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 September 30, 2000

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

                          Commission File Number 0-9579



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



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

         4610 South Ulster Street
                     Suite 200
             Denver, Colorado                                              80237
(Address of principal executive offices)                              (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
Yes [x]  No  [  ]

Number of shares outstanding as of November 8, 2000

Common Stock                                                9,659,239
Series A Cumulative Preferred Stock                         2,263,573








                                  Page 1 of 27


<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>

                                                                     September 30,              December 31,
                                                                          2000                      1999
                                                                    ----------------            ------------

CURRENT ASSETS
<S>                                                                 <C>                            <C>
   Cash and cash equivalents                                        $       554                    $  10,480
   Accounts receivable:
     Oil and gas revenues                                                17,021                       12,442
     Trade                                                                3,872                        4,918
   Due from affiliates                                                    1,315                          704
   Prepaid expenses and other current assets                              1,069                        1,209
                                                                      ---------                    ---------
         Total                                                           23,831                       29,753
                                                                       --------                     --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
   method):
     Proved mineral interests                                           758,533                      758,473
     Unproved mineral interests                                           7,083                        6,543
   Furniture, fixtures and other                                          2,059                        1,941
                                                                      ---------                    ---------
         Total                                                          767,675                      766,957

   Less accumulated depreciation, depletion,
         Total                                                          163,523                      181,621
                                                                        -------                      -------

OTHER ASSETS
   Deferred tax asset                                                       400
   Deferred expenses and other assets                                     1,162                        1,400
                                                                      ---------                    ---------
         Total                                                            1,562                        1,400
                                                                      ---------                    ---------

TOTAL ASSETS                                                           $188,916                     $212,774
                                                                        =======                      =======













<FN>


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


<PAGE>

<TABLE>
<CAPTION>

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



                                                                             September 30,            December 31,
                                                                                 2000                     1999
                                                                            --------------         -----------

CURRENT LIABILITIES
<S>                                                                           <C>                       <C>
   Accounts payable and accrued liabilities                                   $  21,722                 $  26,382
                                                                               --------                  --------

NONCURRENT LIABILITIES
   Long-term debt                                                                78,327                   109,357
   Deferred revenue and other                                                     1,044                     1,066
                                                                              ---------                 ---------
         Total                                                                   79,371                   110,423
                                                                               --------                   -------

           Total liabilities                                                    101,093                   136,805
                                                                                -------                   -------

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

COMMITMENTS AND CONTINGENCIES (NOTE 8)

STOCKHOLDERS' EQUITY
   Series A Cumulative Preferred Stock;  5,000,000 shares Common Stock par value
   $.01 per share; 25,000,000
   Additional paid-in capital                                                    70,084                    67,883
   Accumulated earnings (deficit)                                                 1,372                    (13,982)
   Less cost of treasury stock of 764,454 common shares at 2000                  (4,610)
                                                                              ---------
         Stockholders' equity - net                                              87,823                     75,387
                                                                               --------                   --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $188,916                   $212,774
                                                                                =======                    =======
















<FN>

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


<PAGE>

<TABLE>
<CAPTION>

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


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

REVENUES:
<S>                                                                           <C>                      <C>
   Gas revenue                                                                $  15,095                $  10,580
   Oil revenue                                                                    3,503                    5,063
   Pipeline, facilities and other                                                 1,982                    1,208
   Interest                                                                         157                       92
                                                                            -----------             ------------
                                                                                 20,737                   16,943
                                                                               --------                 --------

EXPENSES:
   Production operating                                                           5,256                    5,238
   Facilities operating                                                              86                      148
   General and administrative                                                     1,536                    1,738
   Depreciation, depletion and amortization                                       6,039                    6,423
   Interest                                                                       2,099                    2,377
                                                                              ---------               ----------
                                                                                 15,016                   15,924
                                                                              ---------                 --------

MINORITY INTEREST IN NET INCOME OF AFFILIATES                                                                 56
                                                                         ---------------            ------------

INCOME BEFORE INCOME TAXES                                                        5,721                      963
                                                                             ----------              -----------

PROVISION (BENEFIT) FOR INCOME TAXES:
   Current                                                                      (1,212)                      156
   Deferred                                                                       (400)                      100
                                                                           -----------               -----------
                                                                                (1,612)                      256
                                                                             ---------               -----------

NET INCOME                                                                        7,333                      707

PREFERRED DIVIDENDS                                                                 566                      552
                                                                            -----------              -----------

NET INCOME ATTRIBUTABLE TO

     NET INCOME PER SHARE - BASIC                                          $        .72             $        .02
                                                                            ===========              ===========

     NET INCOME PER SHARE - DILUTED                                        $        .70             $        .02
                                                                            ===========              ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC                                9,397                   10,000
                                                                              =========                 ========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED                              9,649                   10,000
                                                                               ========                 ========















<FN>

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

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


                                                                                    For the Nine Months Ended
                                                                                           September 30,
                                                                                  2000                    1999
                                                                                  ----                    ----

REVENUES:
<S>                                                                           <C>                      <C>
   Gas revenue                                                                $  43,672                $  24,616
   Oil revenue                                                                   12,683                   10,261
   Pipeline, facilities and other                                                 5,497                    3,847
   Interest                                                                         413                      269
                                                                             ----------               ----------
                                                                                 62,265                   38,993
                                                                               --------                 --------

EXPENSES:
   Production operating                                                          15,119                   11,728
   Facilities operating                                                             412                      475
   General and administrative                                                     5,470                    4,232
   Depreciation, depletion and amortization                                      18,665                   15,235
   Interest                                                                       6,649                    4,468
                                                                             ----------                ---------
                                                                                 46,315                   36,138
                                                                               --------                 --------

OTHER INCOME (EXPENSES):
   Equity in loss of HCRC                                                                                  (419)
   Minority interest in net income of affiliates                                  (127)                    (252)
   Litigation                                                                     (345)                      100
                                                                            ----------                ----------
                                                                                  (472)                    (571)
                                                                            ----------               ----------

INCOME BEFORE INCOME TAXES                                                       15,478                    2,284
                                                                               --------                ---------

PROVISION (BENEFIT) FOR INCOME TAXES:
   Current                                                                         (42)                      182
   Deferred                                                                       (400)
                                                                            ----------
                                                                                  (442)                      182
                                                                            ----------                ----------

NET INCOME                                                                       15,920                    2,102

PREFERRED DIVIDENDS                                                               1,705                    1,752
                                                                              ---------                ---------

NET INCOME ATTRIBUTABLE TO

     NET INCOME PER SHARE - BASIC                                           $      1.46             $        .05
                                                                             ==========              ===========

     NET INCOME PER SHARE - DILUTED                                         $      1.46             $        .05
                                                                             ==========              ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC                                9,706                    7,437
                                                                              =========                =========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED                              9,769                    7,437
                                                                              =========                =========

PRO FORMA INFORMATION ASSUMING PROVISION

     Income before income taxes                                                                       $    2,284

     Provision for income taxes

     Net income                                                                                       $    2,284
                                                                                                       =========

     Net income attributable to common shareholders                                                  $       532
                                                                                                      ==========

     Net income per share - basic                                                                   $        .07
                                                                                                     ===========

     Net income per share - diluted                                                                 $        .07
                                                                                                     ===========
<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 Nine Months Ended
                                                                                        September 30,
                                                                                 2000                   1999
                                                                                 ----                   ----

OPERATING ACTIVITIES:
<S>                                                                              <C>                  <C>
    Net income                                                                   $15,920              $  2,102
    Adjustments to reconcile net income to net cash provided
          Depreciation, depletion and amortization                                18,665                15,235
          Depreciation charged to affiliates                                         151                   165
          Minority interest in net income of affiliates                              127                   252
          Amortization of deferred loan costs and debt discount                      335                   202
          Recoupment of take-or-pay liability                                       (52)                  (173)
          Equity in loss of HCRC                                                                           419
          Undistributed earnings of affiliates                                                         (1,176)
          Deferred tax benefit                                                     (400)

    Changes in operating assets and liabilities provided (used)
          Oil and gas revenues receivable                                        (5,050)               (2,673)
          Trade receivables                                                        1,046               (2,216)
          Due from affiliates                                                      (522)               (3,863)
          Prepaid expenses and other current assets                                  140                   371
          Deferred expenses and other                                                 73
          Accounts payable and accrued liabilities                               (4,604)               (1,800)
                                                                                -------               -------
                Net cash provided by operating activities                         25,829                 6,845
                                                                                  ------               -------

INVESTING ACTIVITIES:
    Additions to property, plant and equipment                                   (8,405)               (3,498)
    Exploration and development costs incurred                                  (10,789)               (7,037)
    Proceeds from sales of property, plant and equipment                          21,437                   143
    Costs incurred in connection with the Consolidation                                                (2,890)
    Distributions received from affiliate                                                                1,635
                                                                            ------------               -------
                Net cash provided by (used in) investing activities                2,243              (11,647)
                                                                                 -------              --------

FINANCING ACTIVITIES:
    Payments of long-term debt                                                  (32,200)               (2,000)
    Proceeds from long-term debt                                                   1,000                 6,000
    Dividends paid                                                               (1,705)               (3,477)
    Purchase of common shares held in treasury                                   (4,610)
    Purchase and cancellation of preferred shares                                  (513)
    Exercise of options                                                               30
    Distributions paid by consolidated affiliates to minority interest                                   (429)
    Syndication costs                                                                                     (47)
                                                                            ------------            ---------
                Net cash provided by (used in) financing activities             (37,998)                    47
                                                                                -------              ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                        (9,926)               (4,755)

CASH AND CASH EQUIVALENTS:

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

END OF PERIOD                                                                 $      554              $  7,119
                                                                               =========               =======
<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  ("Hallwood"  or  the  "Company")  is  a  Delaware
corporation engaged in the development,  exploration, acquisition and production
of oil and gas properties. Hallwood 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 Hallwood,  and all
share and per share  information  assumes that the shares of Hallwood  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, Greater Permian and Gulf Coast regions of the United States.

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

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

<S>                                                        <C>           <C>            <C>
     Revenues                                              $38,993       $11,971        $50,964
     Net income (loss)                                       2,102        (1,065)         1,037
Net income (loss) attributable to common
     Net income (loss) per share - basic                $      .05                   $     (.07)
                                                         =========                    =========
     Net income (loss) per share - diluted              $      .05                   $     (.07)
                                                         =========                    =========

     Production:
  Gas (mcf)                                                 13,016         4,097         17,113
  Oil (bbl)                                                    661           252            913
</TABLE>

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 Hallwood's 1999 Annual
Report on Form 10-K.



<PAGE>


Accounting Policies

Consolidation

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

Pro Forma Information

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

Computation of Net Income Per Share

Basic  income per share is computed by dividing net income  attributable  to the
common  shareholders by the weighted average number of common shares outstanding
during the  periods.  Diluted  income per common share  includes  the  potential
dilution that could occur upon exercise of options or warrants to acquire common
stock,  computed using the treasury stock method which assumes that the increase
in the number of shares is reduced by the number of shares which could have been
repurchased by the Company with the proceeds from the exercise of the options or
warrants  (which were  assumed to have been made at the average  market price of
the common shares during the reporting period). The warrants described in Note 2
and the Company's  outstanding  stock options have been ignored during 1999, and
the stock options  issued in June 1999 and the warrants have been ignored during
the nine  months  ended  September  30, 2000 in the  computation  of diluted net
income per share because their inclusion would be antidilutive.

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

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

For the Three Months Ended September 30, 2000
<S>                                                                     <C>               <C>          <C>
   Net income per share - basic                                         $  6,767          9,397        $     .72
                                                                                                        ========
  Effect of options and warrants                                                            252
                                                                     -----------       --------
  Net income per share - diluted                                        $  6,767          9,649        $     .70
                                                                         =======        =======         ========

For the Nine Months Ended September 30, 2000
   Net income per share- basic                                           $14,215          9,706         $   1.46
                                                                                                         =======
  Effect of options                                                                          63
                                                                     -----------      ---------
  Net income per share- diluted                                          $14,215          9,769         $   1.46
                                                                          ======        =======          =======

For the Three Months Ended September 30, 1999
   Net income per share - basic                                         $    155         10,000        $     .02
                                                                         -------         ------         ========
  Net income per share - diluted                                        $    155         10,000        $     .02
                                                                         =======         ======         ========

For the Nine Months Ended September 30, 1999
   Net income per share- basic                                          $    350          7,437        $     .05
                                                                         -------        -------         ========
  Net income per share- diluted                                         $    350          7,437        $     .05
                                                                         =======        =======         ========
</TABLE>



<PAGE>


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

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

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

Credit Agreement                       $55,000                  $  86,200
Note Agreement                          25,000                     25,000
Debt discount                           (1,673)                    (1,843)
                                       -------                   --------
  Total long-term debt                 $78,327                   $109,357
                                        ======                    =======

On June 8, 1999,  Hallwood and its lenders  entered into an Amended and Restated
Credit Agreement (as amended, the "Credit Agreement") to extend the term date of
its line of credit to May 31,  2002.  The  lenders  were Morgan  Guaranty  Trust
Company, First Union National Bank and Bank of America. Effective June 30, 2000,
Wells Fargo Bank replaced Bank of America as one of Hallwood's lenders under its
Credit  Agreement.  Effective  June 30, 2000,  Hallwood's  Credit  Agreement was
amended  to reduce  Hallwood's  borrowing  base to  $70,000,000.  Subsequent  to
September 30, 2000, Hallwood borrowed an additional  $6,000,000 under its Credit
Agreement,  therefore  Hallwood's  unused  borrowing  base was  $9,000,000 as of
November 8, 2000.

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 .5% or the
Euro-Dollar  rate plus from  1.25% to 2.0%.  The  applicable  interest  rate was
approximately 8.6% at September 30, 2000. Interest is payable monthly. Quarterly
principal payments of $8,714,000 are scheduled to commence May 31, 2002.

The  borrowing  base  for  the  Credit   Agreement  is  typically   redetermined
semiannually,  although the lenders have the right to make a redetermination  at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of Hallwood's oil and gas properties. Additionally, total expenditures for
dividends  paid and stock  repurchased  by Hallwood  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
Hallwood is 50% or more of the borrowing base. Total  expenditures for dividends
paid and stock  repurchased  by  Hallwood  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.


<PAGE>


At the  time  of the  Consolidation,  HCRC  had  $25,000,000  of  10.32%  Senior
Subordinated Notes ("Subordinated  Notes") due December 23, 2007 and warrants to
purchase  common stock which were held by The  Prudential  Insurance  Company of
America  ("Prudential").  On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase  Agreement (the "Note Agreement") was amended to issue
warrants to Prudential to purchase 309,278 shares of Hallwood's  common stock at
an exercise  price of $7.00 per share.  The Company has  requested  an amendment
from Prudential to exclude certain hedging  transactions of the  subsidiaries of
Hallwood from the  calculation  of  indebtedness.  The  Subordinated  Notes bear
interest  at the  rate of  10.32%  per  annum  on the  unpaid  balance,  payable
quarterly.  Annual  principal  payments of $5,000,000  are due December 23, 2003
through December 23, 2007.

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

As  part  of its  risk  management  strategy,  Hallwood  enters  into  financial
contracts  to hedge the  interest  rate  payments  under its  Credit  Agreement.
Hallwood  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 October 23, 2000,
Hallwood was a party to eight contracts with three different counterparties.

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

                                                                    Average
                                             Amount of              Contract
               Period                       Debt Hedged            Floor Rate

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


NOTE 3    -  STATEMENTS OF CASH FLOWS

During the nine months ended September 30, 2000,  Hallwood's  noncash  investing
activity  included  the  issuance  of  417,406  shares of  common  stock for the
acquisition of oil and gas property as described in Note 6.

Cash paid for interest  during the nine months ended September 30, 2000 and 1999
was  $6,124,000  and  $4,251,000,  respectively.  Cash paid for income taxes was
$594,000 during the nine months ended September 30, 2000. There was no cash paid
for income taxes during the nine months ended September 30, 1999.


NOTE 4 -  STOCK OPTIONS

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


<PAGE>


On June 9, 1999,  the  Compensation  Committee  of Hallwood  granted  options to
purchase  600,000 shares of common stock at an exercise price of $7.00 per share
which was equal to the fair market  value on the date of grant.  On November 22,
1999,  Hallwood granted an additional 61,500 options to purchase common stock at
an  exercise  price of $7.00 per share  which was  greater  than the fair market
value of the common stock on the date of the grant.  The options  expire on June
9, 2006,  unless  sooner  terminated  pursuant  to the  provisions  of the plan.
One-third  of the  options  vested on the grant  date,  and the  remainder  vest
one-third on June 8, 2000 and one-third on June 8, 2001.  During the nine months
ended September 30, 2000, 36,000 of these options were cancelled.


NOTE 5 - STOCK REPURCHASES

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

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

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

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

Under the odd-lot  program,  the Company  repurchased  213,404  shares of common
stock at an  average  price of $6.19 per share.  The  Company  also  repurchased
26,776 shares of preferred  shares at an average  price of $7.84 per share.  The
common shares  repurchased  under the odd-lot program are being held as treasury
shares, and the preferred shares repurchased have been cancelled.

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

During the third quarter of 2000,  the Company  purchased  100,000 shares of its
common stock at $8.625 per share.  These  shares are held as treasury  shares by
the Company.


NOTE 6 - PROPERTY ACQUISITION

On August 30,  2000,  Hallwood  completed  the  acquisition  of  interests in 34
producing wells, five service wells and 69 inactive wells in five fields located
in  Chambers,  San  Patricio  and Frio  Counties  in  Texas  and St.  James  and
Assumption  Parishes  in  Louisiana,  as well as  approximately  7,000  acres of
undeveloped  leasehold  and 3-D  seismic  data.  The  total  purchase  price was
comprised of  $4,000,000 in cash and 417,406  shares of Hallwood's  common stock
valued at $3,314,000.


NOTE 7 - PROPERTY SALES

During  the  first  nine  months  of  2000,   Hallwood  sold  its  interests  in
approximately  500  non-strategic  oil and gas wells  located  in the  Keystone,
Merkle  and  Weesatche  areas of  Texas,  as well as  various  wells in  Kansas,
Oklahoma,  North Dakota and  Montana.  The  proceeds  from all of the  Company's
property  sales during the first nine months of 2000 were  $21,437,000  of which
$21,000,000 was used to pay down borrowings under the Credit Agreement.



<PAGE>


NOTE 8    -  LEGAL SETTLEMENTS

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

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

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


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

Overview

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

Pro Forma Results

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

                                    For the Nine Months Ended
                                          September 30,
                                    2000                 1999
                                    ----                 ----
                                    (In thousands except price)

Prices
  Gas (per mcf)                       $2.55               $1.87
  Oil (per bbl)                      $23.80              $14.92

Production
  Gas (mcf)                          17,095              17,113
  Oil (bbl)                             533                 913

Gas revenues                        $43,672             $31,988
Oil revenues                         12,683              13,619
Production operating expenses        15,119              15,815



<PAGE>


Liquidity and Capital Resources

Cash Flow

Hallwood had $25,829,000 of cash flow from operating activities during the first
nine months of 2000.

Primary cash inflows were:

o        Proceeds from the sale of properties of $21,437,000; and

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

Cash was used primarily for:

o        Additions to property and development costs incurred of $19,194,000;

o        Payments of long-term debt of $32,200,000;

o        Purchase of preferred and common stock of $5,123,000; and

o        Dividends to preferred shareholders of $1,705,000.

When combined with  miscellaneous  other cash  activity  during the period,  the
result was a decrease of  $9,926,000  in  Hallwood's  cash from  $10,480,000  at
December 31, 1999 to $554,000 at September 30, 2000.

Production and Capital Spending

Hallwood  expects total year 2000 production to approximate 27.0 bcfe which will
represent  an increase of 13% over the 23.8 bcfe  produced in 1999.  September's
daily  production  totaled 67 mmcfe per day which is  approximately  5 mmcfe/day
lower than June 2000 production rates. The reduction in rate is due primarily to
reduced rates from the Bol Mex 3 well described  below (4 mmcfe/day  net),  high
line  pressure  in its  South  Canyon  production  area (1  mmcfe/day  net)  and
continuing  line  pressure  problems  with San Juan Basin  production.  Hallwood
expects to address the problems  causing the rate  reductions  through  remedial
downhole  procedures which may reinstate  higher or initial  production rates on
the Bol Mex 3 well (if the procedures are deemed to be  economically  viable) as
well as the  addition of, new gas sales  delivery  points in the San Juan Basin,
scheduled  for  connection  this year,  which may yield 4-5 mmcfde of  increased
production  net to  Hallwood.  Hallwood is also  pursuing  line looping with the
gatherer  for South  Canyon;  however,  no  definite  plans  exist at this time.
Hallwood is experiencing what it believes to be an industry wide shortage of oil
field goods and  services.  This  shortage has resulted in the delay of drilling
certain  wells and other work  procedures  and may  continue to cause  delays in
future  periods.  Hallwood is unable to  quantify  the  potential  impact of the
foregoing on estimated production, sales or any other economic barometer.

Capital  spending is expected to reach  $32,000,000 for the year 2000.  Hallwood
has not set budget for the year 2001 and expects to do so in early 2001.

Exploration and Development Projects and Acquisitions

Through September 30, 2000,  Hallwood incurred  $19,194,000 in cash for property
additions,  development,  exploitation,  and exploration  costs.  The costs were
comprised of $8,405,000 for property additions and approximately $10,789,000 for
domestic  exploration and development.  Hallwood also issued shares of its stock
valued at  $3,314,000 as part of a property  acquisition  completed in the third
quarter.  Hallwood's  original  2000  capital  budget  of  $24,000,000  has been
increased to $32,000,000 to reflect property acquisitions,  expanded exploration
and  development  activity and share  repurchases  as discussed in Note 5 of the
accompanying financial statements.  The significant capital expenditures through
September 30, 2000 are as follows.

Gulf Coast Region

During  the  first  nine  months  of  2000,   Hallwood  expended   approximately
$15,190,000  of its capital  budget in the Gulf Coast  Region in  Louisiana  and
South and East Texas. The following are major projects within the region.

Louisiana. In May of 2000, Hallwood successfully completed a 13,600-foot Bol Mex
3 well located in the Scott Field.  The well had stabilized  production rates of
approximately  25,000  mcf  per  day and  500  barrels  of oil  per day  through
mid-August, but as a result of sand production has since been choked back to its
current  level of  approximately  10,000 mcf per day and 225  barrels of oil per
day.  In  2000,  Hallwood's  drilling  and  completion  costs  for the  well are
approximately  $1,627,000.  Hallwood owns an approximate 35% working interest in
the well.  The  originally  targeted  upper zone  remains as behind  pipe proved
nonproducing reserves while the lower zone is produced.  Hallwood's plans in the
area include a Bol Mex 16 exploration well testing sands which are productive in
nearby fields and a Flambeau  prospect  exploration  well testing Marg Tex sands
productive in the adjacent  fault block.  Klump drilling is expected to commence
in the first  quarter of 2001,  subject to drilling rig  availability.  Land and
leasehold  costs incurred this year for this Klump  drilling were  approximately
$161,000.  Hallwood will have an  approximate  33% working  interest in the well
that has a gross 200 bcfe potential and an estimated $3.8 million completed well
cost.  Marg Tex  drilling is also  expected to commence in the first  quarter of
2001.  Hallwood will have a 35% working interest in this well that has a 22 bcfe
potential  and is estimated to have a $1.2 million dry hole cost.  Hallwood also
incurred $135,000 acquiring 377 small working interests totaling less than 1% in
the Scott Field and in the Bol Mex 16 exploration acreage.

Yoakum Gorge  Project.  From  January 1 through  September  30,  2000,  Hallwood
continued its  participation  with  non-operated  and operated  Wilcox  projects
located in the Yoakum Gorge area of Lavaca County,  Texas. Hallwood participated
with three different  operators in the drilling of six non-operated  wells. Four
of the  wells,  with  working  interests  of  12.5%,  3.1%,  15.9% and 12.5% are
producing  at a combined  rate of 8,000  gross mcf per day,  and  another  well,
having a 28.9% working interest,  is awaiting a decision on whether to sidetrack
the well to a more optimum position relative to area faulting.  One non-operated
recompletion  in which Hallwood has a 28.8% working  interest has been placed on
production at 4,500 mcf per day. Another operated, unsuccessful recompletion was
attempted in an uphole sand.  Hallwood owns a 90% working interest in this well.
Hallwood's  exploration  and  development  expenditures in the Yoakum Gorge area
have  totaled  approximately  $2,827,000  during the first nine  months of 2000.
Hallwood  anticipates  continued  activity in the area resulting from additional
exploitation of the 1999 Seisgen Acquisition and from third quarter expenditures
of $2,143,000 to acquire land and additional  3-D seismic data.  With the recent
seismic  acquisition,  Hallwood now owns  approximately  381 square miles of 3-D
seismic data in the area.  Hallwood is currently  evaluating  opportunities  for
three additional Lower Wilcox locations in the fourth quarter of this year.

In the first nine  months of 2000,  Hallwood  participated  in the  drilling  or
recompletion  of six wells in  neighboring  Victoria  County,  Texas,  where the
objective was the shallower Frio sands. Three of the wells are producing and two
are waiting on completion. Hallwood averages a 5% working interest in the wells.
In addition,  Hallwood  anticipates that its drilling  activity in the shallower
Frio and Yegua  formations  in Lavaca County will increase over the next several
quarters. While the potential reserves in these shallower wells are not as great
as in the  Wilcox,  averaging  between .5 bcfe and 1.5 bcfe gross per well,  the
risk and expense to drill the wells are lower.

Goliad County Expanded  Wilcox Project.  During the first nine months of 2000, a
16,500-foot non-operated,  discovery well was completed in the Upper Wilcox, and
is producing  approximately  8,000 mcf per day.  Hallwood  owns a 20.8%  working
interest  in  the  well.  Additional  exploitation  and  exploration  wells  are
possible,  but the  performance  of the discovery  well continues to be assessed
prior to proceeding.  Hallwood's drilling and leasehold acquisition costs during
2000 totaled approximately $1,311,000.

Bell  Prospect.  During  the  first  nine  months  of  2000,  Hallwood  incurred
approximately  $912,000 for costs  associated with completing two wells, and for
various gas gathering,  gas treating, and produced water handling facility costs
associated with the Bell prospect area. One well tested the Georgetown formation
and was  completed  in the Buda  formation  and the other well is a dual lateral
Buda formation development well. The wells are currently producing at a combined
rate of  approximately  500  gross  barrels  of oil per day.  Hallwood  owns 36%
working  interests in the two wells.  Hallwood plans to propose another location
to be  drilled  in the fourth  quarter  of 2000 or during  2001,  subject to rig
availability.  Hallwood will have an  approximate  35% working  interest in this
well.


<PAGE>


Boca  Chica  Prospect.  Hallwood  plans  to  participate  in  the  reentry  of a
directionally drilled 10,000 foot exploration well in the Big Hum formation from
the shore to the bottom hole location under the waters of the Gulf of Mexico.  A
twenty-three  square mile  proprietary  seismic shoot has been  completed in the
area.  Hallwood will have an approximate 25% working  interest in the well which
has unrisked reserve  potential of 2.0 bcfe. The reserve potential for the field
in which  this  exploratory  well is located  is 70 bcfe and would  require  the
drilling of multiple wells.

Property Acquisition.  On August 30, 2000, Hallwood completed the acquisition of
interests in 34 producing  wells,  five service  wells and 69 inactive  wells in
five fields located in Chambers, San Patricio and Frio Counties in Texas and St.
James and Assumption Parishes in Louisiana, as well as approximately 7,000 acres
of  undeveloped  leasehold and 3-D seismic data.  Total  consideration  included
approximately  $4.0 million in cash and Hallwood  stock valued at  approximately
$3.3 million.  The properties  include 13 bcfe of proved reserves,  21% of which
are proved  developed  producing.  Hallwood plans to spend more than  $4,000,000
over  the  next  two  years  developing  the  proved  undeveloped  reserves  and
anticipates  spending $2,000,000 over the next two years to acquire or shoot 3-D
seismic.  Hallwood feels that  significant  additional  recoveries may be gained
with  the  application  of 3-D  seismic  imaging.  This  acquisition  yields  an
estimated  purchase cost per mcfe of $0.60,  and replaces  approximately  50% of
estimated 2000 production. Hallwood believes this acquisition fits strategically
with its ongoing  activities in the Gulf Coast and South Texas and Hallwood will
operate virtually all of the properties acquired.

Rocky Mountain Region

Through the third quarter of 2000, Hallwood expended approximately $1,657,000 of
its  capital  budget  in the Rocky  Mountain  Region  located  in  Colorado  and
Northwest New Mexico. Of this amount,  Hallwood incurred  approximately $800,000
in the Colorado  Western  Slope area to drill two wells,  workover two wells and
perform  maintenance work on several others. The post-workover  production rates
have increased on the wells  undergoing  the  workovers.  One of the two drilled
wells came on at 2,500 mcf per day, declined rapidly, and is waiting for further
stimulation of all the pay zones pending rig availability.  In addition,  during
the first quarter of 2000,  Hallwood  participated in a Hudson Ranch exploration
play that tested the Red River and Nisku  formations of North  Dakota.  The well
found insufficient pay to justify completion.  Hallwood's costs incurred on this
well through the third quarter of 2000 were approximately $289,000.

San Juan Basin  Project - Colorado  and New  Mexico.  Hallwood,  along with many
other industry partners, made application to the Colorado Oil and Gas Commission
for fieldwide  infill drilling in the Fruitland Coal formation.  The application
was to reduce the  present  320-acre  spacing  units to 160 acres,  because  the
existing spacing units cannot be adequately  drained by a single well.  Approval
was granted in July 2000,  and could  result in as many as 18  locations  on the
acreage in which the  Company  has an  indirect  interest  through  its  special
purpose  tax credit  vehicle.  Hallwood  anticipates  that  infill  drilling  in
Colorado could begin as soon as 2001, and is actively making  preparations to do
so. Hallwood historically has not included these locations in its proven reserve
base, but plans to classify most of these as proved undeveloped reserves by year
end.  Using prices at September 30, 2000,  Hallwood's  share of these  locations
would increase proven reserves by approximately  35 bcf.  Hallwood has the right
to acquire the remaining  reserves  attributable to the Colorado  Fruitland Coal
locations,  approximately  18 net bcfe,  in January  2003.  In  addition  to the
Colorado  locations,  Hallwood has the potential for 12 similar locations in New
Mexico if infill  drilling is permitted  there.  It is estimated that at current
pricing  these  additional  locations  would  add  approximately  25 net bcfe in
reserve volumes. Hallwood has not made application for infill drilling locations
in New Mexico.

During the second quarter of 2000, Hallwood recompleted one well in the Colorado
San  Juan  area  which  is  presently   dewatering.   Hallwood's  costs  totaled
approximately  $129,000 and  Hallwood  has an 85% working  interest in the well.
Prior to the  recompletion,  the well had not produced since April 1999. Also in
the area, Hallwood  participated in sidetracking a nonoperated Colorado San Juan
well.  Hallwood  incurred  approximately  $90,000 and the current  production is
2,800 mcf per day compared to 1,800 mcf per day prior to the sidetrack. Hallwood
has a 40% working  interest in the well. In the third quarter of 2000,  Hallwood
completed  a  workover  on  another  well in which  Hallwood  has a 60%  working
interest.  Post workover  production  rates  increased by 700 mcf per day gross.
Hallwood has another recompletion planned in the fourth quarter of 2000.


<PAGE>


Hallwood  currently has two pipeline  projects underway in this basin. The first
project came on line during October 2000 and is expected to increase  production
through backpressure reduction by 1,000 mcf per day gross. The second project is
currently under construction and is expected to be complete in the first quarter
of 2001. Hallwood anticipates  production to increase by 3,000 mcf per day gross
when this project is completed.

Greater Permian Region and Other

The remaining $2,347,000 of Hallwood's capital expenditures  incurred during the
first nine months of 2000  primarily  relate to projects in the Greater  Permian
Region and for technical general and administrative expenditures. Two successful
non-operated  wells  were  drilled  in Gaines  County,  Texas.  The  wells  were
completed  in the Leonard  sand at  approximately  8,000 feet.  Hallwood  owns a
17.50% working  interests in the wells and has incurred  costs of  approximately
$231,000  through the third quarter of 2000. Two 7,850-foot  operated  Spraberry
wells were successfully drilled in the first nine months of 2000. The first well
was completed and is currently  producing  approximately 60 gross barrels of oil
per day. The second well is awaiting  completion.  Hallwood's  costs for the two
wells to date are  approximately  $618,000.  Hallwood  owns an  approximate  87%
working interest in the completed well and approximately 78% in the second well.
Hallwood is  contemplating  an infill  drilling  program in the Spraberry  area.
Hallwood estimates that over one hundred 80-acre infill drilling locations exist
in this  area and that the top 40  prospects  could  yield a rate of  return  in
excess of 40% at  commodity  pricing  lower  than  current  pricing.  West Texas
Permian  production is very predictable,  and a drilling program coupled with an
appropriate  crude oil hedging program can be expected to yield  relatively safe
and  adequate  returns.   The  remainder  of  Hallwood's  costs  are  associated
principally  with technical  general and  administrative  expenditures  totaling
approximately $1,364,000, and for numerous other projects which are completed or
underway and which are individually less significant.

Property Divestments

During  the  first  nine  months  of  2000,   Hallwood  sold  its  interests  in
approximately  500  non-strategic  oil and gas wells  located  in the  Keystone,
Merkle, and Weesatche areas of Texas, and various oil and gas wells in Oklahoma,
North Dakota,  Montana,  and Kansas.  Total proceeds  received through the third
quarter  of 2000  were  approximately  $21,437,000.  The  wells  sold  represent
approximately  35% of  Hallwood's  total well count as of the  beginning  of the
year,  approximately  16% of Hallwood's  reserve value, and approximately 11% of
its  operating  cash  flow  based on five  year  average  reserve  pricing.  The
completion  of Hallwood's  2000 sales effort has enabled  Hallwood to reduce its
level of debt,  reduce  its  administrative  overhead,  and to focus on its core
areas of Colorado, New Mexico, Texas, and Louisiana.

Dividends

On September 14, 2000, Hallwood declared a quarterly dividend of $.25 per Series
A Cumulative  Preferred  share,  payable on November 15, 2000 to shareholders of
record on September 30, 2000. This amount was accrued as of September 30, 2000.

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

Stock Repurchases

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

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

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

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

Under the odd-lot  program,  the Company  repurchased  213,404  shares of common
stock at an  average  price of $6.19 per share.  The  Company  also  repurchased
26,776 shares of preferred  shares at an average  price of $7.84 per share.  The
common shares  repurchased  under the odd-lot program are being held as treasury
shares, and the preferred shares repurchased have been cancelled.

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

During the third quarter of 2000,  the Company  purchased  100,000 shares of its
common  stock at $8.625  per  share.  These  shares  are held by the  Company as
treasury shares.

Financing

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

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

Credit Agreement                       $55,000                  $  86,200
Note Agreement                          25,000                     25,000
Debt discount                           (1,673)                    (1,843)
                                       -------                  ---------
  Total long-term debt                 $78,327                   $109,357
                                        ======                    =======

On June 8, 1999,  Hallwood and its lenders  entered into an Amended and Restated
Credit Agreement (as amended, the "Credit Agreement") to extend the term date of
its line of credit to May 31,  2002.  The  lenders  were Morgan  Guaranty  Trust
Company, First Union National Bank and Bank of America. Effective June 30, 2000,
Wells Fargo Bank replaced Bank of America as one of Hallwood's lenders under its
Credit  Agreement.  Effective  June 30, 2000,  Hallwood's  Credit  Agreement was
amended  to reduce  Hallwood's  borrowing  base to  $70,000,000.  Subsequent  to
September 30, 2000, Hallwood borrowed an additional  $6,000,000 under its Credit
Agreement,  therefore,  Hallwood's  unused  borrowing  base was $9,000,000 as of
November 8, 2000.

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 .5% or the
Euro-Dollar  rate plus from  1.25% to 2.0%.  The  applicable  interest  rate was
approximately 8.6% at September 30, 2000. Interest is payable monthly. Quarterly
principal payments of $8,714,000 are scheduled to commence May 31, 2002.

The  borrowing  base  for  the  Credit   Agreement  is  typically   redetermined
semiannually,  although the lenders have the right to make a redetermination  at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of Hallwood's oil and gas properties. Additionally, total expenditures for
dividends  paid and stock  repurchased  by Hallwood  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
Hallwood is 50% or more of the borrowing base. Total  expenditures for dividends
paid and stock  repurchased  by  Hallwood  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.



<PAGE>


At the  time  of the  Consolidation,  HCRC  had  $25,000,000  of  10.32%  Senior
Subordinated Notes ("Subordinated  Notes") due December 23, 2007 and warrants to
purchase  common stock which were held by The  Prudential  Insurance  Company of
America  ("Prudential").  On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase  Agreement (the "Note Agreement") was amended to issue
warrants to Prudential to purchase 309,278 shares of Hallwood's  common stock at
an exercise  price of $7.00 per share.  The Company has  requested  an amendment
from Prudential to exclude certain hedging  transactions of the  subsidiaries of
Hallwood from the  calculation  of  indebtedness.  The  Subordinated  Notes bear
interest  at the  rate of  10.32%  per  annum  on the  unpaid  balance,  payable
quarterly.  Annual  principal  payments of $5,000,000  are due December 23, 2003
through December 23, 2007.

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

As  part  of its  risk  management  strategy,  Hallwood  enters  into  financial
contracts  to hedge the  interest  rate  payments  under its  Credit  Agreement.
Hallwood  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 October 23, 2000,
Hallwood was a party to eight contracts with three different counterparties.

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

                                                                    Average
                                             Amount of              Contract
               Period                       Debt Hedged            Floor Rate

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

Cautionary Statement Regarding Forward-Looking Statements

In the interest of providing the shareholders with certain information regarding
the Company's future plans and operations,  certain statements set forth in this
Form 10-Q relate to management's future plans, objectives and expectations. Such
statements are forward-looking  statements within the meanings of Section 27A of
the  Securities  Act of 1933,  as amended,  and  Section  21E of the  Securities
Exchange  Act of 1934,  as  amended.  Although  any  forward-looking  statements
contained  in this  Form  10-Q or  otherwise  expressed  by or on  behalf of the
Company are, to the  knowledge and in the judgment of the officers and directors
of the Company,  expected to prove true and come to pass, management is not able
to predict  the  future  with  absolute  certainty.  Forward-looking  statements
involve known and unknown risks and uncertainties  which may cause the Company's
actual  performance and financial results in future periods to differ materially
from  any  projection,  estimate  or  forecasted  result.  Please  refer  to the
Company's  Registration  Statement  dated May 4, 1999,  SEC file  #333-77409 for
additional  statements  concerning  important  factors  that could cause  actual
results to differ  materially from the Company's  expectations.  These risks and
uncertainties  include,  among other  things,  volatility of oil and gas prices,
competition,  risks  inherent in the Company's oil and gas  operations,  risk of
mechanical  failure,  the inexact nature of  interpretation of seismic and other
geological  and  geophysical  data,   imprecision  of  reserve  estimates,   the
availability of capital, the Company's ability to replace and expand oil and gas
reserves, and such other risks and uncertainties  described from time to time in
the  Company's  periodic  reports and filings with the  Securities  and Exchange
Commission. Accordingly, shareholders and potential investors are cautioned that
certain events or circumstances  could cause actual results to differ materially
from those projected, estimated or predicted.


<PAGE>


Inflation and Changing Prices

Prices

Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of  Hallwood,  including  the extent of domestic  and foreign
production,  imports of foreign  oil,  market  demand,  domestic  and  worldwide
economic and political  conditions,  and  government  regulations  and tax laws.
Prices for both oil and gas fluctuated significantly during 1999 and through the
third quarter of 2000. The following table presents the weighted  average prices
received  each quarter by Hallwood  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>
Third quarter - 1999                 $20.22                $18.21                 $2.25                  $1.95
Fourth quarter - 1999                 22.50                 19.01                  2.26                   1.93
First quarter - 2000                  27.26                 24.19                  2.29                   2.19
Second quarter - 2000                 29.42                 23.35                  3.22                   2.70
Third quarter - 2000                  30.69                 23.51                  3.77                   2.84
</TABLE>

As  part  of its  risk  management  strategy,  Hallwood  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.

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

The  financial  contracts  used by  Hallwood  to hedge  the price of its oil and
natural gas production are swaps and collars. Under the swap contracts, Hallwood
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 October 23, 2000,  Hallwood
was a party to 30 financial contracts with four different counterparties.

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

                                               Oil                 Contract
                                 -----------------------

                                  Percent of Production           Delivered
            Period                          Hedged                   Price

                                                                  (per bbl)

Last three months of 2000                    58%                    $18.55
2001                                         32                      20.59



<PAGE>









                                                Gas                Contract
                                  --------------------

                                  Percent of Production           Delivered
            Period                           Hedged                  Price

                                                                  (per mcf)

Last three months of 2000                    56%                   $ 2.16
2001                                         60                      2.14
2002                                         33                      1.95

Between  8% and 12% of the gas  volumes  hedged  in each year are  subject  to a
collar  agreement  under which  Hallwood will receive the contract  price if the
spot price is lower than the contract price,  the cap price if the spot price is
higher  than the cap price,  and the spot  price if that  price is  between  the
contract  price and the cap price.  The cap  prices  range from $2.54 per mcf to
$2.65 per mcf.

During the fourth quarter  through  October 23, 2000,  the weighted  average oil
price (for barrels not hedged) was approximately $31.90 per barrel. The weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $4.85 per mcf.

Inflation

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

Results of Operations

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

Third Quarter of 2000 Compared to the Third Quarter of 1999

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

                                            2000              1999
                                            ----              ----
                                          (In thousands except price)
Gas
  Production (mcf)                          5,308             5,476
  Price (per mcf)                         $  2.84           $  1.95

Oil
  Production (bbl)                            149               278
  Price (per bbl)                          $23.51            $18.21

Gas Revenue

Gas revenue increased  $4,515,000 during the third quarter of 2000 compared with
the third  quarter of 1999.  The  increase  is the result of an  increase in the
average gas price from $1.95 per mcf in 1999 to $2.84 per mcf in 2000, partially
offset by a decrease in  production  from  5,476,000 mcf in 1999 to 5,308,000 in
2000.  The decrease in production is primarily due to the property  sales during
the first and second quarters of 2000,  partially offset by increased production
from successful drilling projects during 2000 as well as a property  acquisition
made by Hallwood during the fourth quarter of 1999.

The effect of Hallwood's hedging  transactions as described under "Inflation and
Changing  Prices," during the third quarter of 2000, was to decrease  Hallwood's
average gas price from $3.77 per mcf to $2.84 per mcf, representing a $4,936,000
decrease in revenue from hedging transactions.

Oil Revenue

Oil revenue decreased  $1,560,000 during the third quarter of 2000 compared with
the  third  quarter  of 1999.  The  decrease  is the  result  of a  decrease  in
production from 278,000  barrels in 1999 to 149,000  barrels in 2000,  partially
offset by an increase in the average oil price from $18.21 per barrel in 1999 to
$23.51 per barrel in 2000. The production  decrease is primarily due to property
sales during the first and second quarters of 2000.

The effect of Hallwood's hedging  transactions  during the third quarter of 2000
was to  decrease  Hallwood's  average oil price from $30.69 per barrel to $23.51
per  barrel,  resulting  in  a  $1,070,000  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  $774,000  during the third quarter of 2000 compared with the
third  quarter of 1999.  The  increase is primarily  due to a one-time  downward
adjustment  to  incentive  payment  income  during  1999,  which  related to gas
measurements made in prior periods.

Interest Income

Interest income increased $65,000 during the third quarter of 2000 compared with
the third quarter of 1999  primarily due to a higher average cash balance during
2000.

Production Operating

Production  operating expense increased $18,000 during the third quarter of 2000
compared with the third quarter of 1999. The increase is the result of increased
operating  expenses  from the drilling  projects  and the  property  acquisition
discussed above,  partially offset by decreased  operating costs due to property
sales during the first and second quarters of 2000.

General and Administrative

General  and   administrative   expense   includes  costs  incurred  for  direct
administrative  services  such as legal,  audit and  reserve  reports as well as
allocated  internal  overhead  incurred  by the  operating  company on behalf of
Hallwood.  These expenses  decreased  $202,000 during the third quarter of 2000.
The decrease is primarily due to  Hallwood's  reduction in its work force during
April  2000.  The work  force  reduction  was made to  reflect  the  operational
efficiencies  caused by the property sales during the first and second  quarters
of 2000.

Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense decreased $384,000 during the
third quarter of 2000  compared with the third quarter of 1999.  The decrease is
primarily  the  result of lower  capitalized  costs in 2000 due to the  property
sales discussed above.

Interest

Interest  expense  decreased  $278,000 during the third quarter of 2000 compared
with the third quarter of 1999 due to a lower average  outstanding  debt balance
during 2000.



<PAGE>


Provision (Benefit) for Income Taxes

The  current  benefit  for  income  taxes  during  the third  quarter of 2000 is
comprised  of a benefit for both  federal and state  income  taxes.  The benefit
resulted from a production  decline during late 1999 on two significant wells in
Louisiana.  The  deferred  tax  benefit  during  2000  represents  the effect of
partially  removing the valuation  allowance for the Company's  total tax assets
which are primarily comprised of the Company's net operating loss carryforwards.
The effective tax rate during 1999 is lower than the  statutory  rate  primarily
because of the use of net operating loss carryforwards.

Minority Interest in Net Income of Affiliates

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

First Nine Months of 2000 Compared to First Nine Months of 1999

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

                                  2000              1999
                                 ------            -----
                                 (In thousands except price)
Gas
   Production (mcf)              17,095            13,016
   Price (per mcf)                $2.55             $1.89

Oil
  Production (bbl)                  533               661
  Price (per bbl)                $23.80            $15.52

Gas Revenue

Gas  revenue  increased  $19,056,000  during  the first  nine  months of 2000 as
compared  to the first nine  months of 1999.  The  increase  is the result of an
increase in production from 13,016,000 mcf in 1999 to 17,095,000 mcf in 2000 and
an  increase  in price from $1.89 per mcf in 1999 to $2.55 per mcf in 2000.  The
increase in production is primarily due to the Consolidation partially offset by
the production decline discussed above.

The effect of Hallwood's  hedging  transactions  during the first nine months of
2000 was to  decrease  Hallwood's  average gas price from $3.05 to $2.55 per mcf
representing a $8,548,000 decrease in revenue from hedging transactions.

Oil Revenue

Oil revenue  increased  $2,422,000 during the first nine months of 2000 compared
with the first nine months of 1999. The increase is the result of an increase in
price from  $15.52  per  barrel in 1999 to $23.80 per barrel in 2000,  partially
offset by a decrease in  production  from  661,000 mcf in 1999 to 533,000 mcf in
2000. The decreased  production is primarily due to the property sales discussed
above, partially offset by the increased production from the Consolidation.

The effect of Hallwood's  hedging  transactions  during the first nine months of
2000 was to  decrease  Hallwood's  average  oil price from  $28.74 per barrel to
$23.80 per barrel  resulting in a  $2,633,000  reduction in revenue from hedging
transactions.



<PAGE>


Pipeline, Facilities and Other

Pipeline,  facilities and other revenue  increased  $1,650,000  during the first
nine months of 2000 compared with the first nine months of 1999. The increase is
primarily  due to  additional  revenue  from  the  Consolidation  as well as the
increase during the third quarter of 2000 discussed above.

Production Operating

Production  operating expense increased  $3,391,000 during the first nine months
of 2000  compared  with the first  nine  months  of 2000.  The  majority  of the
increase is the result of the  Consolidation  and increased  operating  expenses
described above,  partially offset by property sales during the first and second
quarters of 2000.

General and Administrative

General and administrative  expenses increased  $1,238,000 during the first nine
months of 2000  compared  with the first nine  months of 1999.  The  increase is
primarily due to the Consolidation, the one-time severance related costs paid in
connection with the previously  described work force reduction  partially offset
by the reduced salary costs resulting from the work force reduction.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization expense increased $3,430,000 during the
first  nine  months of 2000  compared  with the first nine  months of 1999.  The
increase is primarily the result of a higher depletion rate due to the increased
production described above.

Equity in Loss of HCRC

Equity in loss of HCRC represents  Hallwood's share of its equity  investment in
HCRC prior to the  Consolidation.  This loss  decreased to zero during the first
nine months of 2000, compared with the first nine months of 1999, as a result of
the Consolidation.

Litigation

Litigation  expense  during the first nine  months of 2000 is  comprised  of the
costs related to the settlement of the employment litigation described in Note 8
of the accompanying  financial statements.  This expense was partially offset by
insurance  proceeds  which  reimbursed a portion of the costs paid to settle the
lawsuits  assumed by Hallwood in connection with the  Consolidation as described
in Note 8 of the accompanying financial statements. Litigation income during the
nine months ended  September  30, 1999  represents  the proceeds from a property
related claim.



<PAGE>


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Hallwood does not use or hold derivative  instruments  for trading  purposes nor
does  it  use  derivative   instruments  with  leveraged  features.   Hallwood's
derivative  instruments  are  designated  and  effective  as hedges  against its
identified  risks,  and do not of  themselves  expose  Hallwood  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.  Hallwood 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 Hallwood'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) - Hallwood hedges a portion of the price risk
associated  with the sale of its oil and natural gas production  through the use
of derivative commodity  instruments,  which consist of swaps and collars. These
instruments  reduce  Hallwood's  exposure  to  decreases  in oil and natural gas
prices on the hedged  portion of its  production  by enabling it to  effectively
receive a fixed  price on its oil and gas sales or a price that only  fluctuates
between a predetermined  floor and ceiling. As of October 23, 2000, Hallwood has
entered  into  derivative  commodity  hedges  covering an  aggregate  of 296,000
barrels of oil and 18,300,000  mcf of gas that extend through 2002.  Under these
contracts,  Hallwood  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
September  30,  2000 would  cause a loss in income and cash flows of  $2,551,000
during the remaining three months of 2000,  assuming that oil and gas production
remain at projected  levels.  This loss in income and cash flows would be offset
by a $1,494,000  increase in income and cash flows  associated  with the oil and
natural gas  derivative  contracts  that are in effect for the  remaining  three
months of 2000.


<PAGE>


Interest Rate Risks  (non-trading)  - Hallwood uses both fixed and variable rate
debt to partially finance operations and capital  expenditures.  As of September
30, 2000,  Hallwood's  debt  consisted of  $55,000,000  in borrowings  under its
Credit  Agreement  which bears interest at a variable  rate, and  $25,000,000 in
borrowings under its 10.32% Senior  Subordinated  Notes which bear interest at a
fixed rate.  Hallwood 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,  Hallwood 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 Hallwood'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 $275,000
during the remaining three months of 2000, assuming that outstanding  borrowings
under the Credit  Agreement  remain at September  30, 2000 levels.  This loss in
income and cash flows would be offset by a $225,000  increase in income and cash
flows  associated with the interest rate swap and collar  agreements that are in
effect for the remaining three months of 2000.


<PAGE>


PART II  -OTHER INFORMATION


ITEM 1     -  LEGAL PROCEEDINGS

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


ITEM 2     -  CHANGES IN SECURITIES

              None.


ITEM 3     -  DEFAULTS UPON SENIOR SECURITIES

              None.


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

              None.


ITEM 5     -  OTHER INFORMATION

              None.


ITEM 6     -  EXHIBITS AND REPORTS ON FORM 8-K

         a) Exhibits

         27 Financial Data Schedule

         b) Reports on Form 8-K

                   None.


<PAGE>


SIGNATURE

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

                                    HALLWOOD ENERGY CORPORATION



Date:   November 8, 2000            By: /s/William J.Baumgartner
     ----------------------------      --------------------------------
                                        William J. Baumgartner, Vice President
                                         (Chief Financial Officer)