Document:

<PAGE>

                                                                   Exhibit 10.16

                             SECOND AMENDMENT TO THE
                          CRESTLINE CAPITAL CORPORATION
                      CHANGE IN CONTROL SEPARATION PAY PLAN

     THIS SECOND AMENDMENT by Crestline Capital Corporation (the "Corporation")
is made as of the 22nd day of March, 2001.

                                   WITNESSETH:

     WHEREAS: The Corporation sponsors the Crestline Capital Corporation Change
     in Control Separation Pay Plan (the "Plan");

     WHEREAS: Pursuant to Article 7 of the Plan, the Corporation retained the
     right to amend the Plan; and

     WHEREAS: Resolutions were duly adopted by the Board of Directors of the
     Corporation on March 22, 2001 approving this amendment to the Plan.

     NOW, THEREFORE, the Plan is amended as follows:

     1. The text of Section 1.3 of the Plan shall be deleted in its entirety and
     the following inserted in lieu thereof:

          1.3  Effective Date. This Plan is effective for covered employment
               --------------
               terminations with respect to a Change in Control occurring during
               the period beginning June 25, 1999 (the "Effective Date") and
               ending December 31, 2001 (the "Plan Termination Date"). If
               benefits are paid under this Plan, those benefits replace and
               supersede any and all prior severance or separation pay
               arrangements for the recipients, other than those contained in
               individual contracts with Employees of the Company Group.

     2. The text of Section 7.1 of the Plan shall be deleted in its entirety and
     the following inserted in lieu thereof:

          7.1  Amendment and Termination. The Company forgoes any right to amend
               -------------------------
               the Plan in a manner adverse to Participants for covered
               employment terminations with respect to a Change in Control
               occurring on or before December 31, 2001. Any purported amendment
               or termination inconsistent with the preceding sentence will be
               treated as entitling Participants to benefits under the Plan
               without the requirement of resigning from employment. Subject to
               the

<PAGE>

               foregoing, the Board reserves the right to amend the Plan as it
               deems necessary or advisable. The Plan will terminate at midnight
               Eastern Time on the Plan Termination Date, and no Participant not
               already entitled to or currently receiving benefits or who
               subsequently qualifies to receive benefits with respect to a
               Change in Control which occurs prior to the Plan Termination
               Date, will receive benefits under the Plan after that date.

     IN WITNESS WHEREOF, the undersigned officer of the Corporation certifies
that this Amendment has been authorized and directed by resolution of the Board
of Directors of the Corporation as of the date first written above.

                                          CRESTLINE CAPITAL CORPORATION

______________________________            By: _________________________________
Secretary                                     James L. Francis
                                              Executive Vice President and
                                              Chief Financial Officer<PAGE>

                                                                   Exhibit 10.17

                             THIRD AMENDMENT TO THE
                          CRESTLINE CAPITAL CORPORATION
                      CHANGE IN CONTROL SEPARATION PAY PLAN

     THIS THIRD AMENDMENT by Crestline Capital Corporation (the "Corporation")
is made as of the 25th day of October, 2001.

WITNESSETH:

     WHEREAS, the Corporation sponsors the Crestline Capital Corporation Change
     in Control Separation Pay Plan (the "Plan"); and

     WHEREAS, pursuant to Article 7 of the Plan, the Corporation retained the
     right to amend the Plan; and

     WHEREAS, pursuant to a Unanimous Consent of the Board of Directors of the
     Corporation dated October 25, 2001 the Board approved this amendment to the
     Plan.

     NOW, THEREFORE, the Plan is amended as follows:

     1.   The text of Section 1.3 of the Plan shall be deleted in its entirety
          and the following inserted in lieu thereof:

          1.3  Effective Date. This Plan is effective for covered employment
               --------------
               terminations with respect to a Change in Control occurring during
               the period beginning June 25, 1999 (the "Effective Date") and
               ending December 31, 2002 (the "Plan Termination Date"). If
               benefits are paid under this Plan, those benefits replace and
               supersede any and all prior severance or separation pay
               arrangements for the recipients, other than those contained in
               individual contracts with Employees of the Company Group.

     2.   The text of Section 7.1 of the Plan shall be deleted in its entirety
          and the following inserted in lieu thereof:

          7.1  Amendment and Termination. The Company forgoes any right to amend
               -------------------------
               the Plan in a manner adverse to Participants for covered
               employment terminations with respect to a Change in Control
               occurring on or before December 31, 2002. Any purported amendment
               or termination inconsistent with the preceding sentence will be
               treated as entitling Participants to benefits under the Plan
               without the

<PAGE>

               requirement of resigning from employment. Subject to the
               foregoing, the Board reserves the right to amend the Plan as it
               deems necessary or advisable. The Plan will terminate at midnight
               Eastern Time on the Plan Termination Date, and no Participant not
               already entitled to or currently receiving benefits or who
               subsequently qualifies to receive benefits with respect to a
               Change in Control which occurs prior to the Plan Termination
               Date, will receive benefits under the Plan after that date.

     IN WITNESS WHEREOF, the undersigned officer of the Corporation certifies
that this Amendment has been authorized and directed by resolution of the Board
of Directors of the Corporation as of the date first written above.

                                           CRESTLINE CAPITAL CORPORATION

____________________________________       By: ________________________________
Secretary                                      James L. Francis
                                               Executive Vice President and
                                               Chief Financial Officer<PAGE>

                                                                    EXHIBIT 10.7

                              PURE RESOURCES, INC.
                                500 West Illinois
                              Midland, Texas 79701

                                 March 29, 2001

Union Oil Company of California
2141 Rosecrans Avenue, Suite 4000
El Segundo, California 90245
Attention: Mr. Terry Dallas, Chief Financial Officer

     Re: Pure Resources, Inc. - Business Opportunities Agreement

Ladies and Gentlemen:

     Reference is made to the Business Opportunities Agreement (the "Agreement")
dated as of December 13, 1999 among Union Oil Company of California ("Union
Oil"), Pure Resources, Inc. (formerly named Titan Resources Holdings, Inc.) (the
"Company"), TRH, Inc., and Titan Exploration, Inc. Capitalized terms used and
not otherwise defined herein shall have the meanings given to them in the
Agreement. The Agreement was entered into to address certain legal requirements
and concerns as well as for certain practical business purposes. Although this
letter does request a limited waiver of the Agreement, we wish to make it clear
that we understand that the Agreement will remain in effect after any grant of a
limited waiver and that we will continue to remain focused on the business we
conduct in the Designated Area and any other area that you may permit us to
operate in pursuant to the limited waiver.

     As you are aware, the Company proposes to acquire all of the outstanding
capital stock of Hallwood Energy Corporation ("HEC") pursuant to a negotiated
cash tender offer commenced pursuant to a Merger Agreement between the Company
and HEC (if the Company and HEC reach agreement). HEC or its subsidiaries
currently own, among other things, certain oil and gas leasehold interests, oil
and gas fee mineral interests, royalty interests and related contracts and
assets (collectively, the "Assets"), which Assets include without limitation
those matters identified on Annex A. Attached as Annex B is the "Item 2 -
Properties" section from HEC's 2000 Annual Report on Form 10-K filed March 20,
2001.

     Pursuant to Section 1 of the Agreement, the Company agreed that, except
with the consent of Union Oil (which it may withhold in its sole discretion),
neither the Company nor its subsidiaries will engage in any business other than
the E&P Business and none of them will pursue any business opportunity that
involves any direct or indirect ownership interest in any properties located
outside the Designated Area. Notwithstanding Section 1 or any other provision in
the Agreement, we hereby request your limited waiver and consent (a) to the
acquisition of the Assets by the Company (directly, through subsidiaries or by
acquiring (directly or indirectly) a majority or more interest in HEC), and the
Company's (directly, or through subsidiaries) conducting the E&P Business on
properties included among the Assets following such acquisition (collectively,
the "Acquisition") and (b) to

<PAGE>

March 29, 2001
Page 2

the Company's (and its subsidiaries') engaging in the "Extended Business," which
term means E&P Business opportunities that directly arise out of the ownership
or operation of the Assets, provided, however, that this waiver is conditioned
upon the Company's agreement with Union Oil that (and the Company hereby
covenants to and agrees with Union Oil that) it shall divest itself of any
interest in Assets listed as item 2 on Annex A prior to September 30, 2001. The
term "Extended Business" includes contractual rights and obligations under
currently existing contracts (but not rights or obligations first arising out of
any amendment to such existing contracts entered into after the date hereof)
included within the Assets and other opportunities that primarily relate to land
or minerals that are included within the Assets or located within two (2) miles
of any of the Assets provided that under no circumstances shall the term
"Extended Business" include any investment in or acquisition related to
opportunities in the off-shore areas of the Gulf of Mexico or any area outside
the continental United States. By signing below, Union Oil hereby (1) evidences
its limited waiver of the application of the Agreement's restrictions to the
Acquisition and the Extended Business (but not as to any other expansion outside
the Designated Area that is not clearly and unequivocally contemplated by the
Acquisition and the Extended Business) and (2) acknowledges that neither the
Acquisition nor the Extended Business shall be deemed a breach or violation of
the Agreement.

     We hereby acknowledge that if you grant the limited waiver requested above
or any more restrictive waiver, that such limited waiver will only apply to the
Acquisition and the Extended Business and in no way shall serve to waive any
provision of the Agreement that may be applicable to future transactions or
investments by the Company that are not included within the Acquisition or the
Extended Business. Furthermore, nothing herein shall serve as a general waiver
or be construed as amending or revising in any way the definition of "Designated
Area" in the Agreement or any other provision of the Agreement.

     The limited waiver that shall be effected by Union Oil's execution below
shall automatically terminate, without further action by any party, if the
Company has not consummated the Acquisition by May 30, 2001.

<PAGE>

March 29, 2001
Page 3

     Please sign this letter in the space below, fax a signed copy to Joe
Dannenmaier of Thompson & Knight L.L.P. (fax 214/ 969-1751) and return the
signed original to Pure Resources, Inc. c/o Joe Dannenmaier, Thompson & Knight,
L.L.P., 1700 Pacific Avenue, Suite 3300, Dallas, Texas 75201.

                                    Very truly yours,

                                    PURE RESOURCES, INC.

                                    By: /s/ Jack Hightower
                                        ------------------
                                        Jack D. Hightower,
                                        President and Chief Executive Officer

Accepted and agreed to:

UNION OIL COMPANY OF CALIFORNIA

By:  /s/ Timothy Ling
     ------------------
     Name: Timothy Ling
     Title:
           ---------------------

<PAGE>

March 29, 2001
Page 4

                                     Annex A

1.   State waters leases:

     a.   Texas state block 1224, located in Cameron County, Texas off the coast
          of South Padre Island (Boca Chica Prospect)

     b.   Louisiana state lease 14371 #1, Section 27 10 South 13 East, Iberville
          Parish.

2.   15% interest in the Z3 block in Peru

<PAGE>

               Annex B - Portion of 2000 10-K filed March 20, 2001

ITEM 2 - PROPERTIES

Exploration and Development Projects and Acquisitions

In 2000, Hallwood incurred $25,807,000 in direct property additions,
development, exploitation, and exploration costs. The costs were comprised of
$9,320,000 for property acquisitions and approximately $16,487,000 for domestic
exploration and development. Hallwood also issued 417,406 shares of its common
stock valued at $3,315,000 as part of a property acquisition completed in the
third quarter. Hallwood's 2000 capital program led to the replacement, including
revisions to prior year reserves, of 329% of 2000 production using year-end
prices of $27.00 per bbl and $9.25 per mcf. Sales of reserves in place in 2000,
which were approximately 176% of 2000 production, are excluded from the
replacement calculation.

Property Sales

During 2000, Hallwood received approximately $21,698,000 for the sale of
approximately 500 non-strategic wells located in the Keystone, Merkle and
Weesatche areas of Texas, and various oil and gas wells in Oklahoma, North
Dakota, Montana and Kansas. The proceeds from these sales were all credited
against oil and gas properties without gain or loss recognition. The wells sold
represented 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 and to focus on a four state core area including Colorado, New
Mexico, Texas and Louisiana.

Regional Area Descriptions and 2000 Capital Budget

The following discussion of Hallwood's properties and capital projects contains
forward-looking statements that are based on current expectations, estimates and
projections about the oil and gas industry, management's beliefs and assumptions
made by management. Words such as "projects," "believes," "expects,"
"anticipates," "estimates," "plans," "could," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Please refer to the section entitled "Cautionary Statement Regarding
Forward-Looking Statements" under Item 1. for a discussion of factors which
could affect the outcome of the forward-looking statements.

Gulf Coast Region

Hallwood's significant interests in the Gulf Coast Region in Louisiana and South
and East Texas consist of interests in eleven operated and producing wells, one
nonproducing well and four nonoperated wells located in Lafayette Parish,
Louisiana. The wells produce principally from the Bol Mex formation at 13,500 to
14,500 feet. Seven additional operated producing gas wells and four nonproducing
wells are located primarily in the Lapice Field in St. James Parish, Louisiana.
In South and East Texas, Hallwood has interests in approximately 250 producing
wells, 81 of which are operated by the Company, and produce primarily from the
Austin Chalk, Lower Frio, Travis Peak, Rodessa, Pettit and Cotton Valley
formations at depths from 7,000 to 13,000 feet. In these same areas, Hallwood
owns interests in eight nonoperated wells. During 2000, Hallwood expended
approximately $19,896,000 (68%), including the stock issuance described below,
of its capital budget in this region. Hallwood plans five exploration projects
and 11 exploitation and development projects in the area in 2001.
Property Acquisition. On August 30, 2000, Hallwood completed the acquisition

                                       1

<PAGE>

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 $3.875 million in cash and 417,406 shares of Hallwood common 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 million over the next two years developing the proved undeveloped
reserves and anticipates spending $4.8 million 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 proven mcfe of $0.55. 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.

Yoakum Gorge Project. In 2000, Hallwood continued its participation with
non-operated and operated Wilcox projects located in the Yoakum Gorge area of
Lavaca County, Texas. During 2000, Hallwood participated with four different
operators in the drilling or recompletion of nine wells. Four of the wells, with
working interests of 12.5%, 3.1%, 15.9% and 28.8%, are producing at a combined
rate of 9,220 gross mcf per day. A decision will be made in first quarter 2001
whether or not to sidetrack another well in a more optimum position relative to
the area fault block. Hallwood plans to own a 50% working interest in the well.
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
$3,524,000 for the year 2000. Hallwood anticipates continued activity in the
area resulting from additional exploitation of the 1999 Seisgen Acquisition and
from the reprocessing and evaluation of land and 3-D seismic data purchased
during the third quarter of 2000. With the recent $1,975,000 seismic
acquisition, Hallwood now owns approximately 381 square miles of 3-D seismic
data in the area. In addition to reprocessing Hallwood's seismic data, Hallwood
is also reprocessing 80-square miles of seismic with another operator. At least
two exploration projects are currently planned for 2001.

During 2000, Hallwood participated in the drilling or recompletion of seven
wells in neighboring Victoria County, Texas, where the objective was the
shallower Frio sands. Four of the wells are producing, one was plugged and
abandoned, 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 2000, a 16,500-foot non-operated,
discovery well was completed in the Upper Wilcox, and is producing approximately
1,800 mcf per day. Hallwood owns a 20.8% working interest in the well.
Hallwood's drilling and leasehold acquisition costs during 2000 totaled
approximately $1,375,000.

Louisiana. In May 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 were
approximately $1,634,000. 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.

                                       2

<PAGE>

Hallwood's plans in the area include a Bol Mex 16 Klump 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. The Bol Mex
well is currently drilling and land and leasehold costs incurred in 2000 were
approximately $172,000. Hallwood will have an approximate 28% working interest
in the well that has a gross 200 Bcfe potential and an estimated $5.6 million
completed well cost. The Marg Tex well is also currently drilling. Hallwood will
have a 35% working interest in this well that has a 22 Bcfe potential and is
estimated to have a dry hole cost of $2.86 million. 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.

Boca Chica Prospect. During 2000, a twenty-three square mile proprietary seismic
shoot was completed in the Gulf of Mexico and is currently being reprocessed and
reevaluated. If the results are favorable, 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. Hallwood will have an approximate 25% working interest in the
well, which has unrisked reserve potential of 20 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.

Martinsville Prospect. Hallwood acquired a 45% interest in the Martinsville
Prospect located in Nacogdoches County, Texas during the fourth quarter of 2000.
The initial well for this prospect is presently drilling and one additional
stacked dual lateral James Lime horizontal well is planned for 2001. Hallwood
also plans to drill one or more horizontal James Lime wells on nearby acreage in
the North Trawick Field. Total costs for this project were approximately
$146,000 in 2000.

Bell Prospect. During 2000, Hallwood incurred approximately $930,000 for costs
associated with completing two wells, and for various gas gathering, gas
treating, and produced water-handling facility costs associated with the Bell
prospect area. One well tested the Georgetown formation and was completed in the
Buda formation and the other well is a dual lateral Buda formation development
well. Both wells are currently producing. Seven potential drilling locations
exist.

                                       3

<PAGE>

Greater Permian Region

Hallwood has significant interests in the Greater Permian Region, which includes
West Texas and Southeast New Mexico. In this region, Hallwood has interests in
400 productive oil and gas wells (321 of which are operated), 8 nonproductive
oil and gas wells (five operated) and 13 operated salt-water disposal wells. In
2000, Hallwood expended approximately $2,794,000 (10%) of its capital budget on
projects in this area. Hallwood plans one exploration project and 24
exploitation and development projects in 2001. The following is a description of
the significant areas and 2000 capital projects within the Greater Permian
Region.

Carlsbad/Catclaw Area. Hallwood's interests in the Carlsbad/Catclaw Area as of
December 31, 2000 consist of 85 producing oil and gas wells and four
nonproducing wells. The wells are located on the northwestern edge of the
Delaware Basin in Lea, Eddy and Chaves Counties, New Mexico. The Company
operates 36 of these wells. The wells produce at depths ranging from
approximately 2,500 feet to 14,000 feet from the Delaware, Atoka, Bone Springs
and Morrow formations. In 2000, Hallwood spent approximately $364,000 for one
recompletion and for costs associated with producing wells. Hallwood also
participated in the testing of a horizontal well drilled in the Red Hills field
located in Lea County, New Mexico. Gross unrisked reserve potential for the well
is approximately 65 Bcfe and Hallwood owns an approximate 3.5% working interest.
Hallwood incurred approximately $161,000 for drilling costs on the well and the
results of drilling are currently being evaluated. If deemed to be a commercial
well, seven additional wells could be drilled.

Spraberry Area. Hallwood's interests in the Spraberry Area consist of 315
producing wells, located in Dawson, Upton, Reagan and Irion Counties, Texas. The
Company operates 292 of the producing oil and gas wells and also owns interests
in four nonproducing wells. Current production is predominately from the Upper
and Lower Spraberry, Clearfork Canyon, Dean, and Fusselman formations at depths
ranging from 5,000 feet to 9,000 feet. In 2000, Hallwood initiated a 20 well
infill drilling program in its Greater Permian Basin and Hallwood estimates that
over sixty 80-acre infill drilling locations exist in this area. Historically,
West Texas Permian production has been predictable, and a drilling program
coupled with an appropriate crude oil hedging program can be expected to yield
relatively safe and adequate returns. During the fourth quarter of 2000,
Hallwood successfully drilled and completed three wells out of the 20 prospects,
is currently completing a fourth well, and began drilling a fifth well which
will be completed in first quarter of 2001. Total costs on the projects during
2000 were approximately $2,080,000. Hallwood plans to drill the remaining 15
wells in 2001. The top 20 prospects could yield an overall rate of return in
excess of 40% giving effect to moderate commodity prices and increased costs for
oilfield goods and services and rig costs.

Rocky Mountain Region

Hallwood has significant interests in the Rocky Mountain Region, which include
producing properties in Colorado and Northwest New Mexico. The Company has
interests in 125 producing oil and gas wells, 119 of which are operated by
Hallwood, 10 nonproducing wells, and three salt-water disposal wells. Hallwood
expended approximately $2,661,000 (9%) of its 2000 capital budget in this area.
Hallwood plans 11 exploitation and development projects in the area in 2001. The
following is a description of the major projects for the region for the year
2000.

Colorado Western Slope Project. During 2000, Hallwood incurred

                                       4

<PAGE>

approximately $987,000 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 effected.

San Juan Basin Project - Colorado and New Mexico. Hallwood's interest in the San
Juan Basin consists of 83 producing gas wells (78 operated), 10 operated
nonproducing wells and three salt water disposal wells located in San Juan
County, New Mexico and LaPlata County, Colorado. Hallwood operates 52 producing
wells in New Mexico, 33 of which produce from the Fruitland Coal formation at
approximately 2,200 feet and 19 of which produce from the Picture Cliffs, Mesa
Verde and Dakota formations at 1,200 to 7,000 feet. Hallwood also operates 26
producing wells in La Plata County, Colorado. The wells in Colorado produce from
the Fruitland Coal formation at depths of 1,800-2,200 feet. Hallwood, along with
many other industry partners, made application to the Colorado Oil and Gas
Commission for field wide 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 could not 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 Hallwood has an indirect interest through its
special purpose tax credit vehicle. During the fourth quarter of 2000, Hallwood
completed the first two infill recompletions, which are performing as expected.
A third well was completed in the first quarter of 2001, and a fourth location
is currently drilling. Total year 2000 costs for these projects were
approximately $482,000. Five or more locations will be drilled in 2001 and up to
nine locations will be drilled in 2002. Rig availability will dictate the
ultimate number of locations drilled in 2001. Gross reserves per well average
4.5 Bcfe with gross average total completed well costs of $492,000. In 2000,
Hallwood also incurred approximately $860,000 for maintenance, gas gathering
systems, a sidetrack, interest acquisitions and miscellaneous projects in the
area.

In addition to the Colorado infill locations, Hallwood has the potential for 14
similar locations in New Mexico if infill drilling is permitted there. Total
completed well costs in this area average $354,000 and gross reserves per well
averaged 3.6 Bcfe. Overall, Hallwood's drilling program in this area is
anticipated to yield finding and development costs of $0.35 to $0.45 per mcfe,
on a net basis and net reserve additions of up to 71 Bcfe. Additional upside may
exist as evidenced by secondary recovery projects already underway in the San
Juan Basin. These pilot secondary recovery projects involving CO2 and nitrogen
injection may be additive to Hallwood properties. There can be no assurance that
these projects will yield positive results but current data suggests that an
additional 200 Bcfe of gross recoverable gas may exist.

Other

The remaining $3,771,000 (13%) of Hallwood's capital expenditures incurred in
2000 was devoted to technical general and administrative expenditures, delay
rental costs, and numerous other projects which were completed or are underway
and which are individually less significant.

Future Plans

Hallwood's capital budget for 2001 is expected to be $50,000,000, with
$30,000,000 targeted for exploration, exploitation, and development. In total,
Hallwood plans to participate in 8 exploration projects and 54 exploitation and
development projects during 2001. Fifteen percent of the capital budget has been
allocated to the San Juan Basin, 30% to the Greater Permian Basin, 15% to South
Texas, 30% to South Louisiana, and 10% to other areas. An additional $20,000,000
is available for acquisitions, debt reduction, stock repurchases, and other
capital projects.

                                       5

<PAGE>

During 2000, Hallwood experienced a rig availability shortage. For the year
2001, Hallwood has aggressively pursued reservation of rigs to accommodate
Hallwood's continuous drilling plans. These efforts have resulted in a record
number of rigs currently under contract and/or drilling (5 operated and 5
non-operated). Substantial drilling, completion and operational cost increases
are being experienced throughout the industry.

Company Reserves, Production and Discussion by Significant Regions
The following table presents the December 31, 2000 reserve data by significant
regions.

<TABLE>
<CAPTION>
                         Proved Reserve Quantities   Present Value of Future Net Cash Flows
                                                        Proved         Proved
                         Mcf of Gas   Bbls of Oil      Developed      Undeveloped     Total
                         ----------   ------------   --------------   -----------   --------
                                                     (In thousands)
<S>                       <C>            <C>          <C>            <C>          <C>
Gulf Coast Region          28,360        1,672        $ 81,546       $ 47,902     $129,448
Greater Permian Region     33,234        7,134          93,294         16,465      109,759
Rocky Mountain Region     121,228           17         245,299         71,494      316,793
                          -------        -----        --------       --------     --------
                          182,822        8,823        $420,139       $135,861     $556,000
                          =======        =====        ========       ========     ========
</TABLE>

The following table presents the oil and gas production for significant regions
for the periods indicated.

<TABLE>
<CAPTION>
                              Production for the             Production for the
                         Year Ended December 31, 2000   Year Ended December 31, 1999
                         ----------------------------   ----------------------------
                         Mcf of Gas      Bbls of Oil       Mcf Gas       Bbls of Oil
                         ----------     -------------      -------       ------------
                                                (In thousands)
<S>                        <C>               <C>            <C>              <C>
Gulf Coast Region           7,196            166             5,234           189
Greater Permian Region      2,643            403             2,758           437
Rocky Mountain Region      12,229              2             9,862           151
Other                         180            111               409           148
                           ------         ------            ------           ---
                           22,248            682            18,263           925
                           ======         ======            ======           ===
</TABLE>

The following table presents the Company's extensions and discoveries by
significant regions.

<TABLE>
<CAPTION>
                         For the Year Ended December 31, 2000    For the Year Ended December 31,1999
                         ------------------------------------    -----------------------------------
                              Mcf of Gas     Bbls of Oil              Mcf of Gas     Bbls of Oil
                              ----------     -----------              ----------     -----------
                                                        (In thousands)
<S>                             <C>             <C>                     <C>              <C>
Gulf Coast Region                3,611             63                    5,708           113
Greater Permian Region           4,670          1,563                      291            58
Rocky Mountain Region           44,945                                   4,346             9
Other                                                                      584
                                ------          -----                   ------           ---
                                53,226          1,626                   10,929           180
                                ======          =====                   ======           ===
</TABLE>

Average Sales Prices and Production Costs

The following table presents the average oil and gas sales price and average
production costs per equivalent mcf of gas computed at the ratio of six mcf of
gas to one barrel of oil.

                                       6

<PAGE>

                                                         2000     1999     1998
                                                        ------   ------   ------
Oil and condensate -                                    $23.64   $16.52   $13.65
Natural gas -                                             2.68     1.90     2.02
Production costs (per equivalent mcf of gas)               .80      .72      .65

Productive Oil and Gas Wells

The following table summarizes the productive oil and gas wells as of December
31, 2000 owned by Hallwood. Productive wells are producing wells and wells
capable of production. Gross wells are the total number of wells in which
Hallwood has an interest. Net wells are the sum of Hallwood's fractional
interests owned in the gross wells.

                                                               Gross        Net
Productive Wells

  Oil                                                           447         302
  Gas                                                           360         166
                                                                ---         ---
    Total                                                       807         468
                                                                ===         ===

Oil and Gas Acreage

The following table sets forth the developed and undeveloped leasehold acreage
held directly by Hallwood as of December 31, 2000. Developed acres are acres
which are spaced or assignable to productive wells. Undeveloped acres are acres
on which wells have not been drilled or completed to a point that would permit
the production of commercial quantities of oil and gas, regardless of whether or
not such acreage contains proved reserves. Gross acres are the total number of
acres in which Hallwood has a working interest. Net acres are the sum of
Hallwood's fractional interests owned in the gross acres.

                                                              Gross         Net
                                                              -----         ---
                                                               (in thousands)
Developed acreage                                              214          118
Undeveloped acreage                                            123           62
                                                               ---         ----
    Total                                                      337          180
                                                               ===          ===

At December 31, 2000, Hallwood held undeveloped acreage in Texas, Louisiana, New
Mexico, Colorado, and California.

Drilling Activity

The following table sets forth the number of wells drilled by Hallwood in the
most recent three years.

                                              Year Ended December 31,
                                      2000            1999           1998
                                      ----            ----           ----
                                 Gross    Net    Gross    Net    Gross   Net
                                 -----    ---    -----    ---    -----   ---

Development Wells:

   Productive                      6      2.4      1       .5      12    3.6
   Dry                             1       .8      1       .5       5    1.5
                                  --      ---      -      ---      --    ---

                                       7

<PAGE>

    Total                          7      3.2      2        1      17    5.1
                                  ==      ===      =      ===      ==    ===

Exploratory Wells:
   Productive                     34     15.7     11      4.1      17    4.3
   Dry                             8      3.8      8      2.4      17    3.0
                                  --     ----     --      ---      --    ---
    Total                         42     19.5     19      6.5      34    7.3
                                  ==     ====     ==      ===      ==    ===

Office Space

Hallwood leases office space in Denver, Colorado, for approximately $600,000 per
year under a lease that terminates on December 31, 2006 and office space in
Midland, Texas for approximately $7,000 per year under a lease that terminates
on September 30, 2003. Hallwood also sub-leases office space in Houston, Texas
for approximately $42,000 per year under a lease that terminates on October 14,
2001.

                                       8

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