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, 1999

[ ]          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 Parkway
                    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 11, 1999

Common Stock                                                9,999,754
Series A Cumulative Preferred Stock                         2,334,165











<PAGE>

<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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



                                                                        June 30,                December 31,
                                                                          1999                      1998

CURRENT ASSETS
<S>                                                                   <C>                          <C>
   Cash and cash equivalents                                          $   8,576                    $  11,874
   Accounts receivable:
     Oil and gas revenues                                                10,988                        5,911
     Trade                                                                4,259                        4,040
   Due from affiliates                                                    1,334                          119
   Prepaid expenses and other current assets                              1,614                        1,338
   Net working capital of affiliate                                                                      236
                                                                  -------------                   ----------
         Total                                                           26,771                       23,518
                                                                       --------                     --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
   method):
     Proved mineral interests                                           739,526                      664,799
     Unproved mineral interests - domestic                                5,654                        2,694
   Furniture, fixtures and other                                          3,636                        3,411
                                                                      ---------                    ---------
         Total                                                          748,816                      670,904

   Less accumulated depreciation, depletion,
     amortization and property impairment                              (574,821)                    (565,899)
                                                                        -------                      -------
         Total                                                          173,995                      105,005
                                                                        -------                      -------

OTHER ASSETS
   Deferred expenses and other assets                                     1,352                          408
   Deferred tax asset                                                       100
   Investment in common stock of HCRC                                                                 10,160
                                                                  -------------                     --------
         Total                                                            1,452                       10,568
                                                                      ---------                     --------

TOTAL ASSETS                                                           $202,218                     $139,091
                                                                        =======                      =======












<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,
                                                                                  1999                     1998

CURRENT LIABILITIES
<S>                                                                            <C>                      <C>
   Accounts payable and accrued liabilities                                    $  20,164                $  22,921
   Current portion of long-term debt                                                                        9,319
                                                                                                    -----   -----

         Total                                                                    20,164                   32,240
                                                                                --------                 --------

NONCURRENT LIABILITIES
   Long-term debt                                                                105,372                   40,381
   Deferred liability                                                                927                    1,050
                                                                              ----------                ---------
         Total                                                                   106,299                   41,431
                                                                                 -------                 --------

           Total Liabilities                                                     126,463                   73,671
                                                                                 -------                 --------

MINORITY INTEREST IN AFFILIATES                                                      539                    2,788
                                                                              ----------                ---------

COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY
   Series A Cumulative Preferred Stock;  5,000,000 shares authorized;  2,334,165
     shares issued and outstanding in 1999 and
     1998                                                                         21,386                   21,386
   Common Stock par value $.01 per share; 25,000,000 shares
     authorized; 9,999,754 shares issued and outstanding in 1999 and
     5,599,754 shares issued and outstanding in 1998                                 100                       56
   Additional paid-in capital                                                     69,197                   58,052
   Accumulated deficit                                                           (15,467)                  (16,862)
                                                                                --------                  --------
         Stockholders' equity - net                                               75,216                    62,632
                                                                                --------                  --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $202,218                  $139,091
                                                                                 =======                   =======















<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,
                                                                                  1999                    1998

REVENUES:
<S>                                                                             <C>                      <C>
   Gas revenue                                                                  $  7,546                 $  6,994
   Oil revenue                                                                     3,031                    2,640
   Pipeline, facilities and other                                                  1,430                      976
   Interest                                                                           61                      186
                                                                               ---------                 --------
                                                                                  12,068                   10,796
                                                                                  ------                   ------

EXPENSES:
   Production operating                                                            3,432                    3,000
   Facilities operating                                                              152                       93
   General and administrative                                                      1,152                    1,084
   Depreciation, depletion and amortization                                        4,519                    3,078
   Impairment of oil and gas properties                                                                     2,600
   Interest                                                                        1,273                      549
                                                                                 -------                 --------
                                                                                  10,528                   10,404
                                                                                  ------                   ------

OTHER INCOME (EXPENSES):
   Equity in income (loss) of HCRC                                                    63                  (2,229)
   Minority interest in net income of affiliates                                    (64)                    (271)
   Litigation                                                                        100                    (600)
                                                                               ---------                --------
                                                                                      99                  (3,100)
                                                                              ----------                 -------

INCOME (LOSS) BEFORE INCOME TAXES                                                  1,639                  (2,708)
                                                                                 -------                 -------

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

NET INCOME (LOSS)                                                                  1,713                  (2,708)

PREFERRED DIVIDENDS                                                                  584                      616
                                                                                --------                 --------

NET INCOME (LOSS) ATTRIBUTABLE TO
   COMMON SHAREHOLDERS                                                          $  1,129                $ (3,324)
                                                                                 =======                 =======

     NET INCOME (LOSS) PER SHARE - BASIC                                      $      .17              $     (.59)
                                                                               =========               =========

     NET INCOME (LOSS) PER SHARE - DILUTED                                    $      .17              $     (.59)
                                                                               =========               =========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                         6,664                   5,600
                                                                                 =======                 =======

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

     Income (loss) before income taxes                                          $  1,639                $ (2,708)

     Provision (benefit) for income taxes

     Net income (loss)                                                          $  1,639                $ (2,708)
                                                                                 =======                 =======

     Net income (loss) attributable to common shareholders                      $  1,055                $ (3,324)
                                                                                 =======                 =======

     Net income (loss) per share - basic                                      $      .16              $     (.59)
                                                                               =========               =========

     Net income (loss) per share - diluted                                    $      .16              $     (.59)
                                                                               =========               =========
<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 Six Months Ended
                                                                                            June 30,
                                                                                  1999                    1998

REVENUES:
<S>                                                                             <C>                      <C>
   Gas revenue                                                                  $ 14,036                 $ 13,738
   Oil revenue                                                                     5,198                    5,730
   Pipeline, facilities and other                                                  2,639                    1,676
   Interest                                                                          177                      326
                                                                                --------                 --------
                                                                                  22,050                   21,470
                                                                                  ------                   ------

EXPENSES:
   Production operating                                                            6,490                    6,061
   Facilities operating                                                              327                      245
   General and administrative                                                      2,494                    2,249
   Depreciation, depletion and amortization                                        8,812                    6,617
   Impairment of oil and gas properties                                                                     2,600
   Interest                                                                        2,091                    1,193
                                                                                 -------                  -------
                                                                                  20,214                   18,965
                                                                                  ------                   ------

OTHER INCOME (EXPENSES):
   Equity in loss of HCRC                                                          (419)                  (2,323)
   Minority interest in net income of affiliates                                   (196)                    (584)
   Litigation                                                                        100                    (555)
                                                                                --------                --------
                                                                                   (515)                  (3,462)
                                                                               --------                  -------

INCOME (LOSS) BEFORE INCOME TAXES                                                  1,321                    (957)
                                                                                 -------                --------

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

NET INCOME (LOSS)                                                                  1,395                   (957)

PREFERRED DIVIDENDS                                                                1,200                   1,232
                                                                                 -------                 -------

NET INCOME (LOSS) ATTRIBUTABLE TO
   COMMON SHAREHOLDERS                                                         $     195                $ (2,189)
                                                                                ========                 =======

     NET INCOME (LOSS) PER SHARE - BASIC                                      $      .03              $     (.39)
                                                                               =========               =========

     NET INCOME (LOSS) PER SHARE - DILUTED                                    $      .03              $     (.39)
                                                                               =========               =========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                         6,135                   5,600
                                                                                 =======                 =======

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

     Income (loss) before income taxes                                          $  1,321               $    (957)

     Provision (benefit) for income taxes

     Net income (loss)                                                         $   1,321               $    (957)
                                                                                ========                ========

     Net income (loss) attributable to common shareholders                    $      121                $ (2,189)
                                                                               =========                 =======

     Net income (loss) per share - basic                                     $       .02              $     (.39)
                                                                              ==========               =========

     Net income (loss) per share - diluted                                   $       .02              $     (.39)
                                                                              ==========               =========
<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,
                                                                                  1999                  1998
                                                                                  ----                  ----

OPERATING ACTIVITIES:
<S>                                                                             <C>                 <C>
    Net income (loss)                                                           $  1,395            $    (957)
    Adjustments to reconcile net income (loss) to net cash provided
       by (used in) operating activities:
          Depreciation, depletion and amortization                                 8,812                 6,617
          Impairment of oil and gas properties                                                           2,600
          Depreciation charged to affiliates                                         110                   126
          Equity in loss of HCRC                                                     419                 2,323
          Minority interest in net income                                            196                   584
          Undistributed (earnings) loss of affiliates                            (1,176)                   282
          Deferred tax benefit                                                     (100)
          Gain on asset disposals                                                                        (188)
          Amortization of deferred loan costs and debt discount                       17                    50
          Noncash interest expense                                                                          15
          Recoupment of take-or-pay liability                                      (123)                  (67)

    Changes in  operating  assets and  liabilities  provided  (used) cash net of
       noncash activity:
          Oil and gas revenues receivable                                        (1,454)                 2,425
          Trade receivables                                                          130                 (172)
          Due from affiliates                                                    (3,638)                 (725)
          Prepaid expenses and other current assets                              (2,603)                    29
          Deferred expenses and other                                              2,830
          Accounts payable and accrued liabilities                               (5,411)                 1,197
                                                                                -------               --------
                Net cash provided by (used in) operating activities                (596)                14,139
                                                                               --------                -------

INVESTING ACTIVITIES:
    Additions to property, plant and equipment                                   (1,182)              (18,563)
    Costs incurred in connection with the Consolidation                          (2,634)
    Exploration and development costs incurred                                   (3,568)               (6,221)
    Proceeds from sales of property, plant and equipment                             129                    91
    Distributions received from affiliate                                          1,833
                                                                                --------
                Net cash used in investing activities                            (5,422)              (24,693)
                                                                                -------               -------

FINANCING ACTIVITIES:
    Proceeds from long-term debt                                                   6,000                21,500
    Proceeds from equity offering net of syndication costs                                              16,517
    Payments of long-term debt                                                                        (18,285)
    Dividends paid                                                               (2,893)               (4,664)
    Payment of contract settlement                                                                     (2,767)
    Distribution paid by consolidated affiliates to minority interest              (340)                 (873)
    Exercise of options                                                                                    199
    Capital contribution                                                                                   171
    Syndication costs                                                               (47)
                                                                              ---------
                Net cash provided by financing activities                          2,720                11,798
                                                                                --------               -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             (3,298)                 1,244

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                               11,874                 6,622
                                                                                 -------              --------

END OF PERIOD                                                                  $   8,576             $   7,866
                                                                                ========              ========

<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
principal  objectives  of the Company are to explore for,  develop,  acquire and
produce oil and gas properties.

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 of each year presented.
<TABLE>
<CAPTION>

                                                              For the Three Months Ended June 30,
                                                              -----------------------------------
                                                    1999                                              1998
                                                ------------                                      --------
                                     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         $10,796         $  5,903         $ 16,699
Net income (loss)                   1,713              (87)           1,626           (2,708)        (10,806)         (13,514)
Net income (loss)
   attributable to
     common
     shareholders                   1,129              (87)           1,042           (3,324)        (10,806)         (14,130)
Net income (loss)
   per share - basic           $      .17                        $      .10       $     (.59)                       $    (1.41)
                                =========                         =========        =========                         =========
Net income (loss)
   per share - diluted         $      .17                        $      .10       $     (.59)                       $    (1.41)
                                =========                         =========        =========                         =========

Production:
   Gas (mcf)                        3,960            1,756            5,716             3,396          1,852              5,248
   Oil (bbl)                          193              100              293               191            148                339
</TABLE>



<PAGE>


<TABLE>
<CAPTION>

                                                               For the Six Months Ended June 30,
                                                               ---------------------------------
                                                    1999                                              1998
                                                ------------                                      --------
                                     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                          $22,050         $ 11,971          $34,021         $21,470         $ 11,610         $ 33,080
Net income (loss)                   1,395           (1,065)             330             (957)        (10,814)         (11,771)
Net income (loss)
   attributable to
     common
     shareholders                     195           (1,065)            (870)          (2,189)        (10,814)         (13,003)
Net income (loss)
   per share - basic           $      .03                         $    (.09)       $    (.39)                       $    (1.30)
                                =========                          ========         ========                         =========
Net income (loss)
   per share - diluted         $      .03                         $    (.09)       $    (.39)                       $    (1.30)
                                =========                          ========         ========                         =========

Production:
   Gas (mcf)                        7,540            4,097           11,637             6,661          3,536             10,197
   Oil (bbl)                          383              252              635               393            303                696
</TABLE>

The pro forma  information  shown above  excludes  any  additional  provision or
benefit  for  income  taxes  because  of  the   Company's  net  operating   loss
carryforwards and related valuation allowance.

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 HEP's 1998 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.

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  for all periods  presented.
Because  of the  Company's  net  operating  loss  carryforwards  and its  recent
operating losses, 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 any period.

Computation of Net Income (Loss) Per Share

Basic income  (loss) per share is computed by dividing net income  (loss) by the
weighted average number of common shares outstanding during the periods. Diluted
income 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 stock
options  described in Note 4 have been ignored in the computation of diluted net
income (loss) 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 (loss) per share.
<TABLE>
<CAPTION>

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

For the Three Months Ended June 30, 1999
<S>                                                                 <C>                   <C>             <C>
   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
                                                                     =======             ======            =====

For the Three Months Ended June 30, 1998
   Net loss per share- basic                                        $ (3,324)             5,600          $ (.59)
                                                                     -------             ------           =====
  Net loss per share - diluted                                      $ (3,324)             5,600          $ (.59)
                                                                     =======             ======           =====

For the Six Months Ended June 30, 1998
   Net loss per share - basic                                       $ (2,189)             5,600          $ (.39)
                                                                     -------             ------           =====
  Net loss per share - diluted                                      $ (2,189)             5,600          $ (.39)
                                                                     =======             ======           =====
</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.


NOTE 2    -  DEBT

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 are Morgan  Guaranty Trust Company,
First Union National Bank and Nationsbank of Texas.  Under the Credit Agreement,
HEC has a  borrowing  base of  $84,500,000.  At June 30,  1999,  HEC had amounts
outstanding of $82,200,000,  and therefore,  HEC's unused borrowing base totaled
$2,300,000.


<PAGE>


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 7.2%
at June 30, 1999. Interest is payable monthly,  and quarterly principal payments
of $10,275,000 commence May 31, 2002.

The borrowing base for the Credit  Agreement is redetermined  semiannually.  The
Credit  Agreement  is secured by a first lien on  approximately  80% in value of
HEC's oil and gas properties.  Additionally,  aggregate dividends paid 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.  Aggregate
dividends  paid 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 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 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
$1,828,000  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 June 30, 1999, 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 1999                $45,000,000                5.65%
     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

In connection with the  Consolidation,  the purchase of the common stock of HCRC
and the direct  energy  interests  of Hallwood  Group was  recorded  through the
issuance  of  approximately  2,600,000  shares of HEC  common  stock to HCRC and
1,800,000  shares of HEC common stock to Hallwood  Group based on the  estimated
fair value of the assets acquired and the liabilities  assumed as of the date of
purchase.
This noncash investing activity is summarized as follows:


<PAGE>



                                  Fair Value of
                                Acquired Interest
                                 (In thousands)

Current assets                                                 $  4,637
Oil and gas properties - net                                     81,348
Other assets                                                      1,140
Current liabilities                                              (2,592)
Long-term debt                                                  (49,672)
Other noncurrent liabilities                                        (62)

At the  time of the  Consolidation,  HEC  recorded  the  allocated  value of the
warrants, described in Note 2, as $1,828,000 in additional paid-in-capital which
represented a noncash financing transaction during the first six months of 1999.

Cash paid for  interest  during the six months  ended June 30, 1999 and 1998 was
$2,051,000 and $1,129,000, respectively.


NOTE 4 -  STOCK OPTION GRANT

On June 9, 1999, 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
of the common  stock on the date of grant.  The options  expire on June 9, 2006,
unless sooner  terminated  pursuant to the provisions of the plan.  One-third of
the options vest  immediately,  and the remainder vest one-third on June 8, 2000
and one-third on June 8, 2001.


NOTE 5 - CAPITAL STOCK

HEC's stock  trades on the NASDAQ  under the symbol  "HECO" for Common Stock and
"HECOP" for Series A Cumulative Preferred Stock.

Common Stock

Under its charter,  HEC is authorized  to issue up to  25,000,000  shares of HEC
common  stock with a par value of $.01 per share.  The common  shareholders  are
entitled to one vote per share on all matters  voted on by  shareholders.  After
giving  effect to any  preferential  rights of any  series  of  preferred  stock
outstanding,  the holders of HEC common  stock are  entitled to  participate  in
dividends,  if any,  as may be  declared  from  time to  time  by the  board  of
directors of HEC.  Upon  liquidation,  the common  shareholders  are entitled to
receive  a pro rata  share of all of the  assets of HEC that are  available  for
distribution to such holders. The holders of HEC common stock have no preemptive
rights with respect to future issuances of HEC common stock.

Preferred Stock

HEC is authorized to issue up to 5,000,000  shares of preferred  stock from time
to time,  in one or more  series,  without  shareholder  approval and to fix the
designation,   preferences,   conversion   or  other  rights,   voting   powers,
restrictions,   limitations  as  to  dividends,  qualifications  and  terms  and
conditions of redemption of any series that may be  established by the HEC board
of directors.

In  connection  with  the  Consolidation,  the  board  of  directors  of HEC has
authorized  the  issuance of 2,334,165  shares of Series A cumulative  preferred
stock.  Each share of preferred  stock is entitled to one vote on all matters on
which  shareholders may vote. The preferred  shareholders vote together with the
common shareholders in the election of directors and vote as a separate class on
all other matters.


<PAGE>


Preferred  shareholders are entitled to receive cumulative cash dividends at the
rate of $1.00 per share per year,  if  declared  by the HEC board of  directors.
Dividends  are paid  quarterly  in  arrears  commencing  on June 30,  1999.  The
dividends are fully cumulative and accumulate, whether or not earned or declared
and whether or not HEC has funds legally available to pay them, without interest
on a daily basis.  HEC may not declare or pay  dividends to common  shareholders
unless full cumulative dividends have been paid on the preferred stock.

Upon  liquidation or  dissolution of HEC, all accrued  dividends must be paid to
the preferred  shareholders  before any assets may be  distributed to the common
shareholders.  Once all accrued  preferred  dividends  are paid,  the  preferred
shareholders are entitled to participate equally with the common shareholders in
the distribution of the remaining assets of HEC in a liquidation or dissolution.

The HEC preferred  stock is  redeemable at the option of HEC after  December 31,
2003.  After that date, HEC may redeem shares of preferred  stock in whole or in
part at any time at a  redemption  price  of  $10.00  per  share,  plus  accrued
dividends  which are unpaid on the redemption  date.  Preferred stock may not be
redeemed in part if full  cumulative  dividends  have not been paid or set aside
for payment with respect to all prior dividend periods.

Rights Plan

During the second  quarter of 1999,  the board of  directors of HEC approved the
adoption of a rights plan  designed  to protect  shareholders  in the event of a
takeover  action  that  would  otherwise  deny  them  the  full  value  of their
investment.

Under the terms of the rights plan,  one right was  distributed  for each common
share of HEC to holders of record at the close of business on June 8, 1999.  The
rights trade with the common stock.  The rights will become  exercisable only in
the event, with certain  exceptions,  that an acquiring party accumulates 15% or
more of HEC's outstanding common stock. The rights will expire on June 7, 2009.

HEC will generally be entitled to redeem the rights at one cent per right at any
time until the tenth day  following  the  acquisition  of a 15%  position in its
common shares.


NOTE 6    -  ARBITRATION

In connection with the Demand for Arbitration  filed by Arcadia  Exploration and
Production Company ("Arcadia") with the American Arbitration Association against
Hallwood Energy Partners,  L.P., Hallwood  Consolidated  Resources  Corporation,
E.M.  Nominee  Partnership  Company and  Hallwood  Consolidated  Partners,  L.P.
(collectively  referred  to as  "Hallwood"),  the  arbitrators  ruled  that  the
original  agreement  entered  into  in  August  1997  to  purchase  oil  and gas
properties  for  $16,400,000  should  proceed,  with a  reduction  to the  total
purchase price of  approximately  $2,500,000 for title defects.  The arbitrators
also ruled that Arcadia was not entitled to enforce its claim that  Hallwood was
required to purchase an additional  $8,000,000  worth of  properties  and denied
Arcadia's claim for attorneys' fees. The arbitrators granted Arcadia prejudgment
interest on the adjusted  purchase price, in the amount of $904,000 of which HEP
paid  $452,000.  That amount was  accrued in the  December  31,  1998  financial
statements of the Company and was paid during the second quarter of 1999.

In October 1998, HEP and its affiliate,  HCRC, closed the acquisition of oil and
gas properties from Arcadia,  including  interests in  approximately  570 wells,
numerous proven and unproven drilling locations,  exploration  acreage,  and 3-D
seismic data. HEP's share of the purchase price was $8,200,000.



<PAGE>


NOTE 7    -  LEGAL SETTLEMENT

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  payment  of the
settlement  amount and  dismissal  of the cases will occur thirty days after the
court has given final  approval  for the  settlement.  HEC is  obligated  to pay
approximately  $650,000 in connection with these  lawsuits,  and that amount has
been accrued as a liability on the Company's  balance  sheet in connection  with
the Consolidation. It is anticipated that the court will give its final approval
for the settlement prior to the end of 1999.

Concise Oil and Gas Partnership  ("Concise"),  a wholly owned  subsidiary of the
Company,  was a defendant in a lawsuit styled Dr. Allen J. Ellender,  Jr. et al.
vs. Goldking  Production  Company,  et al., filed in the Thirty-Second  Judicial
District Court, Terrebonne Parish, Louisiana on May 30, 1996. The portion of the
lawsuit against Concise was settled in  consideration  of the payment by Concise
of $600,000.  This amount was recorded as litigation  settlement  expense in the
second  quarter of 1998.  Concise has been  dismissed  with  prejudice  from the
lawsuit.

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

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.  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.

Liquidity and Capital Resources

Cash Flow

HEC used  $596,000  of cash flow in  operating  activities  during the first six
months of 1999.

The primary cash inflows were:

          o   Proceeds from long-term debt of $6,000,000; and

          o   Distributions received from affiliate of $1,833,000;

Cash was used primarily for:

o        Additions to property and development costs incurred of $4,750,000;

         oCosts incurred in connection with the Consolidation of $2,634,000; and

o        Dividends to shareholders of $2,893,000.

When combined with  miscellaneous  other cash  activity  during the period,  the
result was a decrease of $3,298,000 in HEC's cash from  $11,874,000  at December
31, 1998 to $8,576,000 at June 30, 1999.


<PAGE>


Exploration and Development Projects and Acquisitions

Since HEP is considered to be the acquiring entity for accounting purposes,  the
expenditures  discussed  below represent the costs incurred by HEP prior to June
8, 1999 plus the costs  incurred on a consolidated  basis  subsequent to June 8,
1999.

Through June 30, 1999,  HEC incurred  $4,750,000 in direct  property  additions,
development,  exploitation,  and exploration  costs. The costs were comprised of
$1,182,000 for property  acquisitions and approximately  $3,568,000 for domestic
exploration  and  development.  HEC's 1999 capital  budget is  currently  set at
$13,540,000.  This  budget may be revised up or down due to a number of factors,
including  future  developments  that  impact   availability  of  capital.   The
significant capital  expenditures for the first six months of 1999 are discussed
below.

Rocky Mountain Region

During the first six months of 1999,  HEC expended  approximately  $1,301,000 of
its capital  budget in the Rocky Mountain  Region located in Colorado,  Montana,
North Dakota,  Northwest New Mexico and Wyoming.  Of this amount,  approximately
$676,500  was for the  purchase  of  overriding  royalty  interests  and working
interests in 18 coal bed methane  properties already operated by HEC, located in
San Juan County,  New Mexico.  Most of the interests  purchased  qualify for tax
credits  under  Section 29 of the  Internal  Revenue  Code.  The majority of the
acquired  interests  were  purchased  by 44 Canyon  LLC ("44  Canyon") a special
purpose entity owned by a large East Coast  financial  institution,  from HEC in
exchange for cash, a production payment, and promissory notes. HEC's activity in
the area began in 1990.  The  acquisition  increases  HEC's net current  average
daily production by 950 mcf per day.

In the  second  quarter of 1999,  HEC  installed  an  additional  gas  gathering
pipeline in LaPlata County,  Colorado.  HEC anticipates that the additional line
will help lower system  pressures  and will also  increase  production  by 1,000
gross mcf per day. HEC's costs incurred in 1999 for the additional  pipeline are
approximately  $288,000.  In the third quarter of 1999, additional facility work
to add water disposal capacity is scheduled for completion.

Gulf Coast Region

During 1999, HEC expended approximately  $2,452,000 of its capital budget in the
Gulf Coast Region in Louisiana and South and East Texas. The following are major
projects within the Region.

Mirasoles  Project.  In 1998,  HEC began  drilling a 17,000-foot  Frio Formation
exploration  well located in Kenedy County,  Texas.  Eight  potential zones were
identified by this exploration  play. To date, the lower-most zone was abandoned
for  mechanical  reasons  following  encouraging,   but  extremely  preliminary,
results. In the second zone, reserves were found but the formation was too tight
to flow.  HEC is currently  testing a third  potential zone but has not achieved
production  at a stable rate.  As of June 30, 1999,  HEC incurred  approximately
$1,305,000  related to this project and owns a 35% working interest in the well.
The  well is in a large  structural  prospect  defined  by 63  square  miles  of
proprietary 3-D seismic data.

Esperanza   Project.   During  the  first  six  months  of  1999,  HEC  incurred
approximately  $400,000 for costs associated with two  non-operated  directional
exploration wells testing the Wilcox formation in LaVaca County, Texas. One well
was  completed in 1998 and is currently  producing 10 mmcf per day,  gross.  HEC
also owns an interest in a development  well currently  being drilled by another
operator  and in an  exploratory  well in an adjacent  fault block is waiting on
completion. HEC owns a 15% working interest in the wells.

Boca Chica Project. In 1999, HEC expended  approximately  $311,000 participating
in a 10,000 foot  exploration  well in the Big Hum Formation.  This  exploration
well was  directionally  drilled from the shore to a bottom hole location  under
the  waters  of the Gulf of  Mexico.  Even  though  the  well  tested  wet,  the
exploration  results were sufficiently  encouraging that working interest owners
agreed to shoot 3D  seismic  in the third  quarter  of 1999 to  evaluate  future
potential. During the first quarter of 2000, HEC anticipates that it will make a
second drilling  attempt by either  reentering the existing  wellbore or using a
shallow water drilling rig. HEC owns a 25% working interest.

Other

The  remaining  $647,000 of HEC's capital  expenditures  incurred in 1999 relate
principally to technical  general and  administrative  expenditures and numerous
other projects which are completed or underway and which are  individually  less
significant.

Due to the rebounding and  restabilization  of oil prices which occurred  during
the  second  quarter  of  1999,  HEC  is  reevaluating   the  economics  of  the
oil-targeted projects which were postponed during the first quarter.

HEC is in the  process  of  reviewing  its  properties  to  identify  high cost,
non-strategic assets. After this process is complete,  HEC may determine to sell
certain  properties that are not integral to HEC's business,  in order to reduce
the Company's  lifting costs and to more effectively  invest the proceeds of any
sale.

Dividends

On June 18,  1999,  HEC  declared  a  quarterly  dividend  of $.25 per  Series A
Cumulative Preferred share, payable on August 13, 1999 to shareholders of record
on June 30, 1999.

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.

Financing

On June 8, 1999, HEC and its lenders  entered into an HEC's 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  are  Morgan  Guaranty  Trust
Company,  First Union National Bank and  Nationsbank of Texas.  Under the Credit
Agreement,  HEC has a borrowing base of  $84,500,000.  At June 30, 1999, HEC had
amounts  outstanding of $82,200,000 and therefore,  HEC's unused  borrowing base
totaled $2,300,000.

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 7.2%
at June 30, 1999. Interest is payable monthly,  and quarterly principal payments
of $10,275,000 commence May 31, 2002.

The borrowing base for the Credit  Agreement is redetermined  semiannually.  The
Credit  Agreement  is secured by a first lien on  approximately  80% in value of
HEC's oil and gas properties.  Additionally,  aggregate dividends paid 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.  Aggregate
distributions paid 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 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 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
$1,828,000  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.



<PAGE>


For 1999, the Company has  established an initial capital budget of $13,540,000.
This  budget is subject to revision to reflect  future  developments.  It may be
impacted by oil and gas price levels,  future  redeterminations of the borrowing
base under the Credit  Agreement,  proceeds from asset sales and other  factors.
Additionally, the Company is considering other financing alternatives.  Although
this budget is not predicated on these other sources of capital, the Company may
choose to pursue  these other  sources of capital,  in which case the  Company's
capital expenditures in 1999 would likely increase.

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 June 30, 1999, 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 1999                $45,000,000                5.65%
     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

Issues Related to the Year 2000

General.  The following  Year 2000  statements  constitute a Year 2000 Readiness
Disclosure  within  the  meaning  of the Year  2000  Information  and  Readiness
Disclosure  Act of 1998.  The Year 2000 problem has arisen because many existing
computer  programs  use only the last two digits to refer to a year.  Therefore,
these  computer  programs do not properly  recognize and process  date-sensitive
information  beyond  1999.  In  general,  there  are two areas  where  Year 2000
problems may exist for the Company:  information  technology  such as computers,
programs and related systems ("IT") and non-information  technology systems such
as embedded technology on a silicon chip ("Non IT").

The  Plan.  The  Company's  Year 2000 Plan (the  "Plan")  has four  phases:  (i)
assessment,  (ii) inventory,  (iii) remediation,  testing and implementation and
(iv) contingency plans. Approximately eighteen months ago, the Company began its
phase one assessment of its particular  exposure to problems that might arise as
a result of the new  millennium.  The assessment and inventory  phases have been
substantially  completed and have  identified the Company's IT systems that must
be updated or replaced in order to be Year 2000 compliant.  Remediation, testing
and  implementation  are  scheduled to be completed by August 31, 1999,  and the
contingency  plans phase of the Plan is  scheduled  to be completed by September
30, 1999.

However,  the  effects of the Year 2000  problem on IT systems  are  exacerbated
because of the  interdependence  of computer  systems in the United States.  The
Company's  assessment  of the  readiness of third parties whose IT systems might
have an impact on the Company's business has thus far not indicated any material
problems;  responses  have been received to  approximately  70% of the inquiries
made.


<PAGE>


With regard to the Company's Non IT systems,  the Company  believes that most of
these  systems  can be  brought  into  compliance  on  schedule.  The  Company's
assessment of third party readiness is not yet completed. Because Non IT systems
are embedded  chips,  it is difficult to determine with complete  accuracy where
all such systems are located.  As part of its Plan, the Company is making formal
and informal  inquiries of its vendors,  customers and transporters in an effort
to  determine  the third  party  systems  that  might have  embedded  technology
requiring remediation.

Estimated  Costs.  Although  it is  difficult  to  estimate  the total  costs of
implementing  the Plan  through  January  1,  2000  and  beyond,  the  Company's
preliminary  estimate  is that such costs  will not be  material.  To date,  the
Company has determined  that its IT systems are either  compliant or can be made
compliant for less than $100,000. However, although management believes that its
estimates are reasonable,  there can be no assurance,  for the reasons stated in
the next  paragraph,  that the  actual  cost of  implementing  the Plan will not
differ materially from the estimated costs.

Potential  Risks.  The  failure to correct a material  Year 2000  problem  could
result  in  an  interruption  in,  or a  failure  of,  certain  normal  business
activities or  operations.  This risk exists both as to the Company's IT and Non
IT systems,  as well as to the systems of third  parties.  Such  failures  could
materially and adversely affect the Company's  results of operations,  cash flow
and financial  condition.  Due to the general  uncertainty  inherent in the Year
2000 problem,  resulting in part from the uncertainty of the Year 2000 readiness
of third party  suppliers,  vendors and  transporters,  the Company is unable to
determine at this time whether the  consequences of Year 2000 failures will have
a material impact on the Company's results of operations, cash flow or financial
condition.  Although  the  Company  is  not  currently  able  to  determine  the
consequences of Year 2000 failures,  its current  assessment is that its area of
greatest  potential risk in its third party  relationships is in connection with
the transporting  and marketing of the oil and gas produced by the Company.  The
Company  is  contacting  the  various  purchasers  and  pipelines  with which it
regularly does business to determine their state of readiness for the Year 2000.
Although in general the  purchasers  and pipelines will not guaranty their state
of  readiness,  the  responses  received  to date  have  indicated  no  material
problems. The Company believes that in a worst case scenario, the failure of its
purchasers and transporters to conduct business in a normal fashion could have a
material  adverse  effect on cash flow for a period of six to nine  months.  The
Company's Year 2000 Plan is expected to significantly reduce the Company's level
of  uncertainty  about the  compliance  and  readiness of these  material  third
parties.  The  evaluation  of third  party  readiness  will be  followed  by the
Company's development of contingency plans, if necessary.

Cautionary  Statement  Regarding  Forward-Looking   Statements.  The  dates  for
completion of the phases of the Year 2000 Plan are based on the  Company's  best
estimates,  which were derived using numerous  assumptions of future events. Due
to the general uncertainty inherent in the Year 2000 problem,  resulting in part
from the  uncertainty  of the  Year  2000  readiness  of  third-parties  and the
interconnection  of computer  systems,  the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the Year 2000 issue
that may affect its  operations  and  business.  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.

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,  the inexact nature of
interpretation of seismic and other geological and geophysical data, imprecision
of reserve  estimates,  the Company's  ability to replace and expand oil and gas
reserves, and such other risks and uncertainties  described from time to time in
the  Company's  periodic  reports and filings with the  Securities  and Exchange
Commission. Accordingly, 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,  with a distinct downward
trend in both oil and gas prices occurring in the calendar year 1998 and through
the first quarter of 1999.  Prices began to rebound in April 1999. 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>
First quarter - 1998                 $14.80                $15.30                 $2.11                  $2.07
Second quarter - 1998                 13.03                 13.82                  2.08                   2.06
Third quarter - 1998                  12.19                 13.06                  1.85                   1.95
Fourth quarter - 1998                 11.12                 12.29                  1.96                   2.02
First quarter - 1999                  11.33                 11.41                  1.65                   1.81
Second quarter - 1999                 15.99                 15.70                  1.93                   1.91
</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.

The  financial  contracts  used by HEC to hedge the price of its oil and natural
gas  production  are swaps,  collars and  participating  hedges.  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 26, 1999,
HEC was a party to 38 financial contracts with four different counterparties.

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

                                               Oil                 Contract

                                  Percent of Production           Delivered
            Period                          Hedged               Floor Price

                                    (per bbl)

Last six months of 1999                     50%                     $15.30
Approximately 7% of the oil volumes hedged are subject to a participating  hedge
under which HEC will receive the contract  price if the posted  futures price is
lower than the contract  price,  and will receive the contract price plus 25% of
the  difference  between the contract  price and the posted futures price if the
posted futures price is greater than the contract price. Additionally, 7% of the
volumes  hedged are subject to a collar  agreement  whereby 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 delivered cap price.  The cap prices range
from $16.50 to $18.35.



<PAGE>






                                                Gas                Contract

                                  Percent of Production           Delivered
            Period                           Hedged              Floor Price

                                    (per mcf)

Last six months of 1999                      78%                    $1.95
2000                                         42                      2.04
2001                                         39                      2.05
2002                                         30                      2.04

Between  11% and 26% 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 $2.16 per mcf to
$2.80 per mcf.

During the third quarter  through July 26, 1999, the weighted  average oil price
(for  barrels not  hedged) was  approximately  $17.95 per barrel.  The  weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $2.10 per mcf.

Inflation

Inflation did not have a material  impact on HEC in 1998 and is not  anticipated
to have a material impact in 1999.

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.

Second Quarter of 1999 Compared to Second Quarter of 1998

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.

                                           1999              1998
                                           ----              ----

Gas
  Production (mcf)                      3,960,000         3,396,000
  Price (per mcf)                           $1.91             $2.06

Oil
  Production (bbl)                        193,000           191,000
  Price (per bbl)                          $15.70            $13.82



<PAGE>


Gas Revenue

Gas revenue  increased  $552,000 during the second quarter of 1999 compared with
the second  quarter  of 1998.  The  increase  is the  result of an  increase  in
production from 3,396,000 mcf in 1998 to 3,960,000 mcf in 1999 partially  offset
by a decrease  in the  average gas price from $2.06 per mcf in 1998 to $1.91 per
mcf in 1999.  The increase in production  is primarily due to the  Consolidation
which caused an increase in gas production of 562,000 mcf.

The effect of HEC's  hedging  transactions  as described  under  "Inflation  and
Changing  Prices,"  during the second  quarter of 1999,  was to  decrease  HEC's
average  gas price from $1.93 per mcf to $1.91 per mcf,  representing  a $79,000
decrease in revenue from hedging transactions.

Oil Revenue

Oil revenue  increased  $391,000 during the second quarter of 1999 compared with
the second  quarter of 1998.  The  increase  is the result of an increase in the
average  oil price  from  $13.82  per  barrel in 1998 to $15.70 in 1999,  and an
increase in production  from 191,000 barrels in 1998 to 193,000 barrels in 1999.
The increase in oil  production  is  primarily  due to the  Consolidation  which
caused an increase in oil production of 32,000 barrels, which was largely offset
by normal production declines.

The effect of HEC's hedging  transactions  during the second quarter of 1999 was
to decrease HEC's average oil price from $15.99 per barrel to $15.70 per barrel,
resulting in a $56,000 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  $454,000 during the second quarter of 1999 compared with the
second  quarter of 1998.  The increase is primarily  due to increased  incentive
payment income from the  acquisition of a volumetric  production  payment during
May 1998 and due to the Consolidation which caused a $161,000 increase.

Interest Income

Interest  income  decreased  $125,000 during the second quarter of 1999 compared
with the second quarter of 1998 due to a lower average cash balance during 1999.

Production Operating

Production  operating  expense  increased  $432,000 during the second quarter of
1999 compared with the second  quarter of 1998.  The majority of the increase is
the result of the Consolidation.

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  $68,000  during  the  second  quarter  of 1999.  The
Consolidation  caused an  increase  in  general  and  administrative  expense of
$231,000,  which was  partially  offset by  decreases in bank  commitment  fees,
printing and mailing costs and legal fees during the second quarter of 1999.

Depreciation, Depletion and Amortization Expense

Depreciation, depletion and amortization expense increased $1,441,000 during the
second quarter of 1999 compared with the second quarter of 1998. The increase is
primarily the result of higher  capitalized costs and a higher depletion rate in
1999 due to the increase in production primarily caused by the Consolidation.


<PAGE>


Impairment of Oil and Gas Properties

Impairment  of oil  and  gas  properties  during  the  second  quarter  of  1998
represents the impairment  recorded because  capitalized  costs at June 30, 1998
exceeded the present value  (discounted at 10%) of estimated future net revenues
from  proved oil and gas  reserves,  based on prices of $13.00 per barrel of oil
and $2.00 per mcf of gas.

Interest

Interest expense  increased  $724,000 during the second quarter of 1999 compared
with the second quarter of 1998 due to a higher average outstanding debt balance
during 1999.

Equity in Income (Loss) of HCRC

Equity in income of HCRC increased  $2,292,000 during the second quarter through
June 8,  1999,  compared  with the  second  quarter  of 1998.  The  increase  is
primarily  due to a  property  impairment  recorded  by HCRC  during  the second
quarter of 1998.

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  decrease of $207,000
during the second  quarter of 1999 compared  with the second  quarter of 1998 is
primarily due to the liquidation of three of the six May Partnerships.

Litigation

Litigation  income  during  the  second  quarter  of 1999  represents  insurance
proceeds which  reimbursed  costs  previously paid in connection with a property
related claim.  Litigation  expense during the second quarter of 1998 represents
the amount accrued for the settlement of Ellender lawsuit described in Note 7 of
the accompanying financial statements.

Provision (Benefit) 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 net benefit  for income  taxes  during the
second  quarter of 1999 is comprised of a current tax  provision  and a deferred
tax benefit.  The current tax provision is less than tax expense  computed using
statutory  tax  rates,  because  HEC was not a  taxable  entity  for the  entire
quarter.

First Six Months 1999 Compared to the First Six Months 1998

The  comparisons for the first six months 1999 and the first six months 1998 are
consistent  with those  discussed  in the second  quarter  1999  compared to the
second  quarter  of 1998  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.

                                      1999             1998
                                      ----             ----

Gas
  Production (mcf)                    7,540,000        6,661,000
  Price (per mcf)                     $1.86            $2.06

Oil
  Production (bbl)                    383,000          393,000
  Price (per bbl)                     $13.57           $14.58



<PAGE>


Gas Revenue

Gas revenue  increased  $298,000 during the first six months of 1999 as compared
to the first six months of 1998.  The  increase  is the result of an increase in
production from 6,661,000 mcf in 1998 to 7,540,000 mcf in 1999 partially  offset
by a  decrease  in price  from  $2.06  per mcf in 1998 to $1.86 per mcf in 1999.
Approximately  64% of the increase in production is due to the Consolidation and
the remainder is primarily  due to the  acquisition  of a volumetric  production
payment during May 1998.

The effect of HEC's hedging transactions during the first six months of 1999 was
to increase  HEC's average gas price from $1.80 to $1.86 per mcf  representing a
$452,000 increase in revenue from hedging transactions.

Oil Revenue

Oil revenue  decreased  $532,000 during the first six months of 1999 as compared
with the first six months of 1998.  The  decrease is the result of a decrease in
the  average  oil price  from  $14.58 per barrel in 1998 to $13.57 per barrel in
1999 and a  decrease  in  production  from  393,000  barrels  in 1998 to 383,000
barrels  in  1999.  The  decrease  in oil  production  is  comprised  of  normal
production  declines which were partially offset by an increase in production of
32,000 barrels caused by the Consolidation.

The effect of HEC's hedging transactions during the first six months of 1999 was
to decrease HEC's average oil price from $13.68 per barrel to $13.57 per barrel,
representing a decrease in revenue from hedging transactions of $42,000.


<PAGE>


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,  collars and  participating  commodity hedges. 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,  collars  and
participating  hedges.  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.  HEC's participating
hedges also  enable HEC to receive 25% of any  increase in prices over the fixed
prices  specified in the  contracts.  As of July 26, 1999,  HEC has entered into
derivative  commodity hedges covering an aggregate of 265,000 barrels of oil and
30,119,000 mcf of gas that extend through 2002. Under the 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,  1999
would cause a loss in income and cash flows of  $3,220,000  during the remaining
six months of 1999, assuming that oil and gas production,  including  production
from properties  acquired in Consolidation,  remain at current levels during the
last six months of 1999. This loss in income and cash flows would be offset by a
$1,966,000 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
1999.



<PAGE>


Interest Rate Risks  (non-trading)  - HEC uses both fixed and variable rate debt
to partially finance operations and capital  expenditures.  As of June 30, 1999,
the majority of HEC's debt  consists of  borrowings  under its Credit  Agreement
which  bear  interest  at a  variable  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  $822,000  during  the  remaining  six  months of 1999,  assuming  that
outstanding borrowings under the Credit Agreement remain at current levels. This
loss in income and cash flows  would be offset by a $675,000  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 1999.





<PAGE>


PART II  -OTHER INFORMATION


ITEM 1     -  LEGAL PROCEEDINGS

              Reference  is made to Item 8 - Notes  12 and 13 of Form  10-K  for
              Hallwood  Energy  Partners,  L.P. for the year ended  December 31,
              1998 and Notes 6 and 7 of this Form 10-Q.


ITEM 2     -  CHANGES IN SECURITIES

              During the second quarter,  in connection with the  Consolidation,
              HEC  authorized  the  issuance  of  2,334,165  shares  of Series A
              Cumulative  Preferred  Stock and  adopted a  stockholders'  rights
              plan, as described in Note 5 of this Form 10-Q.


ITEM 3     -  DEFAULTS UPON SENIOR SECURITIES

              None.


ITEM 4     -  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

              None.


ITEM 5     -  OTHER INFORMATION

              None.


ITEM 6     -  EXHIBITS AND REPORTS ON FORM 8-K

a)       Exhibits

4.1.1Executed  Rights  Agreement  dated as of June 8, 1999,  between the Company
     and Registrar and Transfer Company

10.5 Registration Rights Agreement dated as of June 8, 1999, between the Company
     and The Prudential Insurance Company of America

10.6*Change of Control  Agreement  between the  Company and Certain  Executives,
     dated as of June 9, 1999.

10.7 Amended and Restated Credit  Agreement dated as of June 8, 1999,  among the
     Company and certain of its subsidiaries and the Banks listed therein.

10.8 Agreement  Regarding Initial Exercise Price dated June 9, 1999, between the
     Company and The Prudential Insurance Company of America.

10.9*Phantom  Working  Interest  Incentive Plan of Hallwood  Energy  Corporation
     dated as of June 8, 1999.

10.10Amended  and  Restated  Subordinated  Note and Warrant  Purchase  Agreement
     dated  as  of  June  8,  1999,  between  Hallwood  Consolidated   Resources
     Corporation and The Prudential Insurance Company of America.

10.11Common Stock  Purchase  Warrant  dated June 8, 1999 between the Company and
     The Prudential Insurance Company of America. 27 Financial Data Schedule

     *Designates management contracts or compensatory plans or arrangements.


<PAGE>


              b)  Reports on Form 8-K

                  HEC filed a report on Form 8-K on June 14, 1999, reporting the
                  completion of the Consolidation.


<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 11, 1999                     By:  /s/Thomas J. Jung
     --------------------------                 --------------------------------