested an amendment from
Prudential to exclude  certain hedging  transactions of the  subsidiaries of HEC
from the calculation of indebtedness.  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 December 23, 2003 through December 23,
2007.

HEC recorded  the  Subordinated  Notes and the warrants  based upon the relative
fair values of the  Subordinated  Notes without the warrants and of the warrants
themselves at the time of Consolidation.  The allocated value of the warrants of
$1,956,000  was  recorded as  additional  paid-in-capital.  The  discount on the
Subordinated  Notes is being amortized over the term of the  Subordinated  Notes
using the interest method of amortization.

As part of its risk management strategy,  HEC enters into financial contracts to
hedge the interest rate payments  under its Credit  Agreement.  HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit  Agreement,  which has a floating interest rate.
The  amounts  received  or  paid  upon  settlement  of  these  transactions  are
recognized as interest expense at the time the interest payments are due.

All contracts are interest rate swaps with fixed rates. As of July 25, 2000, HEC
was a party to eight contracts with three different counterparties.

The following table provides a summary of HEC's financial contracts.

                                                                     Average
                                            Amount of               Contract
               Period                       Debt Hedged            Floor Rate

     Last six months of 2000                $45,000,000                5.65%
     2001                                    36,000,000                5.23
     2002                                    37,500,000                5.23
     2003                                    37,500,000                5.23
     2004                                     6,000,000                5.23


NOTE 3    -  STATEMENTS OF CASH FLOWS

Cash paid for  interest  during the six months  ended June 30, 2000 and 1999 was
$3,937,000 and $2,051,000, respectively. Cash paid for income taxes was $594,000
during the six months  ended  June 30,  2000.  There was no cash paid for income
taxes during the six months ended June 30, 1999.


NOTE 4 -  STOCK OPTIONS

On January 28,  2000,  the  Compensation  Committee  of HEC  granted  options to
purchase 238,500 shares of common stock at an exercise price of $4.625 per share
which  was equal to the fair  market  value of the  common  stock on the date of
grant. The options expire on January 28, 2007, unless sooner terminated pursuant
to the provisions of the plan. One-third of the options vested on the grant date
and the  remainder  vest  one-third on January 28, 2001 and one-third on January
28, 2002.  During the quarter  ended June 30, 2000,  6,533 of these options were
exercised and 13,067 of these options expired.

On June 9, 1999, the  Compensation  Committee of HEC granted options to purchase
600,000 shares of common stock at an exercise price of $7.00 per share which was
equal to the fair market value on the date of grant.  On November 22, 1999,  HEC
granted an  additional  61,500  options to purchase  common stock at an exercise
price of $7.00 per share  which was greater  than the fair  market  value of the
common  stock on the date of the  grant.  The  options  expire on June 9,  2006,
unless sooner  terminated  pursuant to the provisions of the plan.  One-third of
the options  vested on the grant date,  and the remainder vest one-third on June
8, 2000 and one-third on June 8, 2001. During the second quarter of 2000, 36,000
of these options were cancelled.


NOTE 5 - STOCK REPURCHASES

On February 18, 2000,  HEC  repurchased  and retired  43,816  shares of Series A
Preferred Stock from its affiliate, Hallwood Group for $303,426. The shares were
repurchased  for $6.925 per share which  represented  the average of the closing
prices of the stock during the five days prior to February 18, 2000.

On May 5, 2000, the Company  repurchased 360,000 shares of common stock at $5.00
per share. These shares are held as treasury shares by the Company.

During March 2000,  the Board of Directors of HEC approved the  repurchase of up
to $5,000,000 of common and preferred  stock of HEC through a combination  of an
odd-lot program for certain common and preferred shareholders and the repurchase
of common shares in the open market.
Under the odd-lot  program,  the Company  offered to purchase  holdings of 99 or
fewer  common  shares,  or 20 or  fewer  Series  A  Preferred  shares  from  its
shareholders  of record as of April 10,  2000.  The  original  offer was for the
period from April 21, 2000 through May 22,  2000.  The closing date of the offer
was subsequently extended until June 12, 2000.

Under the odd-lot  program,  the Company  repurchased  213,400  shares of common
stock at an  average  price of $6.19 per share.  The  Company  also  repurchased
26,781 shares of preferred  shares at an average  price of $7.84 per share.  The
common shares  repurchased  under the odd-lot program are being held as treasury
shares, and the preferred shares repurchased have been cancelled.

During the second quarter of 2000,  the Company also purchased  91,050 shares of
its common stock on the open market.  The purchase  prices ranged from $4.10 per
share to $7.75 per share. These shares are being held by the Company as treasury
shares.


NOTE 6 - PROPERTY SALES

During the first six months of 2000, HEC sold its interests in approximately 500
non-strategic  oil and gas wells located in the  Keystone,  Merkle and Weesatche
areas of Texas, as well as various wells in Kansas,  Oklahoma,  North Dakota and
Montana.  The proceeds from all of the Company's property sales during the first
six months of 2000 were  $21,202,000 of which  $21,000,000  was used to pay down
borrowings under the Credit Agreement.


NOTE 7    -  LEGAL SETTLEMENTS

In connection with the Consolidation, HEC assumed the liability for two lawsuits
filed against  Hallwood Group and certain  individuals and related to the direct
energy  interests  acquired from Hallwood Group.  These lawsuits,  both filed in
federal  court in Denver,  Colorado,  have been  settled and  dismissed.  During
February  2000,  HEC  paid  approximately  $673,000  in  connection  with  these
lawsuits.  During May 2000,  the Company  received a  settlement  offer from its
insurance  company  to  reimburse  approximately  $419,000  of the costs paid in
connection  with these  lawsuits.  This amount was accrued as litigation  income
during the quarter ended June 30, 2000.

In connection with the 1995 closing of the Jakarta,  Indonesia office of HEP and
HCRC, three former  employees filed a lawsuit against those entities,  primarily
based on allegations that their employment contracts had been breached. The case
was tried in 1997, and after appeals, a final judgment of $487,820 plus interest
was awarded to the plaintiffs.  The amount due was accrued as of March 31, 2000,
and was paid to the plaintiffs in the second quarter of 2000.

In addition to the litigation  noted above, the Company and its subsidiaries are
from time to time subject to routine  litigation and claims  incidental to their
business, which the Company believes will be resolved without material effect on
the Company's financial condition, cash flows or operations.


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

Overview

HEC began  operations on June 8, 1999, in connection with the  Consolidation  of
HEP and HCRC and the  acquisition of the direct  property  interests of Hallwood
Group. For accounting purposes, the Consolidation has been treated as a purchase
by HEP of the common stock of HCRC and the direct  energy  interests of Hallwood
Group. Generally accepted accounting principles require the reporting of results
on a basis that makes it difficult to compare to prior periods.  Therefore, this
Overview  provides  certain  information  on a pro forma basis to facilitate the
comparison with prior periods.


<PAGE>


Pro Forma Results

The following pro forma information is prepared as if the Consolidation had been
completed on January 1, 1999.
<TABLE>
<CAPTION>

                                         For the Three Months Ended           For the Six Months Ended
                                         --------------------------           ------------------------
                                       June 30, 2000    June 30, 1999     June 30, 2000     June 30, 1999
                                       -------------    -------------     -------------     -------------
                                                         (In thousands except prices)
Prices
<S>                                       <C>               <C>              <C>               <C>
  Gas (per mcf)                           $ 2.70            $ 1.89           $ 2.42            $ 1.84
  Oil (per bbl)                           $23.35            $15.90           $23.91            $13.47

Production
  Gas (mcf)                                5,464             5,716           11,787            11,637
  Oil (bbl)                                  130               293              384               635

Gas revenue                              $14,732           $10,785          $28,577           $21,408
Oil revenue                                3,035             4,660            9,180             8,556
Production operating expense               4,613             5,054            9,863            10,577
</TABLE>

Liquidity and Capital Resources

Cash Flow

HEC had $11,209,000 of cash flow from operating  activities during the first six
months of 2000.

Primary cash inflows were:

o        Proceeds from the sale of properties of $21,202,000; and

o        Proceeds from long-term debt of $1,000,000.

Cash was used primarily for:

o        Additions to property and development costs incurred of $9,098,000;

o        Payments of long-term debt of $21,000,000;

o        Purchase of preferred and common stock of $4,260,000; and

o        Dividends to preferred shareholders of $1,139,000.

When combined with  miscellaneous  other cash  activity  during the period,  the
result was a decrease of $2,056,000 in HEC's cash from  $10,480,000  at December
31, 1999 to $8,424,000 at June 30, 2000.

Exploration and Development Projects and Acquisitions

Through June 30, 2000,  HEC incurred  $9,098,000 in direct  property  additions,
development,  exploitation,  and exploration  costs. The costs were comprised of
$2,951,000  for property  additions and  approximately  $6,147,000  for domestic
exploration  and  development.  HEC's 2000 capital budget is set at $24,000,000.
The significant capital expenditures through June 30, 2000 are as follows.

Gulf Coast Region

During the first half of 2000,  HEC  expended  approximately  $6,774,000  of its
capital  budget in the Gulf Coast Region in Louisiana  and South and East Texas.
The following are major projects within the region.  Louisiana.  In May of 2000,
HEC  successfully  completed a  13,600-foot  Bol Mex 3 well located in the Scott
Field. The well has sustained  production rates of approximately  25,000 mcf per
day and 500 barrels of oil per day. In 2000, HEC's drilling and completion costs
for the well are approximately  $1,497,000.  HEC owns an approximate 35% working
interest in the well. The  originally  targeted upper zone will remain as behind
pipe proved nonproducing reserves while the lower zone is produced.  HEC's plans
in the area  include  a Bol Mex 16  exploration  well  testing  sands  which are
productive  in nearby  fields.  Drilling  is  expected to commence in the fourth
quarter of 2000, subject to drilling rig availability.  Land and leasehold costs
incurred  during the second quarter for this well were  approximately  $150,000.
HEC incurred $135,000  acquiring 377 small working interests  totaling less than
1% in the Scott Field and in the Bol Mex 16 exploration acreage.

Yoakum Gorge  Project.  From January 1 through June 30, 2000,  HEC continued its
participation  with  non-operated  and operated Wilcox  projects  located in the
Yoakum Gorge area of Lavaca County, Texas. HEC participated with three different
operators in the drilling of six  non-operated  wells.  Two wells,  with working
interests of 12.5% and 3.1%,  are in the process of being  completed,  two other
wells with  working  interests of 15.9% and 12.5% have  recently  been placed on
production  at  approximately  4,000  and 1,300  mcf per day  respectively,  and
another well, having a 28.9% working interest, is awaiting a decision on whether
to sidetrack the well to a more optimum position relative to area faulting.  One
non-operated  recompletion  in which HEC has a 28.8%  working  interest has been
placed on production at 4,500 mcf per day. An operated recompletion is presently
underway and HEC owns a 90% working interest in the well. HEC's participation in
the Yoakum  Gorge area has cost  approximately  $1,791,000  during the first six
months of 2000. HEC  anticipates  continued  activity in the area resulting from
additional exploitation of the 1999 Seisgen Acquisition and from a third quarter
acquisition  of 945 acres of land and 196 square miles of additional 3-D seismic
data. With the recent seismic acquisition, HEC now owns approximately 381 square
miles of 3-D  seismic  data in the area.  The  third  quarter  seismic  and land
expenditures are anticipated to cost HEC approximately $2,069,000.

Goliad County  Expanded Wilcox Project.  A 16,500-foot  non-operated,  discovery
well was completed in the Upper Wilcox, and is producing approximately 8,000 mcf
per day. HEC owns a 20.8% working interest in the well. Additional  exploitation
and  exploration  wells are possible,  but the performance of the discovery well
will be assessed prior to proceeding.  HEC's drilling and leasehold  acquisition
costs during 2000 totaled approximately $1,119,000.

Bell Prospect.  During the first six months of 2000, HEC incurred  approximately
$723,000 for costs  associated  with  completing two wells,  and for various gas
gathering,  gas treating,  and produced water handling facility costs associated
with the Bell prospect area.  One well tested the  Georgetown  formation and was
completed  in the Buda  formation  and the  other  well is a dual  lateral  Buda
formation  development  well.  Both wells are currently  producing at a combined
rate of  approximately  300 gross  barrels of oil per day.  HEC owns 36% working
interests in the two wells.  The Company may drill one  additional  well in this
area during the current year.

Rocky Mountain Region

Through the second quarter of 2000, HEC expended  approximately  $848,000 of its
capital  budget in the Rocky  Mountain  Region located in Colorado and Northwest
New Mexico.  Of this  amount,  HEC incurred  approximately  $177,000 to frac two
wells located on the Colorado  Western Slope.  These two workovers have improved
production and should increase the wells' ultimate recovery. In addition, during
the first quarter of 2000, HEC  participated in a Hudson Ranch  exploration play
that tested the Red River and Nisku  formations of North Dakota.  The well found
insufficient pay to justify completion.  HEC's costs incurred through the second
quarter of 2000 were approximately $251,000.

San Juan Basin  Project - Colorado  and New Mexico.  HEC,  along with many other
industry  partners,  made application to the Colorado Oil and Gas Commission for
fieldwide  infill drilling in the Fruitland Coal formation.  The application was
to reduce the present 320-acre spacing units to 160 acres,  because the existing
spacing  units  cannot be  adequately  drained by a single  well.  Approval  was
granted in July 2000, and could result in as many as 18 locations on the acreage
in which the Company has an indirect  interest  through its special  purpose tax
credit  vehicle.  It is not yet known what the  economic  effect  will be of any
contractual  requirements related to drilling on the tax credit vehicle acreage.
If a mutually  acceptable  agreement  can be  reached  with the owner of the tax
credit vehicle,  HEC anticipates that infill drilling in Colorado could begin as
soon as 2001,  subject to the  resolution  of drilling and lease  rights  issues
which  currently  exist.  In addition  to the  Colorado  locations,  HEC has the
potential for 14 similar locations in New Mexico if infill drilling is permitted
there.  HEC has not added any volumes to its reserve  projections  in connection
with the Colorado or New Mexico infill drilling opportunities.

During the second quarter of 2000, HEC  recompleted one well in the Colorado San
Juan area which is  presently  dewatering.  HEC's  costs  totaled  approximately
$129,000  and  HEC  has an  85%  working  interest  in the  well.  Prior  to the
recompletion,  the well had not produced since April 1999. Also in the area, HEC
is currently sidetracking a Colorado San Juan well. Total costs for this project
are anticipated to be $110,000 and HEC has a 40% working interest.

Other

The remaining $1,476,000 of HEC's capital expenditures incurred during the first
half of 2000 relate to all other areas.  One  successful  non-operated  well was
drilled in Gaines  County,  Texas and an offset well is  underway.  The well was
completed in the Leonard  sand at  approximately  8,000 feet.  HEC owns a 17.50%
working  interest in the well and has incurred costs of  approximately  $116,000
through the second quarter of 2000. One 7,850-foot  operated  Spraberry well was
successfully  drilled and  completed  during the second  quarter of 2000.  HEC's
costs  for  the  well  were  approximately   $344,000.  The  well  has  produced
approximately 5,000 barrels to date and is currently producing  approximately 65
barrels  of oil per day.  HEC owns an  approximate  87%  working  interest.  The
remaining  costs  are  associated   principally   with  technical   general  and
administrative  expenditures totaling  approximately  $915,000, and for numerous
other projects which are completed or underway and which are  individually  less
significant.

Property Acquisitions

HEC signed a Letter of Intent on July 27, 2000 to purchase properties located in
South Texas and  Louisiana.  The  acquisition  includes oil and gas  properties,
including  interests in approximately 30 wells located in five fields,  numerous
proven  and  unproven  drilling  locations,  7,000  acres of  exploration  lease
holdings,  and 3-D seismic data. HEC anticipates the acquisition will add proven
reserves of approximately  443,000 barrels of oil and 10.2 billion cubic feet of
natural gas. The closing of this  acquisition  is subject to the  resolution  of
certain  contingencies.  The purchase price is estimated at $4,000,000  cash and
430,000 shares of HEC common stock.

Property Divestments

During the first six months of 2000, HEC sold its interests in approximately 500
non-strategic oil and gas wells located in the Keystone,  Merkle,  and Weesatche
areas of  Texas,  and  various  oil and gas  wells in  Oklahoma,  North  Dakota,
Montana,  and Kansas. Total proceeds received through the second quarter of 2000
were approximately  $21,202,000.  The wells sold represent  approximately 35% of
HEC's  total  well  count,   approximately  16%  of  HEC's  reserve  value,  and
approximately  11% of its operating cash flow based on five year average reserve
pricing. The completion of HEC's 2000 sales effort has enabled HEC to reduce its
level of debt and will allow the Company to reduce its administrative  overhead,
and to  focus on its core  areas of  Colorado,  Utah,  New  Mexico,  Texas,  and
Louisiana.

Dividends

On June 20,  2000,  HEC  declared  a  quarterly  dividend  of $.25 per  Series A
Cumulative Preferred share, payable on August 15, 2000 to shareholders of record
on June 30, 2000. This amount was accrued as of June 30, 2000.

The Series A Cumulative  Preferred Stock has a dividend  preference of $1.00 per
share per year.  HEC may not  declare or pay  dividends  to common  shareholders
unless full cumulative dividends have been paid on the preferred stock.


<PAGE>


Stock Repurchases

On February 18, 2000,  HEC  repurchased  and retired  43,816  shares of Series A
Preferred Stock from its affiliate, Hallwood Group for $303,426. The shares were
repurchased  for $6.925 per share which  represented  the average of the closing
prices of the stock during the five days prior to February 18, 2000.

On May 5, 2000, the Company  repurchased 360,000 shares of common stock at $5.00
per share. These shares are held as treasury shares by the Company.

During March 2000,  the Board of Directors of HEC approved the  repurchase of up
to $5,000,000 of common and preferred  stock of HEC through a combination  of an
odd-lot program for certain common and preferred shareholders and the repurchase
of common shares in the open market.

Under the odd-lot  program,  the Company  offered to purchase  holdings of 99 or
fewer  common  shares,  or 20 or  fewer  Series  A  Preferred  shares  from  its
shareholders  of record as of April 10,  2000.  The  original  offer was for the
period from April 21, 2000 through May 22,  2000.  The closing date of the offer
was subsequently extended until June 12, 2000.

Under the odd-lot  program,  the Company  repurchased  213,400  shares of common
stock at an  average  price of $6.19 per share.  The  Company  also  repurchased
26,781 shares of preferred  shares at an average  price of $7.84 per share.  The
common shares  repurchased  under the odd-lot program are being held as treasury
shares, and the preferred shares repurchased have been cancelled.

During the second quarter of 2000,  the Company also purchased  91,050 shares of
its common stock on the open market.  The purchase  prices ranged from $4.10 per
share to $7.75 per  share.  These  shares are being  held,  by the  Company,  as
treasury shares.

Financing

HEC's  long-term  debt at June 30, 2000 and December  31, 1999  consisted of the
following:

                                  June 30, 2000            December 31, 1999
                                  -------------            -----------------
                                               (In thousands)

Credit Agreement                     $  66,200                  $  86,200
Note Agreement                          25,000                     25,000
Debt discount                           (1,731)                    (1,843)
                                      --------                   --------
  Total                                 89,469                    109,357
Less current portion                      (200)
                                   -----------
  Total long-term debt               $  89,269                   $109,357
                                      ========                    =======

On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended,  the "Credit  Agreement")  to extend the term date of its
line of credit to May 31, 2002. The lenders were Morgan  Guaranty Trust Company,
First Union National Bank and Bank of America.  Effective  June 30, 2000,  Wells
Fargo Bank  replaced  Bank of America as one of HEC's  lenders  under its Credit
Agreement. Effective June 30, 2000, HEC's Credit Agreement was amended to reduce
HEC's  borrowing  base to  $70,000,000  provided  that any  amounts in excess of
$66,000,000 shall be applied to the purchase price of approved acquisitions. HEC
repaid  $200,000  of its  borrowings  on July  7,  2000,  to  comply  with  this
amendment.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 2.125%,  prime plus 1/2% or the
Euro-Dollar  rate plus from  1.25% to 2.0%.  The  applicable  interest  rate was
approximately  8.4% at June 30,  2000.  Interest is payable  monthly.  Quarterly
principal payments of $9,429,000 are scheduled to commence May 31, 2002.


<PAGE>


The  borrowing  base  for  the  Credit   Agreement  is  typically   redetermined
semiannually,  although the lenders have the right to make a redetermination  at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas  properties.  Additionally,  total  expenditures  for
dividends  paid and stock  repurchased by HEC in any 12 month period are limited
to 50%  of  cash  flow  from  operations  before  working  capital  changes  and
distributions  received from affiliates,  if the principal amount of debt of HEC
is 50% or more of the borrowing base. Total  expenditures for dividends paid and
stock  repurchased by HEC are limited to 65% of cash flow from operations before
working  capital  changes and  distributions  received from  affiliates,  if the
principal amount of debt is less than 50% of the borrowing base.

At the  time  of the  Consolidation,  HCRC  had  $25,000,000  of  10.32%  Senior
Subordinated Notes ("Subordinated  Notes") due December 23, 2007 and warrants to
purchase  common stock which were held by The  Prudential  Insurance  Company of
America  ("Prudential").  On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase  Agreement (the "Note Agreement") was amended to issue
warrants to  Prudential to purchase  309,278  shares of HEC's common stock at an
exercise  price of $7.00 per share.  The Company has requested an amendment from
Prudential to exclude  certain hedging  transactions of the  subsidiaries of HEC
from the calculation of indebtedness.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 December 23, 2003 through December 23,
2007.

HEC recorded  the  Subordinated  Notes and the warrants  based upon the relative
fair values of the  Subordinated  Notes without the warrants and of the warrants
themselves at the time of Consolidation.  The allocated value of the warrants of
$1,956,000  was  recorded as  additional  paid-in-capital.  The  discount on the
Subordinated  Notes is being amortized over the term of the  Subordinated  Notes
using the interest method of amortization.

As part of its risk management strategy,  HEC enters into financial contracts to
hedge the interest rate payments  under its Credit  Agreement.  HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit  Agreement,  which has a floating interest rate.
The  amounts  received  or  paid  upon  settlement  of  these  transactions  are
recognized as interest expense at the time the interest payments are due.

All contracts are interest rate swaps with fixed rates. As of July 25, 2000, HEC
was a party to eight contracts with three different counterparties.

The following table provides a summary of HEC's financial contracts.

                                                                     Average
                                             Amount of              Contract
               Period                       Debt Hedged            Floor Rate

     Last six months of 2000                $45,000,000                5.65%
     2001                                    36,000,000                5.23
     2002                                    37,500,000                5.23
     2003                                    37,500,000                5.23
     2004                                     6,000,000                5.23

Cautionary Statement Regarding Forward-Looking Statements

In the interest of providing the shareholders 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  meanings  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 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.  Please  refer  to the  Company's
Registration  Statement  dated May 4, 1999,  SEC file  #333-77409 for additional
statements  concerning  important  factors  that could cause  actual  results to
differ materially from the Company's expectations. 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,  risk of  mechanical
failure,  the inexact nature of  interpretation  of seismic and other geological
and geophysical  data,  imprecision of reserve  estimates,  the  availability of
capital,  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,  shareholders  and potential  investors are cautioned  that certain
events or  circumstances  could cause actual results to differ  materially  from
those projected, estimated or predicted.

Inflation and Changing Prices

Prices

Prices obtained for oil and gas production depend upon numerous factors that are
beyond  the  control  of HEC,  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 during 1999 and through the
second quarter of 2000. The following table presents the weighted average prices
received  each  quarter  by HEC  and the  effects  of the  hedging  transactions
discussed 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>
Second quarter - 1999                $15.99                $15.70                 $1.93                  $1.91
Third quarter - 1999                  20.22                 18.21                  2.25                   1.95
Fourth quarter - 1999                 22.50                 19.01                  2.26                   1.93
First quarter - 2000                  27.26                 24.19                  2.29                   2.19
Second quarter - 2000                 29.42                 23.35                  3.22                   2.70
</TABLE>

As part of its risk management strategy,  HEC enters into 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
received or paid upon settlement of hedge contracts are recognized as oil or gas
revenue at the time the hedged volumes are sold.

HEC's  philosophy is to use derivatives to provide a measure of stability in the
volatile  price  environment  of oil and  gas,  and to  furnish  an  element  of
predictability in the cash flow of the Company. In general,  the Company expects
to hedge  up to 50%,  on a total  equivalent  volume  basis,  of its oil and gas
production for the next two forward  years,  and 30% for each of the three years
thereafter. The Company does not ordinarily intend to hedge more than 65% of any
one commodity.  In addition,  HEC will, in most cases,  enter into  transactions
with minimum  fixed prices for the  production  subject to the  contracts.  This
philosophy may be modified as circumstances require.

The  financial  contracts  used by HEC to hedge the price of its oil and natural
gas production are swaps and collars.  Under the swap  contracts,  HEC sells its
oil and gas  production  at spot market  prices and  receives or makes  payments
based on the differential  between the contract price and a floating price which
is based on spot  market  indices.  As of July 25,  2000,  HEC was a party to 30
financial contracts with four different counterparties.



<PAGE>


The following tables provide a summary of HEC's outstanding financial contracts:

                                               Oil                 Contract
                                  Percent of Production           Delivered
            Period                          Hedged                   Price

                                                                  (per bbl)

Last six months of 2000                      68%                    $18.55
2001                                         32                      20.59




<PAGE>






                                                Gas                Contract
                                  Percent of Production           Delivered
            Period                           Hedged                  Price

                                                                  (per mcf)

Last six months of 2000                      55%                    $2.16
2001                                         61                      2.14
2002                                         34                      1.95

Between  8% and 12% of the gas  volumes  hedged  in each year are  subject  to a
collar  agreement  under which HEC 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 $2.54 per mcf to
$2.65 per mcf.

During the third quarter  through July 25, 2000, the weighted  average oil price
(for  barrels not  hedged) was  approximately  $29.45 per barrel.  The  weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $3.65 per mcf.

Inflation

Inflation did not have a material  impact on HEC in 1999 and is not  anticipated
to have a material impact in 2000.

Results of Operations

For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy  interests of Hallwood  Group.
Accordingly,  all  information  presented  for  periods  prior  to June 8,  1999
represents the historical information of HEP because HEP is considered to be the
acquiring entity for accounting purposes.



<PAGE>


Second Quarter of 2000 Compared to the Second Quarter of 1999

The  following  table is  presented  to  contrast  HEC's  oil and gas  price and
production for discussion  purposes.  Significant  fluctuations are discussed in
the accompanying narrative.

                                            2000              1999
                                            ----              ----
                                          (In thousands except price)
Gas
  Production (mcf)                          5,464             3,960
  Price (per mcf)                         $  2.70           $  1.91

Oil
  Production (bbl)                            130               193
  Price (per bbl)                          $23.35            $15.70

Gas Revenue

Gas revenue increased $7,186,000 during the second quarter of 2000 compared with
the second  quarter  of 1999.  The  increase  is the  result of an  increase  in
production  from 3,960,000 mcf in 1999 to 5,464,000 mcf in 2000. The average gas
price  increased  from  $1.91  per mcf in 1999 to  $2.70  per mcf in  2000.  The
increase in  production is primarily  due to the  Consolidation  which caused an
increase in gas  production  of 1,583,000 mcf and property  acquisitions  during
1999. The increase is partially offset by a decrease in production primarily due
to a  production  decline  on two  significant  wells  in  Louisiana  caused  by
increased  rates of water  production on the wells and property sales during the
first and second quarters of 2000.

The effect of HEC's  hedging  transactions  as described  under  "Inflation  and
Changing  Prices,"  during the second  quarter of 2000,  was to  decrease  HEC's
average gas price from $3.22 per mcf to $2.70 per mcf, representing a $2,841,000
decrease in revenue from hedging transactions.

Oil Revenue

Oil revenue increased $4,000 during the second quarter of 2000 compared with the
second quarter of 1999. The increase is the result of an increase in the average
oil price from  $15.70  per barrel in 1999 to $23.35 per barrel in 2000,  almost
entirely  offset by a decrease in  production  from  193,000  barrels in 1999 to
130,000  barrels in 2000. The  production  decrease is primarily due to property
sales during the first and second  quarters of 2000 and a production  decline on
two wells in Louisiana caused by increased rates of water production  during the
first quarter of 2000.

The effect of HEC's hedging  transactions  during the second quarter of 2000 was
to decrease HEC's average oil price from $29.42 per barrel to $23.35 per barrel,
resulting in a $789,000 decrease in revenue from hedging transactions.

Pipeline, Facilities and Other

Pipeline,  facilities and other revenue consists  primarily of facilities income
from two gathering  systems  located in New Mexico,  revenues  derived from salt
water  disposal  and  incentive  payments  related to certain  wells in San Juan
County, New Mexico and LaPlata County, Colorado. Pipeline,  facilities and other
revenue  increased  $419,000 during the second quarter of 2000 compared with the
second quarter of 1999. The increase is primarily due to additional revenue from
the Consolidation.

Interest Income

Interest  income  increased  $42,000  during the second quarter of 2000 compared
with the second  quarter of 1999 due primarily to a higher  average cash balance
during 2000.


<PAGE>


Production Operating

Production  operating expense increased  $1,181,000 during the second quarter of
2000 compared with the second  quarter of 1999.  The majority of the increase is
the result of the Consolidation,  partially offset by decreased  operating costs
due to property sales during the first and second quarters of 2000.

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 the operating company on behalf of HEC.
These expenses  increased  $981,000  during the second  quarter of 2000.  During
April 2000, HEC reduced its work force to reflect the  operational  efficiencies
caused by the property  sales during the first and second  quarters of 2000.  In
connection with this work force reduction HEC incurred approximately $500,000 of
one-time  severance  related  costs.  The  remaining  increase  in  general  and
administrative expenses is primarily due to the Consolidation.

Depreciation, Depletion and Amortization Expense

Depreciation, depletion and amortization expense increased $1,673,000 during the
second quarter of 2000 compared with the second quarter of 1999. The increase is
primarily the result of higher  capitalized costs and a higher depletion rate in
2000 due to the increase in gas production discussed above.

Interest

Interest expense  increased  $882,000 during the second quarter of 2000 compared
with the second quarter of 1999 due to a higher average outstanding debt balance
during 2000 resulting from the Consolidation.

Equity in Income of HCRC

Equity in income of HCRC represents HEC's share of its equity investment in HCRC
prior to the  Consolidation.  This  income  decreased  to zero during the second
quarter of 2000,  compared  with the second  quarter of 1999, as a result of the
Consolidation.

Minority Interest in Net Income of Affiliates

Minority interest in net income of affiliates represents  unaffiliated partners'
interest in the net income of the May Partnerships.  The zero balance during the
second  quarter  of  2000  reflects  the  liquidation  of  the  last  three  May
Partnerships in April 2000.

Litigation

Litigation  income  during  the  second  quarter  of 2000  represents  insurance
proceeds  which  reimbursed  a portion of the costs paid to settle the  lawsuits
assumed by HEC in connection  with the  Consolidation  as described in Note 7 of
the  accompanying  financial  statements.  The  income was  partially  offset by
expenses accrued on the employee related lawsuit also described in Note 7 of the
accompanying financial statements.

Provision for Income Taxes

On June 8, 1999, in connection with the Consolidation, HEC began operations as a
taxable entity.  Prior to the  Consolidation,  HEP was a partnership and was not
subject to federal  income tax. The provision for income taxes during the second
quarter of 2000 is comprised of a provision for current  federal taxes resulting
from alternative  minimum taxes, and current state taxes. The effective tax rate
is  lower  than  the  statutory  tax rate  primarily  because  of the use of net
operating loss carryforwards. The net benefit for income taxes during the second
quarter  of 1999 was  comprised  of a current  provision  for state  taxes and a
deferred tax benefit.




<PAGE>


First Six Months of 2000 Compared to First Six Months of 1999

The  comparisons for the first six months 2000 and the first six months 1999 are
consistent  with those  discussed in the second  quarter of 2000 compared to the
second  quarter  of 1999  except as  discussed  below.  The  following  table is
presented  to contrast  HEC's oil and gas price and  production  for  discussion
purposes. Significant fluctuations are discussed in the accompanying narrative.

                                  2000              1999
                                 ------            -----
                                 (In thousands except price)
Gas
   Production (mcf)              11,787             7,540
   Price (per mcf)                $2.42             $1.86

Oil
  Production (bbl)                  384               383
  Price (per bbl)                $23.91            $13.57

Gas Revenue

Gas  revenue  increased  $14,541,000  during  the  first  six  months of 2000 as
compared  to the first six  months of 1999.  The  increase  is the  result of an
increase in production  from 7,540,000 mcf in 1999 to 11,787,000 mcf in 2000 and
an  increase  in price from $1.86 per mcf in 1999 to $2.42 per mcf in 2000.  The
increase in production is due to the property activity discussed above.

The effect of HEC's hedging transactions during the first six months of 2000 was
to decrease  HEC's average gas price from $2.72 to $2.42 per mcf  representing a
$3,536,000 decrease in revenue from hedging transactions.

Oil Revenue

Oil revenue  increased  $3,982,000  during the first six months of 2000 compared
with the first six months of 1999.  The increase is the result of an increase in
price from  $13.57  per barrel in 1999 to $23.91 per barrel in 2000.  Production
remained fairly  consistent during the first six months of 1999 and 2000 because
the increased production from the Consolidation was offset by the property sales
discussed above.

The effect of HEC's hedging transactions during the first six months of 2000 was
to decrease  HEC's average oil price from $27.99 per barrel to $23.91 per barrel
resulting in a $1,567,000 reduction in revenue from hedging transactions.

Litigation

Litigation expense during the first six months of 2000 is comprised of the costs
related to the  settlement of the employment  litigation  described in Note 7 of
the accompanying financial statements, partially offset by the litigation income
described above.


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

HEC's primary market risks relate to changes in interest rates and in the prices
received  from sales of oil and  natural  gas.  HEC's  primary  risk  management
strategy is to partially  mitigate the risk of adverse changes in its cash flows
caused by increases in interest rates on its variable rate debt and decreases in
oil and natural gas prices, by entering into derivative  financial and commodity
instruments,  including  swaps and  collars.  By  hedging  only a portion of its
market risk exposures,  HEC is able to participate in the increased earnings and
cash flows  associated with decreases in interest rates and increases in oil and
natural gas prices;  however,  it is exposed to risk on the unhedged  portion of
its variable rate debt and oil and natural gas production.

Historically,  HEC has  attempted to hedge the exposure  related to its variable
rate debt and its  forecasted oil and natural gas production in amounts which it
believes  are  prudent  based on the  prices of  available  derivatives  and the
Company's estimated debt levels and deliverable  volumes. HEC attempts to manage
the  exposure  to  adverse  changes  in the fair  value of its  fixed  rate debt
agreements by issuing fixed rate debt only when business  conditions  and market
conditions are favorable.

HEC does not use or hold derivative instruments for trading purposes nor does it
use derivative instruments with leveraged features. HEC's derivative instruments
are designated and effective as hedges against its identified  risks, and do not
of themselves  expose HEC to market risk because any adverse  change in the cash
flows associated with the derivative  instrument is accompanied by an offsetting
change in the cash flows of the hedged transaction.

All derivative activity is carried out by personnel who have appropriate skills,
experience and supervision.  The personnel involved in derivative  activity must
follow prescribed  trading limits and parameters that are regularly  reviewed by
the Board of  Directors  and by  senior  management.  HEC uses only  well-known,
conventional  derivative  instruments  and attempts to manage its credit risk by
entering into financial contracts with reputable financial institutions.

Following are disclosures  regarding HEC's market risk sensitive  instruments by
major  category.  Investors and other readers are cautioned to avoid  simplistic
use of these  disclosures.  Readers  should  realize  that the actual  impact of
future  interest rate and commodity  price movements will likely differ from the
amounts  disclosed  below due to  ongoing  changes in risk  exposure  levels and
concurrent  adjustments to hedging  positions.  It is not possible to accurately
predict future movements in interest rates and oil and natural gas prices.

Commodity  Price  Risk  (non-trading)  - HEC  hedges a portion of the price risk
associated  with the sale of its oil and natural gas production  through the use
of derivative commodity  instruments,  which consist of swaps and collars. These
instruments  reduce HEC's exposure to decreases in oil and natural gas prices on
the hedged  portion of its  production by enabling it to  effectively  receive a
fixed price on its oil and gas sales or a price that only  fluctuates  between a
predetermined  floor and  ceiling.  As of July 25,  2000,  HEC has entered  into
derivative  commodity hedges covering an aggregate of 391,000 barrels of oil and
21,300,000 mcf of gas that extend through 2002. Under these contracts, HEC sells
its oil and natural gas  production  at spot market prices and receives or makes
payments  based on the  differential  between the contract  price and a floating
price which is based on spot market  indices.  The amount  received or paid upon
settlement  of these  contracts is  recognized as oil or natural gas revenues at
the time the hedged volumes are sold. A hypothetical decrease in oil and natural
gas  prices of 10% from the prices in effect as of June 30,  2000 would  cause a
loss in income and cash flows of  $5,277,000  during the remaining six months of
2000, assuming that oil and gas production remain at projected levels. This loss
in income and cash flows would be offset by a $3,032,000  increase in income and
cash flows associated with the oil and natural gas derivative contracts that are
in effect for the remaining six months of 2000.

Interest Rate Risks  (non-trading)  - HEC uses both fixed and variable rate debt
to partially finance operations and capital  expenditures.  As of June 30, 2000,
HEC's debt  consisted of $66,200,000  in borrowings  under its Credit  Agreement
which bears interest at a variable rate, and $25,000,000 in borrowings under its
10.32% Senior Subordinated Notes which bear interest at a fixed rate. HEC hedges
a portion of the risk associated with this variable rate debt through derivative
instruments,  which consist of interest  rate swaps and collars.  Under the swap
contracts,  HEC makes interest payments on its Credit Agreement as scheduled and
receives or makes payments based on the  differential  between the fixed rate of
the swap and a  floating  rate plus a defined  differential.  These  instruments
reduce HEC's  exposure to increases in interest  rates on the hedged  portion of
its debt by  enabling it to  effectively  pay a fixed rate of interest or a rate
which only fluctuates  within a predetermined  ceiling and floor. A hypothetical
increase in interest rates of two percentage points would cause a loss in income
and cash flows of $662,000  during the  remaining  six months of 2000,  assuming
that  outstanding  borrowings under the Credit Agreement remain at June 30, 2000
levels.  This  loss in income  and cash  flows  would be  offset  by a  $450,000
increase in income and cash flows  associated  with the  interest  rate swap and
collar agreements that are in effect for the remaining six months of 2000.


<PAGE>


PART II  -OTHER INFORMATION


ITEM 1     -  LEGAL PROCEEDINGS

              Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for the
              year ended December 31, 1999 and Note 7 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

              On May 17, 2000,  HEC held its Annual Meeting of  Shareholders  at
              which  William  L.  Guzzetti,  Nathan,  C.  Collins  and  Jerry A.
              Lubliner were elected directors.  Following is the number of votes
              cast for and votes withheld for each of the directors:

              Name                         Votes For              Votes Withheld

       William L. Guzzetti                   7,867,171                1,827,856
       Nathan C. Collins                     7,867,005                1,828,022
       Jerry A. Lubliner                     7,866,354                1,828,673

              There were no abstentions.


ITEM 5     -  OTHER INFORMATION

              None.


ITEM 6     -  EXHIBITS AND REPORTS ON FORM 8-K

a)       Exhibits

10.17    Amendment No. 5 to Credit Agreement, dated as of June 30, 2000
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 ENERGY CORPORATION



Date:   August 4, 2000                  By: /s/William J. Baumgartner
                                          William J. Baumgartner, Vice President
                                              (Chief Financial Officer)