<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                              ---------------------
                                    FORM 10-K

 MARK ONE

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999


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

       FOR THE TRANSITION PERIOD  -  FROM             TO
                                         ------------    ------------

                         COMMISSION FILE NUMBER: 1-10643

                               ------------------

                         HALLWOOD REALTY PARTNERS, L.P.
             (Exact name of registrant as specified in its charter)

                              ---------------------


                  DELAWARE                                     75-2313955
       (State or other jurisdiction of                      (I.R.S. Employer
        incorporation or organization)                   Identification Number)


                3710 RAWLINS
                 SUITE 1500
                DALLAS, TEXAS                                  75219-4298
  (Address of principal executive offices)                      (Zip Code)

       Registrant's telephone number, including area code: (214) 528-5588


           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                       Name of each exchange on
               Title of each class                        which registered
------------------------------------------------       ------------------------
UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS       AMERICAN STOCK EXCHANGE


        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
                                                                    ----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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 [ ]  No [X]

The aggregate market value of units held by nonaffiliates of the registrant as
of March 13, 2000 was $61,711,000.

            CLASS: UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
                 OUTSTANDING AT MARCH 13, 2000: 1,672,556 UNITS.


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                                  Page 1 of 38
<PAGE>   2


                         HALLWOOD REALTY PARTNERS, L.P.


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                               Page
                                                                               ----
<S>              <C>                                                           <C>
  PART I

     Item 1.     Business                                                        3

     Item 2.     Properties                                                      4

     Item 3.     Legal Proceedings                                               6

     Item 4.     Submission of Matters to a Vote of
                 Security Holders                                                6


  PART II

     Item 5.     Market for Registrant's units and Related
                 Security Holder Matters                                         7

     Item 6.     Selected Financial Data                                         8

     Item 7.     Management's Discussion and Analysis of
                 Financial Condition and Results of Operations                   9

     Item 7a.    Quantitative and Qualitative  Disclosures about Market Risk    13

     Item 8.     Financial Statements and Supplemental Information              14

     Item 9.     Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosures                           32


  PART III

     Item 10.    Directors and Executive Officers of the
                 Registrant                                                     33

     Item 11.    Executive Compensation                                         34

     Item 12.    Security Ownership of Certain Beneficial Owners
                 and Management                                                 36

     Item 13.    Certain Relationships and Related Transactions                 36


  PART IV

     Item 14.    Exhibits, Financial Statement Schedule and
                 Reports on Form 8-K.                                           37
</TABLE>




                                  Page 2 of 38
<PAGE>   3

                                     PART I


ITEM 1. BUSINESS

DESCRIPTION OF THE BUSINESS

Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate business segment. HRP's
activities include the acquisition, ownership and operation of its commercial
real estate assets. Units representing limited partnership interests are traded
on the American Stock Exchange under the symbol "HRY".

As of December 31, 1999, HRP owned fourteen real estate properties (the
"Properties") located in six states (see Item 2 - Properties) containing
5,352,000 net rentable square feet. HRP seeks to maximize the value of its real
estate by making capital and tenant improvements, by executing marketing
programs to attract and retain tenants, and by controlling or reducing, where
possible, operating expenses.

Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is HRP's general partner and is responsible for asset management of
HRP and its Properties, including the decision making responsibility for
financing, refinancing, acquiring and disposing of properties. In addition,
Realty provides general operating and administrative services to HRP. Hallwood
Commercial Real Estate, LLC ("HCRE"), another wholly-owned subsidiary of
Hallwood, provides property management services to the Properties.

OCCUPANCY/MAJOR TENANT INFORMATION

In the aggregate, the Properties were 94% occupied at December 31, 1999. Set
forth below are the percentages of square feet represented by scheduled lease
expirations for each calendar year, assuming that none of the tenants exercise
early termination or renewal options:

<TABLE>
<S>                                      <C>
                  2000                   28%
                  2001                   13%
                  2002                   17%
                  2003                   12%
                  2004                    8%
                  Thereafter             22%
</TABLE>

During 1999 and 1998, two tenants leasing space contributed 10% or more of HRP's
revenues. Ford Motor Company and affiliates ("Ford") leases space in Parklane
Towers, Fairlane Commerce Park, and Gulley Road Industrial Park. Ford accounted
for 13% of revenues in both 1999 and 1998. The General Services Administration
("GSA") leases space in Corporate Square and Executive Park. GSA accounted for
10% and 9% of the revenues in 1999 and 1998, respectively.

As of December 31, 1999, Ford occupied 224,000 square feet of office space under
7 leases at Parklane Towers; 216,000 square feet of office, technical laboratory
and industrial space under 8 leases at Fairlane Commerce Park; and 5,000 square
feet under 1 lease at Gulley Road Industrial Park. These leases expire between
2000 and 2003 and most contain renewal options, providing for one to ten year
renewals. As of December 31, 1999, GSA occupied 270,000 square feet of office
space at Executive Park under 5 leases which expire between 2001 and 2007 and
158,000 square feet of office space at Corporate Square under a lease which
expires in 2013. In addition, HRP is constructing a 6-story office building
containing 151,000 net rentable square feet. The building will be 100% occupied
by the GSA starting in July 2000.

The remaining tenants are not concentrated in any one industry, nor is HRP
otherwise dependent on any group of related tenants for 10% or more of its
revenues.



                                  Page 3 of 38
<PAGE>   4
COMPETITION AND OTHER FACTORS

The Properties are subject to substantial competition from similar properties in
the vicinity in which they are located. In addition, there are numerous other
potential investors seeking to purchase improved real property and many property
holders seeking to dispose of real estate with which HRP will compete, including
companies substantially larger than HRP and with substantially greater
resources. Furthermore, current economic conditions in each property's
respective real estate market are competitive and as such, competition for
tenants will continue to affect rental rates and revenue.

The environmental laws of the federal government and of certain state and local
governments impose liability on current property owners for the cleanup of
hazardous and toxic substances discharged on such property. This liability may
be imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. HRP could be subject to additional
liability in the event that it owns properties having such environmental
problems. Parklane Towers, as well as certain other properties to a lesser
extent, are known to contain asbestos. Removal of asbestos at Parklane Towers is
not required because it is cementitious, it is not friable and because the
procedures in HRP's site environmental program Operations and Maintenance Manual
are performed as required.

Realty and HCRE, on behalf of HRP, monitor compliance with the Americans with
Disabilities Act and are currently not aware of any material non-compliance
issues.

HRP does not directly employ any individuals. All 91 employees rendering
services on behalf of HRP and its Properties are employees of Realty and/or
HCRE.

The business of HRP involves only one industry segment. Accordingly, all
information required by Item 101(b) of Regulation S-K is included in the
Consolidated Financial Statements included in Item 8. HRP has no foreign
operations and its business is not seasonal.


ITEM 2.  PROPERTIES

As of December 31, 1999, HRP owned fourteen properties in six states with
5,352,000 net rentable square feet.

<TABLE>
<CAPTION>
NAME AND LOCATION                       GENERAL DESCRIPTION OF THE PROPERTY
-----------------                       -----------------------------------
<S>                                     <C>
Airport Plaza                           Fee simple interest in a 3-story office
San Diego, California                   building constructed in 1982 containing
                                        48,853 net rentable square feet of space
                                        located on 2 acres of land. The property
                                        was 100% occupied at December 31, 1999.


Allfirst Building                       Fee simple interest in a 22-story office
Baltimore, Maryland                     building constructed in 1972 containing
                                        344,224 net rentable square feet of
                                        office space on 0.6 acres of land. At
                                        December 31, 1999, the property was 97%
                                        occupied.

Bellevue Corporate Plaza                Fee simple interest in a 10-story office
Bellevue, Washington                    building constructed in 1980 containing
                                        242,847 net rentable square feet of
                                        space located on 3.6 acres of land. The
                                        property was 99% occupied at December
                                        31, 1999.

Bradshaw Business Parks                 Fee simple interest in 21 single-story
Sacramento and                          buildings located at four separate sites
Rancho Cordova, California              containing an aggregate of 452,838 net
                                        rentable square feet of office/warehouse
                                        space on 31 acres of land and
                                        constructed between 1973 and 1981. At
                                        December 31, 1999, the property was 94%
                                        occupied.

Corporate Square                        Fee simple interest in an 8-building
Atlanta, Georgia                        office complex ranging from one to seven
                                        stories, constructed between 1968 and
                                        1973, containing an aggregate of 440,231
                                        net rentable square feet of space
                                        located on 32 acres of land. The
                                        property was 98% occupied at December
                                        31, 1999. In addition, HRP is
                                        constructing, on existing land, a
                                        6-story office building containing
                                        151,000 net rentable square feet which
                                        is 100% pre-leased with occupancy
                                        anticipated to take place by July 2000.
</TABLE>



                                  Page 4 of 38
<PAGE>   5

<TABLE>
<CAPTION>
NAME AND LOCATION                       GENERAL DESCRIPTION OF THE PROPERTY
-----------------                       -----------------------------------
<S>                                     <C>
Executive Park                          Fee simple interest in 26 office
Atlanta, Georgia                        buildings ranging from one to six
                                        stories, constructed between 1965 and
                                        1972, containing a total of 910,909 net
                                        rentable square feet of space located on
                                        70 acres of land. The property was 94%
                                        occupied at December 31, 1999.

Fairlane Commerce Park                  Fee simple interest in a portion of an
Dearborn, Michigan                      office/industrial park consisting of 12
                                        single-story buildings constructed
                                        between 1974 and 1990. The property
                                        consists of 417,922 net rentable square
                                        feet of space on 35 acres of land. The
                                        property was 96% occupied at December
                                        31, 1999.

Gulley Road Industrial Park             Fee simple interest in a 5-building
Dearborn, Michigan                      industrial park constructed between 1991
                                        and 1993 containing 154,360 net rentable
                                        square feet on 11 acres of land. The
                                        property was 98% occupied at December
                                        31, 1999.

Joy Road Distribution Center            Fee simple interest in a 442,201 square
Detroit, Michigan                       foot warehouse situated on 21 acres and
                                        originally constructed in the early
                                        1940's. The property was 98% occupied at
                                        December 31, 1999.

Montrose Office Center                  Fee simple interest in a 10-story office
Rockville, Maryland                     building constructed in 1980 containing
                                        147,658 net rentable square feet of
                                        space on 3 acres of land. The property
                                        was 98% occupied at December 31, 1999.

Parklane Towers                         Fee simple interest in twin 15-story
Dearborn, Michigan                      office buildings constructed in 1973
                                        containing 482,517 net rentable square
                                        feet of space on 31.8 acres of land. The
                                        property was 96% occupied at December
                                        31, 1999.

Raintree Industrial Park                Fee simple interest in an
Solon, Ohio                             office/industrial complex constructed
                                        between 1971 and 1978 containing 794,953
                                        net rentable square feet of space in 14
                                        buildings on 49 acres of land. The
                                        property was 88% occupied at December
                                        31, 1999.

Riverbank Plaza                         Fee simple interest in two 3-story
San Diego, California                   office buildings constructed in 1978
                                        containing 40,304 net rentable square
                                        feet of space located on 1.6 acres of
                                        land. As of December 31, 1999, the
                                        property was being renovated and was not
                                        occupied, however HRP has leased
                                        approximately 90% of the space with
                                        occupancy to coincide with the
                                        anticipated April 2000 completion of
                                        property and tenant improvements.

Seattle Business Parks                  Fee simple interest in office/industrial
Kent and Tukwila, Washington            parks located at two separate sites. The
                                        buildings were completed between 1972
                                        and 1993 and contain an aggregate of
                                        432,467 net rentable square feet of
                                        space in 18 buildings on 27 acres of
                                        land. At December 31, 1999, the property
                                        was 98% occupied.
</TABLE>

On January 26, 2000, HRP acquired three 3-story office buildings in San Diego,
California (Fountain View) containing approximately 89,000 net rentable square
feet on 4.3 acres of land. The property was 95% occupied at the date of
acquisition.

For information regarding encumbrances to which the properties are subject and
the status of related mortgage loans, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" contained in Item 7 and Note 6 to the Consolidated Financial
Statements and Schedule III in Item 8.

OFFICE SPACE -

HRP leases and shares office with Hallwood in Dallas, Texas under a lease which
expires May 31, 2002. The minimum cash rental payments are $295,000, $295,000,
and $123,000 for 2000, 2001, and 2002, respectively, of which HRP's portion is
approximately $179,000, $179,000, and $74,000, for 2000, 2001, and 2002,
respectively.



                                  Page 5 of 38
<PAGE>   6
ITEM 3.  LEGAL PROCEEDINGS

On February 27, 1997, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.
and Hallwood Realty Corporation (C.A. No. 15578). The complaint sought access to
certain books and records of HRP, a list of the limited partners and
reimbursement of the plaintiff's expenses.

On June 20, 1997, Gotham Partners, L.P. filed a separate complaint in the
Chancery Court for New Castle County, Delaware, styled Gotham Partners, L.P. v.
Hallwood Realty Partners, L.P., et al. (C.A. No. 15754), against Hallwood, HRP,
Realty, and the directors of Realty, alleging claims of breach of fiduciary
duties, breach of HRP's partnership agreement, fraud, and as to Hallwood, aiding
and abetting these alleged breaches. At the same time as the filing of this
complaint, plaintiff filed a motion to amend its complaint in the earlier action
to allege the same facts and demand the same relief as plaintiff sought in the
separate complaint.

On June 27, 1997, the parties entered into a Stipulation and Order under which
HRP provided to plaintiff copies of certain of the documents requested. The
other claims in the two actions remain outstanding.

On August 27, 1997, defendants moved to dismiss the complaint in the separate
action for plaintiff's failure either to make a demand on the general partner to
bring suit or to allege adequately that such a demand was futile. On February 6,
1998, the Court granted defendants' motion to dismiss but gave plaintiff thirty
days to file an amended complaint. Plaintiffs filed an amended complaint on
March 6, 1998, which defendants again moved to dismiss. This motion was denied
and the parties are proceeding with discovery. Trial is scheduled for January
2001.

HRP's management believes that the claims are without merit and intend to defend
against the claims vigorously, but cannot predict the outcome of the claims or
any possible effect an adverse outcome might have.

On February 15, 2000, HRP filed a lawsuit in the United States District Court
for the Southern District of New York styled Hallwood Realty Partners, L.P. v.
Gotham Partners, L.P. et al. (Civ. No. 00 CV 115) alleging violations of the
Securities Exchange Act of 1934 by certain purchasers of its units, including
Gotham Partners, L.P., Gotham Partners, III, L.P., Private Management Group,
Inc., Interstate Properties, Steven Roth and EFO Realty, Inc., by virtue of
those purchasers' misrepresentations and/or omissions in connection with filings
required under the Securities Exchange Act of 1934. HRP seeks various forms of
relief, including declaratory judgments, divestiture, corrective disclosures, a
"cooling-off" period and damages, including costs and disbursements.

HRP is from time to time involved in various legal proceedings and claims which
arise in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the resolution of these matters will not
have a material adverse effect on HRP's financial position, cash flow or
operations.

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

No matters were submitted to a vote of the security holders of HRP during the
fourth quarter of 1999.




                                  Page 6 of 38
<PAGE>   7
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED SECURITY HOLDER MATTERS

The Partnership's units are traded on the American Stock Exchange under the
symbol "HRY". As of March 13, 2000, there were approximately 30,000 unitholders
of record of the 1,672,556 units outstanding. HRP has not paid any cash
distributions since February, 1992. Each quarter Realty reviews HRP's capacity
to make cash distributions to its partners.

The following table shows the range of sales prices for the periods indicated,
as reported by the American Stock Exchange:

<TABLE>
<CAPTION>
                                Trading Ranges
                            -----------------------
                             High             Low
                            -------         -------
<S>                         <C>             <C>
1998 -
    1st Quarter             $ 66.00         $ 46.00
    2nd Quarter               70.00           64.25
    3rd Quarter               70.00           53.50
    4th Quarter               64.25           44.50

1999 -
    1st Quarter             $ 59.00         $ 51.00
    2nd Quarter               61.50           47.75
    3rd Quarter               61.25           52.00
    4th Quarter               54.50           50.00
</TABLE>





                                  Page 7 of 38
<PAGE>   8
ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data regarding the
Partnership's results of operations and financial position as of the dates
indicated. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Item 7 and the Consolidated Financial Statements and notes thereto
contained in Item 8.

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                  ------------------------------------------------------------------
                                                    1999          1998          1997          1996           1995
                                                  ---------     ---------     ---------     ---------      ---------
                                                                (in thousands except per unit amounts)
<S>                                               <C>           <C>           <C>           <C>            <C>
STATEMENTS OF OPERATIONS:

Total revenues                                    $  59,645     $  56,680     $  53,899     $  49,612      $  50,829
Income (loss) before extraordinary item               4,062         6,246         2,357        (9,428)        (9,024)
Net income (loss)                                     4,062        11,593         2,357        (9,428)        (9,789)

Income (loss) per unit and equivalent unit :
   Basic -
      Income (loss) before extraordinary item          2.40          3.70          1.40         (5.50)         (5.55)
      Net income (loss)                                2.40          6.86          1.40         (5.50)         (5.55)
   Assuming dilution -
      Income (loss) before extraordinary item          2.31          3.55          1.35         (5.50)         (5.55)
      Net income (loss) per unit                       2.31          6.59          1.35         (5.50)         (5.55)


BALANCE SHEETS:

Real estate, net(a)                               $ 192,814     $ 175,779     $ 179,028     $ 182,877      $ 192,266
Total assets                                        230,386       214,023       207,134       210,214        225,359
Mortgages payable                                   171,312       162,078       157,911       160,732        166,675
Partners' capital(b)                                 48,696        44,634        33,041        30,684         41,917
</TABLE>

Notes to Selected Financial Data:

     (a)  During 1999, HRP, through acquisition and construction activity,
          increased its real estate assets. These increases were partially
          offset by depreciation and amortization. Prior to 1999, real estate
          assets declined in each of the years, primarily due to depreciation
          and amortization exceeding the additions of tenant and property
          improvements.

     (b)  Partners' capital is allocated 99% to the limited partners and 1% to
          the general partner.



                                  Page 8 of 38
<PAGE>   9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

This discussion should be read in conjunction with Item 6 - Selected Financial
Data and Item 8 - Financial Statements and Supplemental Information.


RESULTS OF OPERATIONS:

1999 VERSUS 1998 -


REVENUE FROM PROPERTY OPERATIONS in 1999 increased $2,927,000, or 5.2%, compared
to 1998. The following table illustrates the components of the change:

<TABLE>
<S>                                           <C>
                    Rental income, net        $2,122,000
                    Other property income        805,000
                                              ----------
                       Net increase           $2,927,000
                                              ==========
</TABLE>

Overall, net rental income increased primarily due to higher rental rates,
partially offset by a slight decline in average occupancy between the comparable
periods from 93.5% to 93.1%. As of December 31, 1999, HRP had leases executed
and in place for 94.3% of the portfolio's net rentable square feet. Other
property income increased due to increases in parking revenues, tenants' utility
reimbursements and various tenant services.

INTEREST INCOME increased $38,000 as a result of additional earnings on
overnight investments due to higher average cash balances available for
investment.

PROPERTY OPERATING EXPENSES for 1999 increased $1,701,000, or 7.6%, compared to
1998. The increase is comprised primarily of the following components:

     o    Real estate taxes increased $1,078,000 due to higher taxable values at
          Executive Park, Corporate Square and Bellevue Corporate Plaza and in
          1998, HRP received non-recurring tax refunds of $545,000 for prior
          years' taxes.

     o    Snow removal costs increased $164,000 primarily due to a mild 1998
          winter.

     o    Professional fees increased $141,000 due to costs incurred in 1999 for
          research and analysis of potential property development projects.

     o    Fees paid to Realty of $105,000, which were incurred for the
          acquisitions of Riverbank Plaza and Gulley Road during 1999.

     o    Combined, all other operating costs increased $213,000, or less than
          1%.

INTEREST EXPENSE for 1999 increased $920,000, or 7.2%, compared to 1998. The
1998 period included $1,485,000 of non-cash amortization of Allfirst Building's
loan forgiveness, which served to decrease 1998 expense. This non-cash
amortization ceased in November 1998 as the result of the retirement and
refinancing of that loan. Cash mortgage interest decreased $645,000 (primarily
as the result of reduced contractual interest rates from 1998 loan refinancings)
and loan cost amortization increased $80,000 in 1999 compared to 1998.

DEPRECIATION AND AMORTIZATION EXPENSE decreased $116,000 primarily due to a
reduction in the amount of depreciable tenant improvements in 1999 compared to
1998.

GENERAL AND ADMINISTRATIVE EXPENSES for 1999 increased $2,644,000, or 80.7%,
compared to 1998, primarily as a result of an increase of $1,971,000 in
litigation costs (see Note 10 to the consolidated financial statements). All
other costs increased $673,000 primarily as a result of higher personnel,
occupancy and travel costs.



                                  Page 9 of 38
<PAGE>   10
RESULTS OF OPERATIONS   (CONTINUED) -

1998 VERSUS 1997 -


REVENUE FROM PROPERTY OPERATIONS in 1998 increased $2,864,000, or 5.4%, as
compared to 1997. The following table illustrates the components of the change:

<TABLE>
<S>                                 <C>
          Rental income, net        $2,771,000
          Other property income         93,000
                                    ----------
             Net increase           $2,864,000
                                    ==========
</TABLE>

Rental income increased largely due to rental rate increases at a number of
properties and to a lesser degree due to a rise in average occupancy to 93.5% in
1998 from 93.1% in 1997.

INTEREST INCOME increased $311,000 as a result of additional earnings on
overnight investments due to higher average cash balances available for
investment.

PROPERTY OPERATING EXPENSES for 1998 decreased $987,000, or 4.2%, compared to
1997. The decrease is comprised of the following components:

     o    Real estate taxes decreased $603,000 primarily due to tax refunds
          received in 1998 for tax years 1993 to 1997 for Parklane Towers and
          Raintree Industrial Park.

     o    Repairs and maintenance costs decreased $450,000 primarily due to
          exterior window glazing costs performed in 1997 at Parklane Towers.

     o    Management fees rose $121,000 due to the increase in net rental income
          and occupancy mentioned above.

     o    Janitorial costs increased $129,000 principally due to the increase in
          occupancy.

     o    Combined, all other operating costs decreased $184,000, or 0.8%,
          between the years.

INTEREST EXPENSE decreased $164,000, or 1.3%, due to lower principal balances as
a result of scheduled principal payments and due to lower interest rates from
the refinancing of loans secured by Executive Park and Seattle Business Parks
during 1998 (see Note 6 to the Consolidated Financial Statements for more
information about refinancing of loans).

DEPRECIATION AND AMORTIZATION EXPENSE increased $59,000 primarily due to an
increase in lease commission amortization of $131,000 as a result of new leases
executed during 1997 which increased the portfolio's occupancy, partially offset
by a decrease in building cost depreciation.

GENERAL AND ADMINISTRATIVE EXPENSES decreased $16,000 for 1998 compared to 1997,
due to lower insurance premiums for director and officer coverage and lower
investor mailing costs, partially offset by an increase in franchise taxes for
the state of Michigan.

NET GAIN FROM EARLY EXTINGUISHMENTS OF DEBT of $5,347,000 in 1998 is comprised
of the following transactions and is further discussed in Note 6 to the
Consolidated Financial Statements:

     o    A gain of $7,223,000 from the early payoff of the loan secured by
          Allfirst Building comprised of $7,441,000 of unamortized loan
          forgiveness, net of a $200,000 prepayment penalty and $18,000 of
          unamortized loan costs, all associated with the retired loan.

     o    A loss of $1,611,000 from the early payoff of the loan secured by
          Executive Park comprised of a prepayment penalty of $1,465,000 and the
          writeoff of $146,000 of unamortized loan costs associated with the
          retired loan.

     o    A loss of $265,000 from the early payoff of the loan secured by
          Seattle Business Park comprised of a prepayment penalty of $190,000
          and the writeoff of $75,000 of unamortized loan costs associated with
          the retired loan.



                                 Page 10 of 38
<PAGE>   11
LIQUIDITY AND CAPITAL RESOURCES

HRP operates in the commercial real estate business segment. HRP's activities
include the acquisition, ownership and operation of its commercial real estate
assets. While it is the General Partner's intention to operate HRP's existing
real estate investments and to acquire and operate additional real estate
investments, Realty also continually evaluates each of HRP's real estate
investments in light of current economic trends and operations to determine if
any should be considered for disposal.

HRP's cash position decreased $6,165,000 during 1999 from $14,497,000 as of
December 31, 1998 to $8,332,000 as of December 31, 1999. The sources of cash
during the period were $8,874,000 of cash provided by operating activities and
$6,998,000 of mortgage principal proceeds from a new construction loan. The uses
of cash during the period were $7,024,000 of property and tenant improvements,
$6,427,000 of property development costs, $5,454,000 of property acquisition
costs, $2,913,000 of mortgage principal payments, and $219,000 of loan fees and
expenses.

In addition to the commitments described below with regards to Corporate Square
and Riverbank Plaza, HRP had commitments for construction projects in progress
as of December 31, 1999 of about $1,500,000. Additionally for the year 2000, HRP
has estimated and budgeted tenant and capital improvements of $7,400,000 and
lease commissions of about $1,700,000.

For the foreseeable future, HRP anticipates that mortgage principal payments,
tenant and capital improvements, lease commissions and litigation costs will be
funded by net cash from operations. The primary sources of capital to fund any
future acquisitions will be proceeds from the sale or financing of one or more
of its Properties.

Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992.

PROPERTY DEVELOPMENT -

During the second quarter of 1999, HRP began construction of a 6-story office
building containing approximately 151,000 net rentable square feet. It is being
constructed on 6.1 acres of land that was acquired in May 1997 within the
Corporate Square complex in Atlanta, Georgia. A 20-year lease with the General
Services Administration for all six floors has been executed with occupancy
anticipated to take place by July 2000.

The building, tenant improvements, lease commissions and loan costs are
estimated to be $19,000,000 (excluding the land). In August 1999, HRP paid off
the outstanding loan balance of $475,000 that was secured by the land and closed
on interim-construction loan financing that will fund up to $13,762,000 of the
costs. The amount outstanding under the interim-construction loan as of December
31, 1999 was $6,998,000. The interim-construction loan calls for interest
payments only with an interest rate of LIBOR plus 170 basis points (8.19% as of
December 31, 1999). HRP anticipates repaying the interim-construction loan at
its maturity in August 2000 from proceeds of a $19,000,000 to $20,000,000
permanent loan.

As of December 31, 1999, HRP has incurred and capitalized $9,068,000 of the
construction costs. Additionally, HRP has paid $1,481,000, or 50%, of the lease
commissions incurred; the remaining 50%, which has been accrued as of December
31, 1999, will be paid when the tenant takes occupancy of the space.

ACQUISITIONS  -

In August 1999, HRP acquired two 3-story office buildings in San Diego,
California (Riverbank Plaza) containing approximately 40,300 net rentable square
feet on 1.6 acres of land for $2,354,000 in cash. As of December 31, 1999, the
property was being renovated and was not occupied, however HRP has leased
approximately 90% of the space with occupancy to coincide with the anticipated
April 2000 completion of approximately $1,550,000 of property and tenant
improvements.

In October 1999, HRP acquired a 5-building industrial park in Dearborn, Michigan
(Gulley Road Industrial Park) containing approximately 154,000 net rentable
square feet on 11 acres of land. The property was 98% occupied as of December
31, 1999. The acquisition costs of $8,249,000 included the assumption of an
outstanding mortgage of $5,149,000. The loan, which fully amortizes over the
next eleven and a half years, matures in May 2011, and has a fixed interest rate
of 7.375%.


                                 Page 11 of 38
<PAGE>   12
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

On January 26, 2000, HRP acquired three 3-story office buildings in San Diego,
California (Fountain View) containing approximately 89,000 net rentable square
feet on 4.3 acres of land. The property was 95% occupied at the date of
acquisition. The acquisition cost was approximately $7,800,000, including a loan
with two notes totaling $5,500,000. The loan's monthly payment is based on a
twenty-year amortization, but matures in ten years, and has a fixed interest
rate of 8.17%. The balance of the acquisition cost, or approximately $2,300,000,
was paid in cash.

MORTGAGES -

Substantially all of the buildings in twelve of HRP's fourteen real estate
properties were encumbered and pledged as collateral by nine non-recourse
mortgages aggregating $171,312,000 as of December 31, 1999. These mortgages have
interest rates varying from 6.78% to 8.70% (with an effective average interest
rate of 8.10%) and mature between 2003 and 2011. Except for the construction
loan discussed previously, HRP has no other mortgage loans maturing or requiring
balloon principal payments until the year 2003. Based upon loan amortizations in
effect, HRP is required to pay $2,874,000 of principal payments in 2000.

NEW ACCOUNTING STANDARDS -

Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998 and is
effective for periods (or years) beginning after June 15, 2000. It requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of the derivatives would be recorded each period in
current earnings or other comprehensive income depending on whether a derivative
is designated as part of a hedge transaction, and if it is, the type of hedge
transaction. The impact on HRP's results of operation, financial position, or
cash flows will be dependent on the level and types of derivative instruments
that HRP will have entered into at the time SFAS No. 133 is implemented. HRP is
currently not planning on early adoption of SFAS No. 133 and has not had an
opportunity to evaluate the impact of the provisions of SFAS No. 133 on its
consolidated financial statements relating to future adoption.

YEAR 2000 COMPLIANCE -

In 1999, HRP completed its year 2000 compliance review of its information
technology ("IT") systems and non-IT systems and successfully implemented all
related upgrades, replacements, or modifications necessary. HRP did not
experience any year 2000 business interruptions either internally or related to
its major vendors. Total costs were less than $100,000.

INFLATION -

Inflation did not have a significant impact on HRP in 1999, 1998 and 1997 and is
not anticipated to have a material impact in 2000.

FORWARD-LOOKING STATEMENTS -

In the interest of providing investors with certain information regarding HRP's
future plans and operations, certain statements set forth in this Form 10-K
relate to management's future plans and objectives. Such statements are forward-
looking statements. Although any forward-looking statements contained in this
Form 10-K or otherwise expressed by or on behalf of HRP are, to the knowledge
and in the judgment of the officers and directors of the General Partner,
expected to prove true and come to pass, management is not able to predict the
future with absolute certainty. Although HRP believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements will prove to be accurate.

Forward-looking statements involve known and unknown risks and uncertainties,
which may cause HRP's actual performance and financial results in future periods
to differ materially from any projection, estimate or forecasted result. These
risks and uncertainties include, among other things, interest rates, occupancy
rates, lease rental rates, outcome of litigation, future economic, competitive
and market conditions and future business decisions, all of which are difficult
or impossible to predict accurately and many of which are beyond the control of
HRP; other risks and uncertainties may be described, from time to time, in HRP's
periodic reports and filings with the Securities and Exchange Commission.



                                 Page 12 of 38
<PAGE>   13




ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUALITATIVE INFORMATION -

HRP's primary risk management strategy is to manage its exposure to adverse
changes in interest rates by issuing fixed rate debt, where possible. HRP
attempts to manage the exposure to adverse changes in the fair value of its
fixed rate debt by issuing fixed rate debt when business and market conditions
are favorable. There is inherent rollover risk for borrowings as they mature and
are renewed at the then current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest rates
and HRP's future financing requirements. HRP does not hold or issue derivative
financial instruments for trading purposes. As part of HRP's financing activity,
a derivative security was used for the sole purpose of fixing the interest rate
of HRP's only variable rate debt instrument.

SPECIFIC AND QUANTITATIVE INFORMATION -

HRP's derivative instrument, which is matched directly against an outstanding
borrowing is a "pay fixed / receive variable" interest rate swap with a highly
rated counterparty in which the interest payments are calculated on a notional
amount. The notional amount does not represent amounts exchanged by the parties
and thus are not a measure of exposure to HRP through its use of the derivative.
HRP is exposed to credit-related gains or losses in the event of non-performance
by counterparties to this financial instrument; however, HRP does not expect any
counterparties to fail to meet their obligations. The interest rate swap is
described as follows:

<TABLE>
<CAPTION>
                                                     Variable Rate as of December 31, 1999
                                                     --------------------------------------
                                                                                Fair Value
Notional Amount    Maturity Date    Fixed Rate %       %          Based On      of Swap(a)
---------------    -------------    ------------     -----     --------------   -----------
<S>                <C>              <C>              <C>       <C>              <C>
  $ 25,000,000     April 30, 2006       6.78%        7.78%     30 day LIBOR      $1,873,000
</TABLE>

(a)  The estimated amount that HRP would receive upon termination of its
     interest rate swap agreement as of December 31, 1999 was based on a quote
     received from the swap counterparty.




                                 Page 13 of 38
<PAGE>   14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION


    INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION


<TABLE>
<CAPTION>
       FINANCIAL STATEMENTS:                                                     Page
                                                                                 ----
<S>                                                                              <C>
         Independent Auditors' Report                                             15

         Consolidated Balance Sheets as of December 31, 1999 and 1998             16

         Consolidated Statements of Income for the years
            ended December 31, 1999, 1998 and 1997                                17

         Consolidated Statements of Partners' Capital for the years
            ended December 31, 1999, 1998 and 1997                                18

         Consolidated Statements of Cash Flows for the years
            ended December 31, 1999, 1998 and 1997                                19

         Notes to Consolidated Financial Statements                               20



       FINANCIAL STATEMENT SCHEDULE:

         Schedule III - Real Estate and Accumulated Depreciation                  31

         All other schedules have been omitted because they are not applicable,
          not required, or the required information is disclosed in the
          consolidated financial statements or notes thereto.
</TABLE>




                                 Page 14 of 38
<PAGE>   15
INDEPENDENT AUDITORS' REPORT


To the Partners of Hallwood Realty Partners, L.P.

We have audited the accompanying consolidated balance sheets of Hallwood Realty
Partners, L.P. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, partners' capital and cash flows for
each of the three years in the period ended December 31, 1999. Our audit for the
year ended December 31, 1999 also included the financial statement schedule
listed in the Index at Item 8. These financial statements and financial
statement schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based upon our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hallwood Realty Partners, L.P. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.



DELOITTE & TOUCHE LLP


Dallas, Texas
February 25, 2000


                                 Page 15 of 38
<PAGE>   16
                         HALLWOOD REALTY PARTNERS, L.P.
                           CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT UNIT AMOUNTS)



<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                               ------------------------
                                                                 1999           1998
                                                               ---------      ---------
<S>                                                            <C>            <C>
          ASSETS

          Real estate:
            Land                                               $  58,378      $  56,441
            Buildings and improvements                           282,013        262,588
            Tenant improvements                                   17,924         17,692
                                                               ---------      ---------
                                                                 358,315        336,721
            Accumulated depreciation and amortization           (165,501)      (160,942)
                                                               ---------      ---------
                  Real estate, net                               192,814        175,779

          Cash and cash equivalents                                8,332         14,497
          Accounts receivable                                      2,287          1,456
          Lease commissions, net                                  10,653          7,186
          Loan reserves and escrows                                7,073          6,986
          Loan costs, net                                          3,607          3,923
          Prepaid expenses and other assets                        5,620          4,196
                                                               ---------      ---------

                  Total assets                                 $ 230,386      $ 214,023
                                                               =========      =========


          LIABILITIES AND PARTNERS' CAPITAL

          Liabilities:
            Mortgages payable                                  $ 171,312      $ 162,078
            Accounts payable and accrued expenses                  6,013          4,435
            Prepaid rent and security deposits                     2,578          2,703
            Payable to affiliates, net                             1,787            173
                                                               ---------      ---------
                  Total liabilities                              181,690        169,389
                                                               ---------      ---------

          COMMITMENTS AND CONTINGENCIES

          Partners' capital:
            Limited partners - 1,672,556 units outstanding        48,209         44,188
            General partner                                          487            446
                                                               ---------      ---------
                  Total partners' capital                         48,696         44,634
                                                               ---------      ---------

                  Total liabilities and partners' capital      $ 230,386      $ 214,023
                                                               =========      =========
</TABLE>


                 See notes to consolidated financial statements.



                                 Page 16 of 38
<PAGE>   17
                         HALLWOOD REALTY PARTNERS, L.P.
                        CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS EXCEPT PER UNIT AMOUNTS)



<TABLE>
<CAPTION>
                                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                              -------------------------------------
                                                                1999          1998          1997
                                                              ---------     ---------     ---------
<S>                                                           <C>           <C>           <C>
          REVENUES:
             Property operations                              $  58,737     $  55,810     $  52,946
             Gain from property sale                                 --            --           394
             Interest                                               908           870           559
                                                              ---------     ---------     ---------
                Total revenues                                   59,645        56,680        53,899
                                                              ---------     ---------     ---------
          EXPENSES:
             Property operations                                 23,962        22,261        23,248
             Interest                                            13,701        12,781        12,945
             Depreciation and amortization                       11,998        12,114        12,055
             General and administrative                           5,922         3,278         3,294
                                                              ---------     ---------     ---------
                Total expenses                                   55,583        50,434        51,542
                                                              ---------     ---------     ---------

          INCOME BEFORE EXTRAORDINARY ITEM                        4,062         6,246         2,357

          Extraordinary item -
             Net gain on early extinguishments of debt               --         5,347            --
                                                              ---------     ---------     ---------
          NET INCOME                                          $   4,062     $  11,593     $   2,357
                                                              =========     =========     =========

          ALLOCATION OF NET INCOME:
             Limited partners                                 $   4,021     $  11,477     $   2,334
             General partner                                         41           116            23
                                                              ---------     ---------     ---------
                Total                                         $   4,062     $  11,593     $   2,357
                                                              =========     =========     =========

          NET INCOME PER UNIT AND POTENTIAL UNIT:
             Earnings per unit - basic
                Income before extraordinary item              $    2.40     $    3.70     $    1.40
                Net gain on early extinguishments of debt            --          3.16            --
                                                              ---------     ---------     ---------
                   Net income                                 $    2.40     $    6.86     $    1.40
                                                              =========     =========     =========
             Earnings per unit - assuming dilution
                Income before extraordinary item              $    2.31     $    3.55     $    1.35
                Net gain on early extinguishments of debt            --          3.04            --
                                                              ---------     ---------     ---------
                   Net income                                 $    2.31     $    6.59     $    1.35
                                                              =========     =========     =========
          WEIGHTED AVERAGE UNITS
          USED IN COMPUTING NET INCOME
          PER UNIT AND POTENTIAL UNIT:
             Basic                                                1,673         1,673         1,673
                                                              =========     =========     =========
             Assuming dilution                                    1,740         1,741         1,730
                                                              =========     =========     =========
</TABLE>



                See notes to consolidated financial statements.




                                 Page 17 of 38
<PAGE>   18

                         HALLWOOD REALTY PARTNERS, L.P.
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
                       (IN THOUSANDS EXCEPT UNIT AMOUNTS)


<TABLE>
<CAPTION>
                                                                                              Limited
                                                                                            Partnership
                                                    General      Limited                       Units
                                                    Partner      Partners       Total       Outstanding
                                                   ---------     ---------     ---------    -----------
<S>                                                <C>           <C>           <C>           <C>
          PARTNERS' CAPITAL, JANUARY 1, 1997       $     307     $  30,377     $  30,684     1,672,556

          Net income                                      23         2,334         2,357            --
                                                   ---------     ---------     ---------     ---------

          PARTNERS' CAPITAL, DECEMBER 31, 1997           330        32,711        33,041     1,672,556

          Net income                                     116        11,477        11,593            --
                                                   ---------     ---------     ---------     ---------

          PARTNERS' CAPITAL, DECEMBER 31, 1998           446        44,188        44,634     1,672,556

          Net income                                      41         4,021         4,062            --
                                                   ---------     ---------     ---------     ---------

          PARTNERS' CAPITAL, DECEMBER 31, 1999     $     487     $  48,209     $  48,696     1,672,556
                                                   =========     =========     =========     =========
</TABLE>

                See notes to consolidated financial statements.


                                 Page 18 of 38
<PAGE>   19

                         HALLWOOD REALTY PARTNERS, L.P.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                                              ------------------------------------------
                                                                                1999            1998            1997
                                                                              ----------      ----------      ----------
<S>                                                                           <C>             <C>             <C>
          OPERATING ACTIVITIES:
               Net income                                                     $    4,062      $   11,593      $    2,357
               Adjustments to reconcile net income
               to net cash provided by operating activities:
                   Depreciation and amortization                                  11,998          12,114          12,055
                   Net gain on early extinguishments of debt                          --          (5,347)             --
                   Amortization of mortgage principal forgiveness                     --          (1,485)         (1,674)
                   Gain from property sale                                            --              --            (394)
                   Effective rent adjustments                                       (778)           (444)           (157)
               Changes in assets and liabilities:
                   Receivables                                                      (831)           (294)            444
                   Lease commission payments                                      (4,272)         (2,369)         (2,191)
                   Prepaid expenses and other assets                                (250)            255             510
                   Accounts payable and other liabilities                         (1,055)             55          (1,086)
                                                                              ----------      ----------      ----------
                      Net cash provided by operating activities                    8,874          14,078           9,864
                                                                              ----------      ----------      ----------

          INVESTING ACTIVITIES:
               Property and tenant improvements                                   (7,024)         (6,603)         (5,534)
               Property development cost                                          (6,427)             --              --
               Property acquisitions                                              (5,454)             --            (649)
               Tenant improvement escrow                                              --              --           1,532
               Cash proceeds from property sale, net of selling costs                 --              --             502
               Mortgage receivable principal collections                              --              --              46
                                                                              ----------      ----------      ----------
                      Net cash used in investing activities                      (18,905)         (6,603)         (4,103)
                                                                              ----------      ----------      ----------

          FINANCING ACTIVITIES:
               Mortgage principal proceeds                                         6,998          66,500             549
               Mortgage principal refinanced                                          --         (59,577)             --
               Mortgage prepayment penalties                                          --          (1,855)             --
               Mortgage principal payments                                        (2,913)         (2,756)         (3,226)
               Loan reserves                                                          --            (550)             --
               Loan fees and expenses                                               (219)         (1,405)             25
                                                                              ----------      ----------      ----------
                      Net cash provided by (used in) financing activities          3,866             357          (2,652)
                                                                              ----------      ----------      ----------

          INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        (6,165)          7,832           3,109
          BEGINNING CASH AND CASH EQUIVALENTS                                     14,497           6,665           3,556
                                                                              ----------      ----------      ----------
          ENDING CASH AND CASH EQUIVALENTS                                    $    8,332      $   14,497      $    6,665
                                                                              ==========      ==========      ==========
</TABLE>



                See notes to consolidated financial statements.



                                 Page 19 of 38
<PAGE>   20
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


1.   ORGANIZATION

     Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
     partnership, operates in the commercial real estate business segment. HRP's
     activities include the acquisition, ownership and operation of its
     commercial real estate assets. Units representing limited partnership
     interests are traded on the American Stock Exchange under the symbol "HRY".
     As of December 31, 1999, there were 1,672,556 units outstanding.

     As of December 31, 1999, HRP owned fourteen real estate assets (the
     "Properties"), located in six states containing 5,352,000 net rentable
     square feet. HRP seeks to maximize the value of its real estate by making
     capital and tenant improvements, by executing marketing programs to attract
     and retain tenants, and by controlling or reducing, where possible,
     operating expenses.

     Hallwood Realty, LLC, formerly Hallwood Realty Corporation, ("Realty" or
     the "General Partner"), a Delaware limited liability company and
     wholly-owned subsidiary of The Hallwood Group Incorporated ("Hallwood") is
     HRP's general partner and is responsible for asset management of HRP and
     its Properties, including the decision making responsibility for financing,
     refinancing, acquiring and disposing of properties. In addition, Realty
     provides general operating and administrative services to HRP. Hallwood
     Commercial Real Estate, LLC, formerly Hallwood Commercial Real Estate,
     Inc., ("HCRE"), another wholly-owned subsidiary of Hallwood, provides
     property management services to the Properties.

2.   ACCOUNTING POLICIES

     CONSOLIDATION

     HRP fully consolidates into its financial statements majority owned
     entities and reflects a minority interest for those entities not fully
     owned. For each of the three years in the period ended December 31, 1999,
     all entities and Properties were fully owned. All significant intercompany
     balances and transactions have been eliminated in consolidation.

     CASH AND CASH EQUIVALENTS

     HRP considers highly liquid investments with original maturities of three
     months or less at the time of purchase to be cash equivalents.

     PROPERTY

     Property is stated at cost. Renovations and improvements are capitalized;
     maintenance and repairs are expensed. When an asset is sold or otherwise
     disposed of, the related cost and accumulated depreciation are removed from
     the accounts and any gain or any previously unanticipated loss is
     recognized in the year of sale or disposition. HRP's management routinely
     reviews its investments for impairment whenever events or changes in
     circumstances indicate that the carrying amount of an asset may not be
     recoverable.

     Depreciation of buildings is computed using the straight-line method over
     estimated useful lives ranging from 15 to 43 years. Equipment and other
     improvements are depreciated on the straight-line method over estimated
     useful lives ranging from 3 to 23 years. Tenant improvements are
     capitalized and amortized over the terms of the respective leases.

     HRP capitalizes all costs related to the development and construction of
     its projects, including interest of $124,000 in 1999. The development
     period of a project is considered to have begun when activities related to
     the construction of the project or a portion thereof have commenced. All
     costs for construction are capitalized and allocated to each building.
     Capitalization of construction costs related to a particular building is
     discontinued when the building is available for occupancy.



                                 Page 20 of 38
<PAGE>   21
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


2.   ACCOUNTING POLICIES - (CONTINUED)

     HRP accrues for losses associated with environmental remediation
     obligations when such losses are probable and reasonably estimable.
     Accruals for estimated losses from environmental remediation obligations
     generally are recognized no later than completion of a remedial feasibility
     study. Such accruals are adjusted as further information develops or
     circumstances change. Costs of future expenditures for environmental
     remediation obligations are not discounted to their present value.
     Recoveries of environmental remediation costs from other parties are
     recorded as assets when their receipt is deemed probable. HRP's management
     is not aware of any environmental remediation obligations which would
     materially affect the operations, financial position or cash flows of HRP
     and therefore has made no loss accruals.

     OTHER ASSETS

     Lease concessions and commissions are amortized over the terms of the
     respective leases. Leases at the Properties expire from 2000 to 2013. Loan
     costs are amortized over the terms of the respective loans. The loans
     mature between 2000 and 2011. Amortization of effective rent income
     adjustments, included in property operations revenues, was $778,000,
     $444,000 and $157,000 in 1999, 1998 and 1997, respectively. Amortization of
     lease commissions, included in depreciation and amortization expense, was
     $2,286,000, $2,232,000, and $2,101,000 in 1999, 1998 and 1997,
     respectively. Amortization of loan costs, included in interest expense, was
     $536,000, $456,000, and $453,000 in 1999, 1998 and 1997, respectively. The
     caption "Prepaid expenses and other assets" on the Consolidated Balance
     Sheets include unamortized effective rent adjustments, prepaid real estate
     taxes, prepaid insurance and other miscellaneous deposits and prepaid
     expenses.

     REVENUE RECOGNITION

     Rental income is recognized as earned on a straight-line basis over the
     terms of the respective leases.

     INTEREST RATE AGREEMENTS

     Interest rate swaps are entered into as a hedge against interest exposure
     of variable rate debt. Differences between amounts to be paid or received
     on these interest rate agreements designated as hedges are included in
     interest expense as the payments are made or received. HRP is exposed to
     credit-related gains or losses in the event of non-performance by
     counterparties; however, HRP does not expect any counterparties to fail to
     meet their obligations.

     INCOME TAXES

     Currently, HRP is a non-taxable entity. Federal and state income taxes, if
     any, are the responsibility of the individual partners. Accordingly, the
     Consolidated Financial Statements do not include a provision for income
     taxes. However, certain business and franchise taxes are the responsibility
     of HRP and subsidiary entities. These business and franchise taxes,
     included in general and administrative expenses, were $243,000, $248,000,
     and $117,000 in 1999, 1998, and 1997, respectively. HRP's tax returns are
     subject to examination by federal and state taxing authorities. If HRP's
     amounts are ultimately changed by the taxing authorities, the tax liability
     of the partners could be changed accordingly. Additionally, no assurance
     can be given that the federal or state governments will not pass
     legislation that will characterize HRP as an association taxable as a
     corporation for federal income tax purposes. Such classification may have
     an adverse effect on HRP.



                                 Page 21 of 38
<PAGE>   22
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


2.   ACCOUNTING POLICIES - (CONTINUED)


     COMPUTATION OF NET INCOME PER UNIT

     Basic earnings per unit is computed by dividing net income attributable to
     the limited partners' interests by the weighted average number of units
     outstanding. Earnings per unit assuming dilution is computed by dividing
     net income attributable to the limited partners' interests by the weighted
     average number of units and potential units outstanding. Options to acquire
     units were issued during 1995 and are considered to be potential units. The
     number of potential units is computed using the treasury stock method which
     assumes that the increase in the number of units is reduced by the number
     of units which could have been repurchased by HRP with the proceeds from
     the exercise of these options. The following table illustrates the amounts
     used to calculate the weighted average number of units outstanding:

<TABLE>
<CAPTION>
                                                                       1999           1998           1997
                                                                     ---------      ---------      ---------
<S>                                                                  <C>            <C>            <C>
          Weighted average units outstanding - basic                     1,673          1,673          1,673
          Issuance of units from options                                    86             86             86
          Repurchase of units from unit option proceeds                    (19)           (18)           (29)
                                                                     ---------      ---------      ---------
          Weighted average units outstanding - assuming dilution         1,740          1,741          1,730
                                                                     =========      =========      =========
</TABLE>

     ACCOUNTING PRONOUNCEMENTS AND OTHER

     The preparation of consolidated financial statements in conformity with
     generally accepted accounting principles requires management to make
     estimates and assumptions that affect the reported amounts of certain
     assets, liabilities, revenues, and expenses as of and for the reporting
     periods. Actual results may differ from these estimates.

     Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting
     for  Derivative Instruments and Hedging Activities" was issued in June 1998
     and is effective for periods (or years) beginning after June 15, 2000. It
     requires that all derivative instruments be recorded on the balance sheet
     at their fair value. Changes in the fair value of the derivatives would be
     recorded each period in current earnings or other comprehensive income
     depending on whether a derivative is designated as part of a hedge
     transaction, and if it is, the type of hedge transaction. The impact on
     HRP's results of operation, financial position, or cash flows will be
     dependent on the level and types of derivative instruments that HRP will
     have entered into at the time SFAS No. 133 is implemented. HRP is currently
     not planning on early adoption of SFAS No. 133 and has not had an
     opportunity to evaluate the impact of the provisions of SFAS No. 133 on its
     consolidated financial statements relating to future adoption.




                                 Page 22 of 38
<PAGE>   23

                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


3.   TRANSACTIONS WITH RELATED PARTIES

     Realty receives certain fees in connection with the ongoing management of
     HRP, including an asset management fee, acquisition fees and incentive
     disposition fees. Specifically, Realty is entitled to receive (i) an asset
     management fee equal to 1% of the net aggregate base rents of the
     Properties, (ii) acquisition fees equal to 1% of the purchase price of
     newly acquired properties, and (iii) incentive fees for performing
     disposition services with respect to real estate investments, other than
     the properties owned at the time of HRP's formation on November 1, 1990,
     equal to 10% of the amount, by which the sales price of a property disposed
     of exceeds the purchase price of such property.

     HCRE receives compensation in connection with the management of the
     Properties, which includes a property management fee, lease commissions and
     construction supervision fees. The management contracts have been extended
     and expire June 30, 2004 and provide for (i) basic compensation from a
     property management fee which is an amount equal to 2.85% of cash receipts
     collected from the Properties' tenants, (ii) lease commissions equal to the
     current market rate as applied to the net aggregate rent (none exceeding 6%
     of the net aggregate rent), and (iii) construction supervision fees for
     administering all construction projects equal to 5% of the total contracted
     costs of each capital expenditure or tenant improvement project.

     Realty and HCRE are compensated for services provided to HRP and its
     Properties as described above. The following table sets forth such
     compensation and reimbursement paid by HRP for the periods presented (in
     thousands):

<TABLE>
<CAPTION>
                                       Entity
                                       Paid or
                                      Reimbursed     1999          1998          1997
                                      ----------   ---------     ---------     ---------
<S>                                   <C>          <C>           <C>           <C>
          Asset management fee          Realty     $     514     $     495     $     458
          Acquisition fee               Realty           105            --             7
          Reimbursement of costs(a)     Realty         2,941         2,320         2,316
          Property management fee       HCRE           1,693         1,608         1,524
          Lease commissions(b)          HCRE           4,933         1,964         1,425
          Construction fees             HCRE             891           314           353
</TABLE>

          (a)  These costs are mostly recorded as general and administrative
               expenses and represent reimbursement to Realty, at cost, for
               partnership level salaries, bonuses, employee and director
               insurance, and certain overhead costs. HRP pays the balance of
               its account with Realty on a monthly basis.

          (b)  As of December 31, 1999, $1,481,000 of the 1999 lease commissions
               accrued are related to the development property at Corporate
               Square and are scheduled to be paid in the year 2000. See Note 5.

4.   STATEMENTS OF CASH FLOWS

     Cash interest payments were $13,114,000 (net of capitalized interest of
     $94,000), $13,934,000, and $14,177,000 in 1999, 1998 and 1997,
     respectively.

     Supplemental disclosure of noncash investing and financing activities -

          As of December 31, 1999, HRP had a construction payable for property
          development cost at Corporate Square of $2,641,000 for 1999.

          In October 1999, HRP acquired Gulley Road Industrial Park for
          $8,249,000 including the assumption of an outstanding mortgage of
          $5,149,000.




                                 Page 23 of 38
<PAGE>   24
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


5.   PROPERTY TRANSACTIONS

     ACQUISITIONS -

     In May 1997, HRP acquired 6.1 acres of land at the Corporate Square office
     complex for a purchase price of $725,000, plus about $25,000 of
     miscellaneous costs. The purchase price consisted of a $75,000 cash down
     payment and a $650,000 seven year, fully-amortizing non-recourse mortgage
     note with 0% interest the first year; 4% interest in years two and three;
     6% interest in years four and five; and 8% interest in years six and seven.
     For financial reporting purposes, the carrying values of the mortgage note
     and land were reduced by $101,000 in order to reflect an imputed market
     interest rate of 8% for the mortgage note. The note was paid in full during
     1999 in connection with the development of the land discussed below.

     In August 1999, HRP acquired two 3-story office buildings in San Diego,
     California (Riverbank Plaza) containing approximately 40,300 net rentable
     square feet on 1.6 acres of land for $2,354,000 in cash. As of December 31,
     1999, the property was being renovated and was not occupied, however HRP
     has leased approximately 90% of the space with occupancy to coincide with
     the anticipated April 2000 completion of approximately $1,550,000 of
     property and tenant improvements.

     In October 1999, HRP acquired a 5-building industrial park in Dearborn,
     Michigan (Gulley Road Industrial Park) containing approximately 154,000 net
     rentable square feet on 11 acres of land. The property was 98% occupied as
     of December 31, 1999. The acquisition costs of $8,249,000 included the
     assumption of an outstanding mortgage of $5,149,000. The loan, which fully
     amortizes over the next eleven and a half years, matures in May 2011, and
     has a fixed interest rate of 7.375%.

     PROPERTY DEVELOPMENT

     During the second quarter of 1999, HRP began construction of a 6-story
     office building containing approximately 151,000 net rentable square feet.
     It is being constructed on 6.1 acres of land that was acquired in May 1997
     within the Corporate Square complex and discussed above. A 20-year lease
     with the General Services Administration for all six floors has been
     executed with occupancy anticipated to take place by July 2000.

     The building, tenant improvements, lease commissions and loan costs are
     estimated to be $19,000,000 (excluding the land). In August 1999, HRP paid
     off the outstanding loan balance of $475,000 that was secured by the land
     and closed on interim-construction loan financing that will fund up to
     $13,762,000 of the costs.

     As of December 31, 1999, HRP has incurred and capitalized $9,068,000 of the
     construction costs. Additionally, HRP has paid $1,481,000, or 50%, of the
     lease commissions incurred; the remaining 50%, which has been accrued as of
     December 31, 1999, will be paid when the tenant takes occupancy of the
     space.

     PROPERTY SALE

     In October 1997, HRP sold one building in Fairlane Commerce Park containing
     3,500 net rentable square feet on approximately 0.5 acres for $510,000 in
     cash before closing expenses of $8,000. HRP recorded a $394,000 gain from
     the property sale.




                                 Page 24 of 38
<PAGE>   25
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


6.   MORTGAGES PAYABLE

     Substantially all of the buildings in twelve of HRP's fourteen real estate
     properties were encumbered and pledged as collateral by nine non-recourse
     mortgages aggregating $171,312,000 as of December 31, 1999. These mortgages
     have interest rates varying from 6.78% to 8.70% (with an effective average
     interest rate of 8.10%) and mature between 2003 and 2011.

     Most of the mortgages require monthly principal payments with balloon
     payments due at maturity. The following table shows for the periods
     presented the principal and balloon payments that are required (in
     thousands):

<TABLE>
<CAPTION>
                                                         Total
                         Principal       Balloon        Mortgage
                          Payments       Payments       Payments
                         ----------     ----------     ----------
<S>                      <C>            <C>            <C>
          2000           $    2,874     $    6,998     $    9,872
          2001                3,152             --          3,152
          2002                3,426             --          3,426
          2003                3,723          4,900          8,623
          2004                3,695             --          3,695
          Thereafter          8,068        134,476        142,544
                         ----------     ----------     ----------
             Total       $   24,938     $  146,374     $  171,312
                         ==========     ==========     ==========
</TABLE>

     CORPORATE SQUARE -

     In August 1999, HRP closed on interim-construction loan financing that will
     fund up to $13,762,000 of the development costs of a new office building at
     Corporate Square (see Note 5 for more information about this project). The
     amount outstanding under the interim-construction loan as of December 31,
     1999 was $6,998,000. The interim-construction loan calls for interest
     payments only with an interest rate of LIBOR plus 170 basis points (8.19%
     as of December 31, 1999). HRP anticipates repaying the interim-construction
     loan at its maturity in August 2000 from proceeds of a $19,000,000 to
     $20,000,000 permanent mortgage loan.

     ALLFIRST BUILDING -

     On November 16, 1998, HRP refinanced Allfirst Building's existing loan with
     a new lender in the amount of $25,000,000. The interest rate was reduced to
     LIBOR plus 1.30% from LIBOR plus 3.25% and the maturity date was extended
     three years to April 30, 2006. The loan does not require any principal
     amortization. In connection with the refinancing, HRP entered into an
     interest rate swap agreement to reduce its exposure to changes in interest
     rates, which has been designated as a hedge against HRP's variable interest
     exposure relating to the loan with a notional amount of $25,000,000
     terminating on April 30, 2006. This agreement, which is settled monthly,
     effectively fixes the loan's interest rate at 6.78% compared to the
     previous loan's rate of LIBOR plus 325 basis points, or 8.47% as of
     November 1998.

     The loan proceeds of $25,000,000 plus $15,000 of cash were used (i) to pay
     the outstanding principal balance of $24,531,000 with the former lender,
     (ii) to pay transaction costs of $284,000, and (iii) to pay a prepayment
     penalty of $200,000.

     HRP was amortizing mortgage principal forgiveness associated with
     Allfirst's previous loan over that loan's life. The remaining unamortized
     debt forgiveness of $7,441,000 less the prepayment penalty of $200,000 and
     unamortized loan costs of $18,000, all associated with the retired loan,
     resulted in a gain from early extinguishment of debt of $7,223,000, which
     is included in the Consolidated Statements of Income as an extraordinary
     item in 1998.




                                 Page 25 of 38
<PAGE>   26
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999

6.   MORTGAGES PAYABLE  - (CONTINUED)

     SEATTLE BUSINESS PARKS -

     On June 1, 1998, HRP refinanced the mortgage loan secured by Seattle
     Business Parks into two new loans which reduced the interest rate from
     9.25% to 6.97%. The new loans lengthened the amortization period from
     twenty-two years to thirty years and the maturity date was extended by
     seven years to June 7, 2008. The loan proceeds of $7,500,000 were used (i)
     to pay the outstanding principal balance of $6,339,000 with the former
     lender, (ii) to pay transaction costs of $220,000, (iii) to pay a
     prepayment penalty of $190,000, and (iv) for general working capital. The
     prepayment penalty along with the writeoff of $75,000 of unamortized loan
     costs associated with the retired loan were expensed and are included in
     the Consolidated Statements of Income as an extraordinary item.

     EXECUTIVE PARK -

     On February 27, 1998, HRP entered into an agreement to refinance the
     mortgage loan secured by Executive Park that became effective March 20,
     1998. The new loan reduced the interest rate from 8.87% to an effective
     interest rate of 7.32% and extended the amortization period from fifteen
     years to twenty-seven years with a maturity date of April 11, 2008. The
     loan proceeds of $34,000,000 were used (i) to pay the outstanding principal
     balance of $28,707,000 with the former lender, (ii) to pay transaction
     costs of $901,000, (iii) to pay a prepayment penalty of $1,465,000, (iv) to
     pay $550,000 of net loan reserves, and (v) for general working capital. The
     prepayment penalty along with the writeoff of $146,000 of unamortized loan
     costs associated with the retired loan were expensed and are included in
     the Consolidated Statements of Income as an extraordinary item.

7.   LEASE AGREEMENTS

     The lease provisions generally require tenants to pay fixed rental amounts
     plus their proportionate share of certain building operating costs and real
     property taxes. In addition, certain leases include provisions for annual
     rental adjustments. Revenue from expense recoveries, included in property
     operations, was $2,539,000, $2,591,000, and $2,561,000 in 1999, 1998 and
     1997, respectively. At December 31, 1999, the Properties, in the aggregate,
     were 94% occupied and minimum cash rental payments to be received under
     non-cancelable leases with tenants were as follows (in thousands):

<TABLE>
<S>                                        <C>
                          2000             $  51,073
                          2001                40,769
                          2002                33,529
                          2003                24,703
                          2004                18,174
                          Thereafter          37,067
                                           ---------
                          Total            $ 205,315
                                           =========
</TABLE>

     During 1999 and 1998, two tenants leasing space contributed 10% or more of
     HRP's revenues. Ford Motor Company and affiliates ("Ford") leases space in
     Parklane Towers, Fairlane Commerce Park, and Gulley Road Industrial Park.
     Ford accounted for 13% of revenues in both 1999 and 1998. The General
     Services Administration ("GSA") leases space in Corporate Square and
     Executive Park. GSA accounted for 10% and 9% of the revenues in 1999 and
     1998, respectively.

     As of December 31, 1999, Ford occupied 224,000 square feet of office space
     under 7 leases at Parklane Towers; 216,000 square feet of office, technical
     laboratory and industrial space under 8 leases at Fairlane Commerce Park;
     and 5,000 square feet under 1 lease at Gulley Road Industrial Park. These
     leases expire between 2000 and 2003 and most contain renewal options,
     providing for one to ten year renewals. As of December 31, 1999, GSA
     occupied 270,000 square feet of office space at Executive Park under 5
     leases which expire between 2001 and 2007 and 158,000 square feet of office
     space at Corporate Square under a lease which expires in 2013. In addition,
     HRP is constructing a 6-story office building containing 151,000 net
     rentable square feet. The building will be 100% occupied by the GSA
     starting in July 2000.

     The remaining tenants are not concentrated in any one industry, nor is HRP
     otherwise dependent on any group of related tenants for 10% or more of its
     revenues.

     HRP leases and shares office with Hallwood in Dallas, Texas under a lease
     which expires May 31, 2002. The minimum cash rental payments are $295,000,
     $295,000, and $123,000 for 2000, 2001, and 2002, respectively, of which
     HRP's portion is approximately $179,000, $179,000, and $74,000, for 2000,
     2001, and 2002, respectively.



                                 Page 26 of 38
<PAGE>   27
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


8.   PARTNERS' CAPITAL

     In 1995, HRP issued options totaling 86,000 units to certain executives of
     Realty with an exercise price of $11.875 per unit. The options expire after
     10 years (approximately February 27, 2005) and generally, the optionees may
     borrow the amounts necessary to exercise the options. As of December 31,
     1999, none of the options had been exercised. HRP has adopted the
     disclosure-only provisions of SFAS No. 123 - "Accounting for Stock Based
     Compensation". The options were vested over a three year period ending in
     1997, and accordingly under SFAS No. 123 would have had no effect on
     compensation cost in 1998 or 1999. Had compensation costs for the Options
     been determined based on the fair value at the grant date for the awards in
     1995 consistent with the provisions of SFAS No. 123, HRP's net income and
     net income per unit for 1997 would have been the pro forma amounts
     indicated below (in thousands except per unit amounts):

<TABLE>
<CAPTION>
                                                 1997
                                              ----------
<S>                                           <C>
          Net income (loss) - as reported     $    2,357
          Net income (loss) - pro forma            2,325
          Net income (loss) per unit:
          As reported -
              Basic                                 1.40
              Assuming dilution                     1.35
          Pro forma -
              Basic                                 1.38
              Assuming dilution                     1.33
</TABLE>

     The fair value of the option grant is estimated on the date of grant using
     the Black-Scholes option-pricing model with the following assumptions used:
     expected volatility of 57.8%, risk-free interest rate of 7.1%, expected
     life of 5 years and no distribution yield.

9.   ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

     Estimated fair value amounts of certain financial instruments have been
     determined using available market information based upon negotiations held
     by Realty with potential lenders or other appropriate valuation
     methodologies that require considerable judgment in interpreting market
     data and developing estimates. Accordingly, the estimates presented herein
     are not necessarily indicative of the amounts that the Partnership could
     realize in a current market exchange. The use of different market
     assumptions and/or estimation methodologies may have a material effect on
     the estimated fair value amounts.

     The fair value of financial instruments that are short-term or re-price
     frequently and have a history of negligible credit losses is considered to
     approximate their carrying value. These include cash and cash equivalents,
     short term receivables, accounts payable and other liabilities. Real estate
     and other assets consist of nonfinancial instruments.

     Management has reviewed the fair values of its mortgages payable in
     connection with interest rates currently available to the Partnership for
     borrowing with similar characteristics and maturities (approximately 8.2%
     and 7.3% as of December 31, 1999 and 1998, respectively) and has determined
     that the estimated fair value as of December 31, 1999 and 1998 would equal
     approximately $167,212,000 and $171,921,000, respectively.

     The fair value of HRP's interest rate swap agreement (used to hedge against
     exposure to interest rate fluctuations) is $1,873,000, the estimated amount
     that HRP would receive upon termination of the agreement as of December 31,
     1999. The amount was determined based on a quote received from its swap
     counterparty.

     As of December 31, 1999 and 1998, the fair value information presented
     herein is based on pertinent information available to management. Although
     management is not aware of any factors that would significantly affect the
     estimated fair value amounts, such amounts have not been comprehensively
     revalued for purposes of these financial statements since that date and,
     therefore current estimates of fair value may differ significantly from the
     amounts presented herein.



                                 Page 27 of 38
<PAGE>   28
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


10.  COMMITMENTS AND CONTINGENCIES

     LITIGATION

     On February 27, 1997, a lawsuit was filed in the Chancery Court for New
     Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty
     Partners, L.P. and Hallwood Realty Corporation (C.A. No. 15578). The
     complaint sought access to certain books and records of HRP, a list of the
     limited partners and reimbursement of the plaintiff's expenses.

     On June 20, 1997, Gotham Partners, L.P. filed a separate complaint in the
     Chancery Court for New Castle County, Delaware, styled Gotham Partners,
     L.P. v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754), against
     Hallwood, HRP, Realty, and the directors of Realty, alleging claims of
     breach of fiduciary duties, breach of HRP's partnership agreement, fraud,
     and as to Hallwood, aiding and abetting these alleged breaches. At the same
     time as the filing of this complaint, plaintiff filed a motion to amend its
     complaint in the earlier action to allege the same facts and demand the
     same relief as plaintiff sought in the separate complaint.

     On June 27, 1997, the parties entered into a Stipulation and Order under
     which HRP provided to plaintiff copies of certain of the documents
     requested. The other claims in the two actions remain outstanding.

     On August 27, 1997, defendants moved to dismiss the complaint in the
     separate action for plaintiff's failure either to make a demand on the
     general partner to bring suit or to allege adequately that such a demand
     was futile. On February 6, 1998, the Court granted defendants' motion to
     dismiss but gave plaintiff thirty days to file an amended complaint.
     Plaintiffs filed an amended complaint on March 6, 1998, which defendants
     again moved to dismiss. This motion was denied and the parties are
     proceeding with discovery. Trial is scheduled for January 2001.

     HRP's management believes that the claims are without merit and intend to
     defend against the claims vigorously, but cannot predict the outcome of the
     claims or any possible effect an adverse outcome might have.

     On February 15, 2000, HRP filed a lawsuit in the United States District
     Court for the Southern District of New York styled Hallwood Realty
     Partners, L.P. v. Gotham Partners, L.P. et al (Civ. No. 00 CV 115) alleging
     violations of the Securities Exchange Act of 1934 by certain purchasers of
     its units, including Gotham Partners, L.P., Gotham Partners, III, L.P.,
     Private Management Group, Inc., Interstate Properties, Steven Roth and EFO
     Realty, Inc., by virtue of those purchasers' misrepresentations and/or
     omissions in connection with filings required under the Securities Exchange
     Act of 1934. HRP seeks various forms of relief, including declaratory
     judgments, divestiture, corrective disclosures, a "cooling-off" period and
     damages, including costs and disbursements.

     HRP is from time to time involved in various legal proceedings and claims
     which arise in the ordinary course of business. These matters are generally
     covered by insurance. Management believes that the resolution of these
     matters will not have a material adverse effect on HRP's financial
     position, cash flow or operations.

     ASBESTOS

     The environmental laws of the federal government and of certain state and
     local governments impose liability on current property owners for the
     cleanup of hazardous and toxic substances discharged on such property. This
     liability may be imposed without regard to the timing, cause or person
     responsible for the release of such substances onto the property. HRP could
     be subject to additional liability in the event that it owns properties
     having such environmental problems. Parklane Towers, as well as certain
     other properties to a lesser extent, are known to contain asbestos. Removal
     of asbestos at Parklane Towers is not required because it is cementitious,
     it is not friable and because the procedures in HRP's site environmental
     program Operations and Maintenance Manual are performed as required.






                                 Page 28 of 38
<PAGE>   29
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


10.  COMMITMENTS AND CONTINGENCIES - (CONTINUED)

     RIGHTS PLAN

     HRP has a Unit Purchase Rights Agreement ("Rights Plan") that provides for
     a distribution of one right for each unit of the Partnership to holders of
     record at the close of business as of December 10, 1990. The rights will
     become exercisable only in the event, with certain exceptions, an acquiring
     party accumulates 15 percent or more of the Partnership's units, or if a
     party commences or announces an intent to commence a tender offer or
     exchange offer to acquire 30 percent or more of such units. Each right will
     entitle the holder to buy one additional unit at a price of $250. In
     addition, upon the occurrence of certain events, holders of the rights will
     be entitled to purchase either Partnership units or shares in an "acquiring
     entity" at half of market value. HRP will generally be entitled to redeem
     the rights at $.01 per right at any time on or prior to the tenth day
     following the acquisition of a 15 percent or greater interest in its units.

     Although it is HRP's position in the litigation filed in the Southern
     District of New York that certain holders of HRP's units have become an
     "Acquiring Person" under the Rights Plan by virtue of obtaining dispositive
     power over more than 15% of the outstanding units, a final determination of
     this issue will be made by the court. As a result, the general partner has
     amended the Rights Plan, among other things, to postpone the "Distribution
     Date" under the Rights Plan based on the general partner's current
     understanding of the facts. By taking such action, the rights will become
     exercisable, if at all, only after the final resolution by a court that an
     "Acquiring Person" exists for the purposes of the Rights Plan.
     Additionally, the expiration of the redemption period under the Rights Plan
     has also been extended pending litigation. However, if additional facts
     come to the general partner's attention or the status or unit ownership of
     any unitholder change in any respect, the general partner will review the
     circumstances at that time and may change its conclusions. HRP has also
     amended the Rights Plan to extend the expiration period of the rights until
     one year after entry of an order, which is final and not subject to appeal,
     resolving the above-mention lawsuit.

     OTHER

     In addition to the commitments previously described in Note 5 with regards
     to Corporate Square and Riverbank Plaza, HRP had commitments for
     construction projects in progress as of December 31, 1999 of about
     $1,500,000. Additionally for the year 2000, HRP has estimated and budgeted
     tenant and capital improvements of $7,400,000 and lease commissions of
     about $1,700,000.

11.  SUBSEQUENT EVENT

     On January 26, 2000, HRP acquired three 3-story office buildings in San
     Diego, California (Fountain View) containing approximately 89,000 net
     rentable square feet on 4.3 acres of land. The property was 95% occupied at
     the date of acquisition. The acquisition cost was approximately $7,800,000,
     including a loan with two notes totaling $5,500,000. The loan's monthly
     payment is based on a twenty-year amortization, but matures in ten years,
     and has a fixed interest rate of 8.17%. The balance of the acquisition
     cost, or approximately $2,300,000, was paid in cash.



                                 Page 29 of 38
<PAGE>   30
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 1999


12.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)


     Set forth below is selected quarterly financial data for the years ended
     December 31, 1999 and 1998.

<TABLE>
<CAPTION>
                                                                         Quarter Ending
                                                      ----------------------------------------------------------
                                                      March 31         June 30       September 30    December 31
                                                      ----------      ----------     ------------    -----------
                                                                (in thousands except per unit amounts)
<S>                                                   <C>             <C>             <C>            <C>
                  1999

    Total revenues                                    $   14,559      $   14,252      $   15,140     $   15,694

    Property operations revenues less property
      operations expenses and general
        and administrative expenses                        7,397           7,302           7,399          6,755

    Net income                                             1,214           1,182           1,239            427

    Net income per unit - basic                              .72             .70             .73            .25
    Net income per unit - assuming dilution                  .69             .67             .70            .24

                  1998

    Total revenues                                    $   13,823      $   13,771      $   14,515     $   14,571

    Property operations revenues less property
       operations expenses and general
        and administrative expenses                        7,183           7,581           7,674          7,833

    Income before extraordinary item                       1,069           1,655           1,727          1,795
    Net income (loss)(a)                                    (542)          1,390           1,727          9,018

    Earnings per unit - basic
        Income before extraordinary item                     .63             .98            1.02           1.07
        Extinguishments of debt(a)                          (.95)           (.16)             --           4.27
        Net income (loss)                                   (.32)            .82            1.02           5.34
    Earnings per unit - assuming dilution
        Income before extraordinary item                     .61             .94             .98           1.02
        Extinguishments of debt(a)                          (.92)           (.15)             --           4.11
        Net income (loss)                                   (.31)            .79             .98           5.13
</TABLE>

(a)  Net income (loss) for the first and second quarter of 1998 includes losses
     on early extinguishments of debt of $1,611,000 and $265,000, respectively.
     Net income for the fourth quarter of 1998 includes a gain on early
     extinguishment of debt of $7,223,000. (See Note 6 to the Consolidated
     Financial Statements for more information about the refinancing of mortgage
     loans during 1998).





                                 Page 30 of 38
<PAGE>   31

                         HALLWOOD REALTY PARTNERS, L.P.
             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        Costs
                                                                      capitalized
                                                                     subsequent to      Gross amount at which
                                                  Initial cost        acquisition      carried at close of period
                                            ------------------------ ------------  ------------------------------------
                                                          Buildings    Buildings                Buildings
                                                            and          and                       and
Description(A)                Encumbrances     Land     improvements improvements     Land     improvements    Total(B)
---------------               ------------  ----------  ------------ ------------  ----------  ------------  ----------
<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>
Airport Plaza                  $      760   $      300   $    4,013   $      306   $      300   $    4,319   $    4,619

Allfirst Building                  25,000        2,100       43,772        3,778        2,100       47,550       49,650

Bellevue Corporate Plaza           15,200        7,428       17,617        2,878        7,428       20,495       27,923

Bradshaw Business Parks             5,956        5,018       15,563        4,611        5,018       20,174       25,192

Corporate Square                   18,818        6,142       14,112       17,274        6,142       31,386       37,528

Executive Park                     33,337       15,243       34,982        9,674       15,243       44,656       59,899

Fairlane Commerce Park             20,141        5,191       18,080        5,599        5,191       23,679       28,870

Gulley Road Industrial Park         5,101        1,227        7,022           --        1,227        7,022        8,249

Joy Road Distribution Center           --          359        1,340        2,107          359        3,447        3,806

Montrose Office Center              6,175        5,096       15,754        3,755        5,096       19,509       24,605

Parklane Towers                    22,801        3,420       37,592        5,523        3,420       43,115       46,535

Raintree Industrial Park           10,640        1,191       18,208        1,401        1,191       19,609       20,800

Riverbank Plaza                        --          710        1,644          214          710        1,858        2,568

Seattle Business Parks              7,383        4,953        8,730        4,170        4,953       12,900       17,853

Corporate office equipment             --           --           --          218           --          218          218
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------

TOTAL                          $  171,312   $   58,378   $  238,429   $   61,508   $   58,378   $  299,937   $  358,315
                               ==========   ==========   ==========   ==========   ==========   ==========   ==========
<CAPTION>
                                  Accumulated
                                 depreciation      Date
Description(A)                      (B)(C)       acquired
---------------                 ------------- ---------------
<S>                             <C>              <C>  <C>
Airport Plaza                   $    3,733       4/30/87

Allfirst Building                   28,165       6/29/84

Bellevue Corporate Plaza             6,286       6/30/88

Bradshaw Business Parks             11,728       9/24/85

Corporate Square                    14,366       8/2/85 & 10/1/92

Executive Park                      32,671       12/19/85

Fairlane Commerce Park              11,081       12/30/86 & 7/1/87

Gulley Road Industrial Park             56       10/29/99

Joy Road Distribution Center           593       2/14/96

Montrose Office Center               8,614       1/8/88

Parklane Towers                     29,549       12/16/84

Raintree Industrial Park            10,496       7/17/86

Riverbank Plaza                         30       8/19/99

Seattle Business Parks               8,069       4/24/86

Corporate office equipment              64       various
                                ----------

TOTAL                           $  165,501
                                ==========
</TABLE>



                  See notes to Schedule III on following page.



                                 Page 31 of 38
<PAGE>   32

                         HALLWOOD REALTY PARTNERS, L.P.
                              NOTES TO SCHEDULE III
                                DECEMBER 31, 1999
                                 (IN THOUSANDS)


     (A)  PROPERTY LOCATIONS ARE AS FOLLOWS:

          Airport Plaza                 San Diego, California
          Allfirst Building             Baltimore, Maryland
          Bellevue Corporate Plaza      Bellevue, Washington
          Bradshaw Business Parks       Sacramento and Rancho
                                          Cordova, California
          Corporate Square              Atlanta, Georgia
          Executive Park                Atlanta, Georgia
          Fairlane Commerce Park        Dearborn, Michigan
          Gulley Road Industrial Park   Dearborn, Michigan
          Joy Road Distribution Center  Detroit, Michigan
          Montrose Office Center        Rockville, Maryland
          Parklane Towers               Dearborn, Michigan
          Raintree Industrial Park      Solon, Ohio
          Riverbank Plaza               San Diego, California
          Seattle Business Parks        Kent and Tukwila, Washington


     (B)  RECONCILIATION OF CARRYING COSTS (in thousands):

<TABLE>
<CAPTION>
                                                          Accumulated
                                              Cost        Depreciation
                                           -----------    -----------
<S>                                        <C>            <C>
         Balance, January 1, 1997          $   332,391    $   149,514

             Additions                           6,183          9,924
             Retirements and disposition        (4,179)        (4,071)
                                           -----------    -----------

         Balance, December 31, 1997            334,395        155,367

             Additions                           6,603          9,852
             Retirements                        (4,277)        (4,277)
                                           -----------    -----------

         Balance, December 31, 1998            336,721        160,942

             Additions                          26,694          9,659
             Retirements                        (5,100)        (5,100)
                                           -----------    -----------

         Balance, December 31, 1999        $   358,315    $   165,501
                                           ===========    ===========
</TABLE>

     (C)  COMPUTATION OF DEPRECIATION:

          Depreciation of buildings is computed using the straight-line method
          over estimated useful lives ranging from 15 to 43 years. Equipment and
          other improvements are depreciated on the straight-line method over
          estimated useful lives ranging from 3 to 23 years. Tenant improvements
          are capitalized and amortized over the term of the respective leases.
          Accumulated depreciation also includes loss reserves established for
          anticipated losses on future dispositions.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURES

          None.




                                 Page 32 of 38
<PAGE>   33
                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


HRP has no officers or directors. Realty, as general partner, performs functions
generally performed by officers and directors. Realty was formed in Delaware as
a corporation in January 1990 and became a limited liability company in December
1998.

BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS OF REALTY -

ANTHONY J. GUMBINER, 55, CHAIRMAN OF THE BOARD AND DIRECTOR OF REALTY
     Mr. Gumbiner has served a director and Chairman of the Board of Realty
     since January 1990. He has also served as Chairman of the Board of Hallwood
     since 1981 and as Chief Executive Officer since April 1984. He has served
     as a director of Hallwood Energy Corporation ("HEC") since June 1999. He
     was Chairman of the Board from 1984 to June 1999 and Chief Executive
     Officer from 1987 to June 1999 of the general partner of Hallwood Energy
     Partners, L.P. ("HEP"). He was Chairman of the Board and Chief Executive
     Officer of Hallwood Consolidated Resources Corporation ("HCRC") from
     February 1992 to June 1999. Mr. Gumbiner has also served as Chairman of the
     Board of Directors and as a director of Hallwood Holdings S.A. ("HHSA"), a
     Luxembourg real estate investment company, since March 1984. Mr. Gumbiner
     is also a solicitor of the Supreme Court of Judicature of England.

WILLIAM L. GUZZETTI, 56, PRESIDENT AND DIRECTOR OF REALTY
     Mr. Guzzetti has been President, Chief Operating Officer and a director of
     Realty since January 1990. He has also served as Executive-Vice President
     of Hallwood since October 1989 and in that capacity may devote a portion of
     his time to the activities of Hallwood, including the management of real
     estate investments, acquisitions and restructurings of entities controlled
     by Hallwood. He has served as President, Chief Operating Officer and a
     director of HEC since December 1998 and in that capacity devotes a portion
     of his time to the activities of HEC. He was President, Chief Operating
     Officer and a director of the general partner of HEP from February 1985 to
     June 1999. He was President, Chief Operating Officer and a director of HCRC
     from May 1991 until June 1999. He is a member of The Florida Bar and the
     State Bar of Texas.

JOHN G. TUTHILL, 56, EXECUTIVE VICE PRESIDENT AND SECRETARY
     Mr. Tuthill has been an Executive Vice President and Secretary of Realty
     since January 1990. He joined Hallwood in October 1989 to head all property
     management functions, having previously served as President of Southmark
     Commercial Management since November 1986, where he was responsible for a
     diversified real estate portfolio of over 18,000,000 square feet.

UDO H. WALTHER, 51, SENIOR VICE PRESIDENT
     Mr. Walther has been an Executive Vice President of Realty since November
     1998. Mr. Walther was a member of the Board of Directors of Realty from
     June 1994 to November 1998. Mr. Walther had been President and Chief
     Executive Officer of Walther Group, Inc., a full service design and
     construction consultancy, and President of Precept Builders, Inc. from 1991
     to 1998. Previously, Mr. Walther was a Partner at Trammell Crow Company,
     Project Manager with HCB Contractors and Marketing Vice President for
     Researched Investments, Ltd.

JEFFREY D. GENT, 52, VICE PRESIDENT - FINANCE
     Mr. Gent joined Hallwood in March 1990 and has been Vice President-Finance
     of Realty since March 1990. He previously served as Vice President -Finance
     of Southmark Commercial Management since September 1984, where he was
     responsible for the financial functions of a diversified real estate
     portfolio of over 18,000,000 square feet.

ALAN G. CRISP, 58, DIRECTOR OF REALTY
     Mr. Crisp was Chairman and Chief Executive Officer of Atlantic Metropolitan
     Holdings (U.K.) plc from 1979 until 1988, when he joined Interallianz Bank
     Zurich AG. From 1988 to 1993, he was General Manager of the London Office
     of the Bank. Since 1994, Mr. Crisp has been a consultant for various
     international companies. He is a Fellow of the Royal Institution of
     Chartered Surveyors and holds a B.A. (Hons) Degree.

WILLIAM F. FORSYTH, 50, DIRECTOR OF REALTY
     Mr. Forsyth has been Chairman of Kildalton & Co., an investment management
     consultancy based in Edinburgh, Scotland since 1992. He graduated in law at
     Edinburgh University in 1971, and is a member of the Society of Investment
     Analysts in the United Kingdom.

EDWARD T. STORY, 56, DIRECTOR OF REALTY
     Mr. Story has been President and Chief Executive Officer of SOCO
     International, plc, an oil and gas company, since September, 1991. Prior to
     September 1991, he was Founder and Chairman of Thaitex Petroleum Company,
     Co-founder and Chief Financial Officer of Conquest Exploration Company, the
     Chief Financial Officer for Superior Oil Company and Exploration and
     Production Controller with Exxon Corporation.




                                 Page 33 of 38

<PAGE>   34
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)

Section 16(a) of the Securities and Exchange Act of 1934 requires the officers
and directors of Hallwood Realty, LLC and persons who own more than ten percent
of HRP's units to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent owners are required by the SEC regulations to furnish HRP with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such forms furnished to HRP, or written representations from certain
reporting persons that no forms were required of those persons, HRP believes
that during the period January 1, 1999 to December 31, 1999, all officers and
directors of Hallwood Realty, LLC and ten percent owners complied with
applicable filing requirements, except that, as alleged in litigation filed in
the Southern District of New York, HRP believes that certain holders of HRP's
units have obtained dispositive power over more than 15% of the outstanding
units, which has not been properly disclosed. A final determination of this
issue will be made by the court.

ITEM 11. EXECUTIVE COMPENSATION


COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND COMPENSATION OF
DIRECTORS

Realty does not have a compensation committee and compensation decisions are
made by the Board of Directors of Realty. During 1999, Messrs. Gumbiner and
Guzzetti and (until December 21, 1999) Mr. Brian M. Troup served on the Board of
Directors of Realty and the compensation committee of HEC and the general
partner of HEP. Mr. Gumbiner is also Chief Executive Officer of Hallwood,
Realty, and HEC. Mr. Troup was the President and Chief Operating Officer of
Hallwood until December 1999. Mr. Guzzetti is also President and Chief Operating
Officer of Realty; Chief Operating Officer and President of HEC; and Executive
Vice President of Hallwood. Messrs. Forsyth, Crisp, and Story were each paid
$20,000 in each of the three years ended December 31, 1999 for director fees.
Mr. Walther was paid $20,000 in each of the two years ended December 31, 1998
for director fees.

Realty receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and incentive disposition
fees. Specifically, Realty is entitled to receive (i) an asset management fee
equal to 1% of the net aggregate base rents of the Properties, (ii) acquisition
fees equal to 1% of the purchase price of newly acquired properties, and (iii)
incentive fees for performing disposition services with respect to real estate
investments, other than the properties owned at the time of HRP's formation on
November 1, 1990, equal to 10% of the amount, by which the sales price of a
property disposed of exceeds the purchase price of such property.

HCRE receives compensation in connection with the management of the Properties,
which includes a property management fee, lease commissions and construction
supervision fees. The management contracts expire June 30, 2004 and provide for
(i) basic compensation from a property management fee which is an amount equal
to 2.85% of cash receipts collected from the Properties' tenants, (ii) lease
commissions equal to the current market rate as applied to the net aggregate
rent (none exceeding 6% of the net aggregate rent), and (iii) construction
supervision fees for administering all construction projects equal to 5% of the
total contracted costs of each capital expenditure or tenant improvement
project.

Realty and HCRE are compensated for services provided to HRP and its Properties
as described above. The following table sets forth such compensation and
reimbursement paid by HRP for the periods presented (in thousands):

<TABLE>
<CAPTION>
                                  Entity
                                 Paid or
                                Reimbursed            1999          1998         1997
                                ----------          --------      --------     --------
<S>                             <C>                 <C>           <C>          <C>
Asset management fee               Realty           $    514      $    495     $    458
Acquisition fee                    Realty                105            --            7
Reimbursement of costs (a)         Realty              2,941         2,320        2,316
Property management fee            HCRE                1,693         1,608        1,524
Lease commissions (b)              HCRE                4,933         1,964        1,425
Construction fees                  HCRE                  891           314          353
</TABLE>

          (a)  These costs are mostly recorded as General and Administrative
               Expenses and represent reimbursement to Realty, at cost, for
               partnership level salaries, bonuses, employee and director
               insurance, and certain overhead costs. HRP pays the balance of
               its account with Realty on a monthly basis.

          (b)  As of December 31, 1999, $1,481,000 of the 1999 lease commissions
               accrued are related to the development property at Corporate
               Square and are scheduled to be paid in the year 2000.


                                 Page 34 of 38
<PAGE>   35
ITEM 11. EXECUTIVE COMPENSATION - (CONTINUED)

CASH COMPENSATION OF EXECUTIVE OFFICERS

The Partnership has no executive officers, however, employees of Realty (general
partner of the Partnership) perform all functions ordinarily performed by
executive officers. The following table sets forth annual compensation
information for the Chief Executive Officer and the four other executive
officers with earnings that exceeded $100,000 for the year ended December 31,
1999. Bonuses and other annual compensation are with respect to years presented
and are usually paid in the following year.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                       Annual Compensation
                                        --------------------------------------------------
                                                                            Other Annual
      Name and Principal Position       Year      Salary (a)    Bonus     Compensation (b)
      ---------------------------       ----      ----------   --------   ----------------
<S>                                     <C>       <C>          <C>        <C>
      Anthony J. Gumbiner               1999        $    --    $150,000      $    --
      Chairman of the Board and         1998             --          --           --
      Chief Executive Officer           1997             --          --           --

      William L. Guzzetti               1999        200,000      32,333           --
      President and Chief               1998        200,000      28,833           --
      Operating Officer                 1997        200,000      15,583           --

      John G. Tuthill                   1999        150,360      68,265        7,923
      Executive Vice President          1998        150,360      56,265        8,282
      and Secretary                     1997        150,360      57,265        8,212

      Udo H. Walther                    1999        150,000      68,250           --
      Senior Vice President             1998         25,000       6,250           --

      Jeffrey D. Gent                   1999        108,541      18,784        6,206
      Vice President - Finance          1998        104,366      15,523        8,017
                                        1997         99,396      28,212        5,984
</TABLE>

----------------

     (a)  Represents executive officers' gross salary before contributions to
          the qualified 401(k) Tax Favored Savings Plan.

     (b)  Represents employer matching contributions to the 401(k) Tax Favored
          Savings Plan or payments in lieu thereof made under a special bonus
          arrangement.


In 1995, HRP issued options totaling 86,000 units to certain executives of
Realty with an exercise price of $11.875 per unit. The following table discloses
for each of the executive officers of Realty the number of these options held by
each of the executive officers and the potential realizable values for their
options at December 31, 1999. None of the executive officers exercised any
options during the year ended December 31, 1999 and HRP has not granted SARs.

                    AGGREGATED OPTION/SAR EXERCISES IN 1999
                   AND OPTION/SAR VALUES AT DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                         Value of Unexercised
                                          Number of Unexercised              In-the-Money
                          Units                Options at                     Options at
                        Acquired            December 31, 1999              December 31, 1999
                                     -------------------------------   ----------------------------
Name                   on Exercise   Exercisable       Unexercisable   Exercisable    Unexercisable
----                   -----------   -----------       -------------   -----------    -------------
<S>                    <C>           <C>               <C>             <C>            <C>
Anthony J. Gumbiner         0           25,800              0          $ 1,015,875        $ 0
William L. Guzzetti         0           15,000              0              590,625          0
John G. Tuthill             0           13,000              0              511,875          0
Jeffrey D. Gent             0            7,000              0              275,625          0
</TABLE>


                                 Page 35 of 38
<PAGE>   36

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


The following table sets forth information as of March 13, 2000 concerning the
number of Partnership units owned beneficially by (l) the persons who, to the
knowledge of the management, beneficially owned more than 5% of the units
outstanding on such date, (2) each director and (3) the present directors and
executive officers of Realty as a group:

<TABLE>
<CAPTION>
                                            Amount         Percent
Name and Address of                       Beneficially       of
Beneficial  Owner                           Owned(h)        Class
-------------------                       ------------     -------
<S>                                       <C>              <C>
HWG, LLC                                    413,040         24.7%
c/o The Hallwood Group Incorporated
3710 Rawlins, Suite 1500
Dallas, Texas 75219 (a)

Gotham Partners, L.P.  and                  247,994         14.8%
Gotham Partners, L.P. III
237 Park Avenue, 9th Floor
New York, NY 10017 (b)

Interstate Properties                       135,600          8.1%
Park 80 West, Plaza II
Saddle Brook, NJ 07662 (b)

Private Management Group, Inc. ("PMG")      108,655          6.5%
20 Corporate Park, Suite 400
Irvine, CA 92606 (b) (c)

Alan G. Crisp (d)                                --           --

William F. Forsyth (d)                           --           --

Anthony J. Gumbiner (d)                      25,800(e)       1.5%(e)

William L.  Guzzetti (d)                     15,100(f)       0.9%(f)

Edward T. Story (d)                              --           --

All directors and executive officers
as a group (8 persons)                       60,900(g)       3.5%(g)
</TABLE>
--------------------
     (a)  Includes 82,608 units, or 4.9% of the outstanding units, transferred
          to Epsilon Trust on December 21, 1999 as part of the resignation of
          Mr. Brian Troup as an officer and director of Hallwood. Hallwood has
          sole voting power with respect to the units and a right to purchase
          such units for six months after the transfer and a right of first
          refusal thereafter.

     (b)  See discussion in Item 3 regarding certain litigation filed in the
          Southern District of New York.

     (c)  PMG is an Investment Advisor registered under Section 203 of the
          Investment Advisers Act of 1940 with sole power to vote or direct the
          vote of all the units, including any units directly-owned. PMG also
          has sole power to dispose or direct the disposition of all of the
          units.

     (d)  Represents the following address: c/o Hallwood Realty, LLC, 3710
          Rawlins, Suite 1500, Dallas, Texas, 75219.

     (e)  Comprised of currently exercisable options to purchase 25,800 units.

     (f)  Includes currently exercisable options to purchase 15,000 units.

     (g)  Includes currently exercisable options to purchase 60,800 units.

     (h)  Unless otherwise indicated, each of the persons named has sole voting
          and investment power with respect to the units reported.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For information covered by this item, see Note 3 to the Registrant's
consolidated financial statements included in Item 8 hereof.


                                 Page 36 of 38
<PAGE>   37

                                     PART IV



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.


(1)  Financial Statements.

     See Index contained in Item 8.

(2)  Reports on Form 8-K.

     No reports on Form 8-K were filed during the fourth quarter of 1999 or in
     2000 prior to the filing of this Form 10-K for the year ended December 31,
     1999.

(3)  Exhibits and Reports on Form 8-K.

     The response to this portion of Item 14 is incorporated by reference as
     detailed in the Exhibit Index.

(4)  Financial Statement Schedules.

     See Index contained in Item 8.




                                 Page 37 of 38
<PAGE>   38

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                       HALLWOOD REALTY PARTNERS, L.P.
                                       BY: HALLWOOD REALTY, LLC
                                           GENERAL PARTNER


DATE: March 15, 2000                   BY: /s/ WILLIAM L. GUZZETTI
                                           -------------------------------------
                                           William L. Guzzetti
                                           President and Chief Operating Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K for the year ended December 31, 1999, has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the date indicated.

       Signature                   Capacity                          Date
       ---------                   --------                          ----


/s/ ANTHONY J. GUMBINER    Chairman of the Board and Director,   March 15, 2000
------------------------   Hallwood Realty, LLC
Anthony J. Gumbiner        (Chief Executive Officer)


/s/ WILLIAM L. GUZZETTI    President and Director,               March 15, 2000
------------------------   Hallwood Realty, LLC
William L. Guzzetti        (Chief Operating Officer)


/s/ JEFFREY D. GENT        Vice President - Finance,             March 15, 2000
------------------------   Hallwood Realty, LLC
Jeffrey D. Gent            (Chief Accounting Officer)


/s/ ALAN G. CRISP          Director,                             March 15, 2000
------------------------   Hallwood Realty, LLC
Alan G. Crisp


/s/ WILLIAM F. FORSYTH     Director,                             March 15, 2000
------------------------   Hallwood Realty, LLC
William F. Forsyth


/s/ EDWARD T. STORY        Director,                             March 15, 2000
------------------------   Hallwood Realty, LLC
Edward T. Story




                                 Page 38 of 38

<PAGE>   39

                         HALLWOOD REALTY PARTNERS, L.P.
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number                           Exhibit
------                           -------
<S>           <C>
3.1(a)        Certificate of Limited Partnership of Hallwood Realty Partners,
              L.P., dated January 10, 1990.

3.2(a)        Amended and Restated Agreement of Limited Partnership of Hallwood
              Realty Partners, L.P., dated June 7, 1990.

4.1           Unit Purchase Rights Agreement, dated as of November 30, 1990,
              between the Partnership and The First National Bank of Boston, as
              Rights Agent (filed as part of Exhibit 1 to Current Report of Form
              8-K, dated November 30, 1990, and which is incorporated herein by
              reference - File No.1 -10643). (4.1)

4.2           Amendment No. 1 to Unit Purchase Rights Agreement dated February
              14, 2000

10.1(b)*      1995 Unit Option Plan for Hallwood Realty Partners, L.P.

10.2(b)*      1995 Unit Option Plan Loan Program for Hallwood Realty Partners,
              L.P.

10.3          Loan Agreement between Hallwood 95, L.P. and Nomura Asset Capital
              Corporation. (Incorporated by reference from exhibit 2.1 filed
              with Current Report on Form 8-K dated September 29, 1995.)

10.4          Amended and Restate Agreement of Limited Partnership of Hallwood
              95, L.P. (Incorporated by reference from exhibit 10.17 filed with
              Annual Report on Form 10-K for the fiscal year ended December 31,
              1995.)

10.5          Management Agreement between Hallwood Real Estate Investors Fund
              XV and Hallwood Commercial Real Estate, LLC dated July 1, 1999.
              (Agreement is representative of each individual management
              agreement for real estate properties owned by Hallwood Realty
              Partners, L.P. Differences in the individual agreements include,
              but not limited to, owners' name, property name, and legal
              description. Exhibit D to this item is a schedule reflecting the
              economic differences in leasing fee compensation.)

27            Financial Data Schedule
</TABLE>


-------------------



*    Constitutes a management compensation plan.

(a)  Filed as an Exhibit to Registration Statement No. 33-35621 on Form S-4 of
     the Partnership, filed with the Commission on June 28, 1990, as amended, on
     June 29, 1990 and incorporated herein by reference.

(b)  Incorporated by reference as the exhibit indicated and filed with Annual
     Report on Form 10-K for the fiscal year ended December 31, 1994.