PHANTOM WORKING INTEREST
                                 INCENTIVE PLAN
                                       OF
                           HALLWOOD ENERGY CORPORATION



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


                                    ARTICLE I
                                   Definitions


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

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

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

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

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

             "Cash Flow" means, as to an Eligible  Domestic Well, with regard to
the  period  in  question,  (i) all  revenues  received  by the  Company  or its
Affiliates  from the sale of production or  monetization of tax credits from the
Eligible  Domestic Well, plus all proceeds received from the sale or transfer of
all or part of an  interest  in the  Eligible  Domestic  Well to  other  than an
Affiliate,  less in each case (A) all operating  expenses paid by the Company or
its Affiliates and normally attributable to a working interest;  (B) all amounts
paid by the Company or its  Affiliates  to improve,  recomplete  or maintain the
production  from  an  Eligible  Domestic  Well  (other  than  amounts  spent  in
connection  with the initial  spudding,  drilling  and first  Completion  of the
Eligible  Domestic  Well  or  recompletion  of a  Marginal  Well);  and  (C) all
severance,  production or other production related taxes paid by the Company and
its Affiliates and applicable to the Eligible Domestic Well; Cash Flow means, as
to a

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

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

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

         "Effective Date" means June 8, 1999.


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

         "Key  Employee"  means an employee or consultant of the Company who the
Board, in its sole discretion,  determines has or may substantially  benefit the
Company.

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

         "Non-Domestic  Project" means any project  undertaken by the Company or
its  Affiliates  in which the  properties  owned,  operated  or  serviced by the
Company or its Affiliates  are outside of the  continental  United  States.  The
timing of inclusion of a Non-Domestic Project in the Plan and the

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properties   and/or   contracts  which  would  be  considered  to  constitute  a
Non-Domestic  Project shall be as  determined  and described by the Board at the
time of the annual  determination  of Participants  and awards,  and may include
Non-Domestic Projects which were commenced in prior years.

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

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

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

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

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

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

         "Reserve  Report"  means the most  recent  regularly  prepared  reserve
report which applies the rules and  regulations  of the  Securities and Exchange
Commission, except that the five-year average prices used by the Company for its
then current  planning  purposes,  rather than year-end  prices,  shall be used.
"Termination for Cause" means  termination which is initiated by the Company for
either serious misconduct or sub-standard performance.



                                   ARTICLE II
                            Participation in the Plan


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


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

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






                                   ARTICLE III

      Allocation and Distribution of Cash Flow from Eligible Domestic Wells

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

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


                                   ARTICLE IV

      Allocation and Distribution of Net Income from Non-Domestic Projects

         4.1 Distribution of Cash Flow from Non-Domestic  Projects.  In order to
recognize  that  Non-Domestic  Projects  are by their  nature  longer lived than
Eligible  Domestic Wells and that future  exploitation of Non-Domestic  Projects
needs to be  encouraged,  the  revenues  from a  Non-Domestic  Project  shall be
allocated  to  successive  Plan  Years,  commencing  in the first  year in which
revenues are received from a Non-Domestic Project. To the extent revenues from a
Non-Domestic Project are

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


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

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



                                    ARTICLE V

                                     Vesting

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

         5.2 Termination Other Than for Cause. If a Participant's  employment or
consultancy  with the Company or its Affiliates is terminated by the Company for
any reason other than a Termination for Cause,  the Participant  shall receive a
cash lump sum payment equal to the fair market value of

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such Participant's interest in the Plan as of such termination.

         5.3  Determination  of Fair Market Value of  Participant=s  Interest in
Plan. The fair market value of a Participant's  interest in a Plan shall include
100% of the  Buy-Out  Value of  Eligible  Domestic  Wells,  based on the Reserve
Report  and 100% of the fair  market  value of the Cash Flow  from  Non-Domestic
Projects  allocated  to the Plan,  both  taking into  account the  Participation
Points  held by the  Participant  in the  pertinent  Plan  Years  at the date of
termination of employment or  consultancy.  In determining the fair market value
of Cash Flow from Non-Domestic  Projects,  the Participant and the Company shall
mutually agree on such value, or if they cannot,  then an independent  appraiser
shall  be  jointly  selected  by the  Participant  and  the  Company,  and  such
independent  appraiser's  valuation  shall be binding on the Participant and the
Company.  The Company shall bear the expense of any such  appraiser.  Payment of
the fair  market  value  determined  under this  Section 5.3 shall be made as to
Eligible  Domestic  Wells  within  sixty  days  of  the  event  triggering  such
determination, and as to Non Domestic Projects, within thirty days of either the
mutual  agreement  of such value or the  receipt of the  independent  appraisers
valuation, as the case may be.


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

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

         .

                                   ARTICLE VI
                  Allocation of Administrative Responsibilities

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

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

         6.3 Others. The Board of the Company may designate  one or more persons
whomay, but need not be, employees of the Company or Participants, to assist it
in the ministerial tasks

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required in administering  the Plan. The Company hereby  indemnifies each person
so designated by the Board against any and all claims,  loss,  damages,  expense
and  liability  arising  from any action or  failure to act with  respect to the
Plan,  except  when the same is  judicially  determined  to be due to the fraud,
gross negligence or willful misconduct of such person.



                                   ARTICLE VII
                        Termination and Amendment of Plan


         7.1  Termination  of Plan or Removal of  Certain  Assets  from Plan and
Discontinuance of  Contributions.  The Company presently intends to continue the
Plan  indefinitely,  but  the  continuance  of  the  Plan  is not  assumed  as a
contractual  obligation  and the Company may  terminate  the Plan at any time by
delivering  written notice of termination to each  Participant  and  Beneficiary
then  entitled  to  receive  distributions  pursuant  to  the  Plan.  Upon  such
termination,  all affected  Participants  shall  receive a cash lump sum payment
equal to the  fair  market  value of each  such  Participant's  interest  in the
terminated Plans,  calculated as described in this section 5.3. In addition, the
sale or exchange of all or substantially all of the assets of the Company or any
of its Affiliates (to other than an Affiliate of the Company), the merger of the
Company or an Affiliate  (if the Company or an  Affiliate  is not the  surviving
entity) or any material change in the direct or indirect ownership or control of
the  Company  or an  Affiliate  (if the new  owner is not an  Affiliate)  or the
liquidation of the Company or an Affiliate,  shall  automatically  terminate the
Company's  obligations under the Plan as such obligations relate to the Eligible
Domestic Wells and Non-Domestic Projects sold, exchanged,  merged or owned by an
entity in which  there has been a  material  change  in the  direct or  indirect
ownership or control of such entity (such assets herein being referred to as the
"Affected  Assets"),  and each  Participant  in a Plan which  includes  Affected
Assets shall  receive a cash lump sum payment  equal to the fair market value of
such Participant's interest in the Plan, calculated as described in section 5.3.

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

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



                                   ARTICLE VI
                                  Miscellaneous

         8.1  Right to  Dismiss  Employees  and  Consultants.  The  Company  may
terminate  the  employment  of any  employee or  consultant  at any time for any
reason as freely as if this Plan were

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not in existence.

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


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

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

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

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

         8.7  Non-Transferability  of Benefits.  No  Participant or other person
shall have any right to assign,  alienate,  transfer,  hypothecate,  encumber or
anticipate any interest in any benefits under

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this Plan,  nor shall such benefits be subject to any legal process to levy upon
or attach the same for  payment of any claim  against  any such  Participant  or
other  person  through  any  process  whatsoever,  and any attempt to cause such
rights to be so subjected will not be recognized except to such extent as may be
required by law.


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

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

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

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

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




Executed as of June 8, 1999.





                          CORPDAL:130590.1 18747-00028

<PAGE>


                                                   HALLWOOD ENERGY CORPORATION,



                                                     /s/ William L. Guzzetti
                                                     William L. Guzzetti
                                                     President


                                                     HEC ACQUISITION CORPORATION


                                                     /s/ William L. Guzzetti
                                                     William L. Guzzetti
                                                     President


                                       EM NOMINEE PARTNERSHIP COMPANY
                                       By HEC Acquisition Corp., general partner


                                       /s/ William L. Guzzetti
                                           William L. Guzzetti
                                               President


                                                  HCRC ACQUISITION CORPORATION



                                                     /s/ William L. Guzzetti
                                                     William L. Guzzetti
                                                     President





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



                                                     /s/ William L. Guzzetti
                                                     William L. Guzzetti
                                                     President


                          CORPDAL:130590.1 18747-00028

<PAGE>