According to the Company’s FORM 10-Q For The Quarterly Period Ended March 31, 2001, 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 received by the Company during the third quarter of 2000 and recognized as litigation income during that quarter.

In an article dated March 22, 1999, the Law Office of J. James Carriero, Esq., advised persons who were owners of record of Hallwood Energy Corporation ("HEC") stock (who were paid by the Hallwood Group, Inc. in connection with the tender offer dated October 15, 1996 of the Hallwood Group, Inc. and ensuing merger of HEC into the Hallwood Group, Inc. or who filed for appraisal) that, pursuant to Rule 23 of the Federal Rules of Civil Procedure and an Order of the United States District Court for the District of Colorado, dated March 2, 1999, the Court has certified a class for purposes of a proposed settlement of the above-captioned action.

Further, according to the article, a hearing will be held on April 30, 1999 at 9:30 a.m. before the Honorable Walker D. Miller at the United States Courthouse, District of Colorado, 1929 Stout Street, Denver, Colorado 80294. The purpose of this hearing is to determine whether the proposed settlement of the Consolidated Class Action against defendants, Hallwood Energy Corporation, the Hallwood Group Incorporated, Anthony J. Gumbiner, William L. Guzzetti, Brian. Troup, Hans-Peter Holinger, Rex A. Sebastian and Nathan C. Collins (collectively, the "Defendants"), should be approved by the Court as fair, reasonable and adequate, whether the application by counsel for Plaintiffs in the Consolidated Class Action for an award of attorneys' fees and reimbursement of expenses should be approved, and whether the Consolidated Class Action should be dismissed with prejudice.

The First Amended Complaint charges HEC, its majority stockholder Hallwood Group, Inc. (HWG - NYSE) and the Company's directors with violations of the federal securities laws and the statutory and common law of the State of Texas. Specifically, plaintiff alleges that the defendants engaged in a wrongful plan and scheme to cash out the minority stockholders. It is alleged that this wrongful plan and scheme including, among other things, the dissemination of a materially misleading Offer to Purchase dated October 15, 1996, which induced stockholders to tender at a grossly inadequate price, and which thereby enabled Hallwood Group, Inc. to obtain sufficient shares to effectuate a short form merger pursuant to Texas law, at the same grossly inadequate price.