<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, 2000


 [ ]  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:

<TABLE>
<CAPTION>
                                                                                    Name of each exchange on
                         Title of each class                                             which registered
                         -------------------                                        -----------------------
<S>                                                                                 <C>
         UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS                           AMERICAN STOCK EXCHANGE
</TABLE>

        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 14, 2001 was $83,751,000.

            CLASS: UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
                 OUTSTANDING AT MARCH 14, 2001: 1,589,948 UNITS.

================================================================================


                                  Page 1 of 40

<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                               34


           PART III

              Item 10.    Directors and Executive Officers of the
                          Registrant                                                         35

              Item 11.    Executive Compensation                                             36

              Item 12.    Security Ownership of Certain Beneficial Owners
                          and Management                                                     38

              Item 13.    Certain Relationships and Related Transactions                     38


           PART IV

              Item 14.    Exhibits, Financial Statement Schedule and
                          Reports on Form 8-K.                                               39

</TABLE>


                                  Page 2 of 40
<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, 2000, HRP owned fifteen real estate properties (the
"Properties") located in six states (see Item 2 - Properties) containing
5,576,000 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 indirectly 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
indirectly wholly-owned subsidiary of Hallwood, provides property management,
leasing and construction supervision services to the Properties.


OCCUPANCY/MAJOR TENANT INFORMATION

In the aggregate, the Properties were approximately 90% occupied as of December
31, 2000. 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>
                  2001                   24%
                  2002                   17%
                  2003                   17%
                  2004                   10%
                  2005                   10%
                  Thereafter             22%
</TABLE>


During 2000 and 1999, two tenants leasing space contributed 10% or more of HRP's
revenues. Ford Motor Company and affiliates ("Ford") leases space in Parklane
Towers and Fairlane Commerce Park. Ford accounted for 11% and 13% of revenues in
2000 and 1999, respectively. The General Services Administration ("GSA") leases
space in Corporate Square and Executive Park. GSA accounted for 12% and 10% of
revenues in 2000 and 1999, respectively.

As of December 31, 2000, Ford occupied 200,000 square feet of office space under
8 leases at Parklane Towers and 224,000 square feet of office, technical
laboratory and industrial space under 7 leases at Fairlane Commerce Park. These
leases expire between 2001 and 2005 and most contain renewal options, providing
for one to ten year renewals. As of December 31, 2000, GSA occupied 269,000
square feet of office space at Executive Park under 5 leases which expire
between 2001 and 2007 and 309,000 square feet of office space at Corporate
Square under 2 leases which expire in 2003 and 2020.

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 40
<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 93 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, 2000, HRP owned fifteen properties in six states with
5,576,000 net rentable square feet.

NAME AND LOCATION                  GENERAL DESCRIPTION OF THE PROPERTY
-----------------                  -----------------------------------


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
                                   77% occupied at December 31, 2000.


Allfirst Building                  Fee simple interest in a 22-story office
Baltimore, Maryland                building constructed in 1972 containing
                                   345,172 net rentable square feet of office
                                   space on 0.6 acres of land. At December 31,
                                   2000, the property was 97% occupied.


Bellevue Corporate Plaza           Fee simple interest in a 10-story office
Bellevue, Washington               building constructed in 1980 containing
                                   242,939 net rentable square feet of space
                                   located on 3.6 acres of land. The property
                                   was 97% occupied at December 31, 2000.


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, 2000,
                                   the property was 93% occupied.


Corporate Square                   Fee simple interest in a 10-building office
Atlanta, Georgia                   complex ranging from one to seven stories,
                                   constructed between 1968 and 2000,
                                   containing an aggregate of 591,985 net
                                   rentable square feet of space located on 32
                                   acres of land. The property was 98% occupied
                                   at December 31, 2000.




                                  Page 4 of 40
<PAGE>   5
NAME AND LOCATION                   GENERAL DESCRIPTION OF THE PROPERTY
-----------------                   -----------------------------------

Executive Park                      Fee simple interest in 25 office buildings
Atlanta, Georgia                    ranging from one to six stories, constructed
                                    between 1965 and 1972, containing a total of
                                    892,515 net rentable square feet of space
                                    located on 70 acres of land. The property
                                    was 92% occupied at December 31, 2000. In
                                    addition, in 2001, HRP began constructing
                                    (on existing land and after demolishing an
                                    existing 1-story 18,000 square foot
                                    building) a 5-story building which will
                                    contain 122,000 net rentable square feet.


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, 2000.


Fountain View Business Center       Fee simple interest in three 3-story office
San Diego, California               buildings constructed in 1980 containing
                                    89,432 net rentable square feet of space
                                    located on 4.3 acres of land. As of December
                                    31, 2000, the property was 97% occupied.


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, 2000.


Joy Road Distribution Center        Fee simple interest in a 442,201 square foot
Detroit, Michigan                   warehouse situated on 21 acres and
                                    originally constructed in the early 1940's.
                                    The property was 28% occupied at December
                                    31, 2000.


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 97%
                                    occupied at December 31, 2000.


Parklane Towers                     Fee simple interest in twin 15-story office
Dearborn, Michigan                  buildings constructed in 1973 containing
                                    482,350 net rentable square feet of space on
                                    31.8 acres of land. The property was 99%
                                    occupied at December 31, 2000.


Raintree Industrial Park            Fee simple interest in an office/industrial
Solon, Ohio                         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 89% occupied at
                                    December 31, 2000.


Riverbank Plaza                     Fee simple interest in two 3-story office
San Diego, California               buildings constructed in 1978 containing
                                    40,222 net rentable square feet of space
                                    located on 1.6 acres of land. As of December
                                    31, 2000, the property was 100% occupied.



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 432,313 net
                                    rentable square feet of space in 18
                                    buildings on 27 acres of land. At December
                                    31, 2000, the property was 98% occupied.


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.



                                  Page 5 of 40
<PAGE>   6


OFFICE SPACE -

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


ITEM 3.  LEGAL PROCEEDINGS

Beginning in 1997, HRP has been a defendant in two lawsuits that were brought by
Gotham Partners, L.P. in the Delaware Court of Chancery.

The first suit was filed on February 27, 1997 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), and it sought
access to certain books and records of HRP and was subsequently settled,
allowing certain access.

The second action was filed on June 20, 1997 in 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). This action alleges
claims of breach of fiduciary duties, breach of HRP's partnership agreement, and
fraud in connection with certain transactions involving HRP's units in the mid
1990's. Hallwood is alleged to have aided and abetted the alleged breaches. On
June 21, 2000, after completing fact discovery, all parties moved for summary
judgment on several issues. In September and October, 2000, the Delaware court
issued three separate written opinions resolving the summary judgment motions.
In the opinions, the court ruled that trial would be required as to all issues,
except that (i) Gotham was found to have standing to pursue its derivative
claims; (ii) defendants were entitled to judgment dismissing the fraud claim;
(iii) the general partner was entitled to judgment dismissing the breach of
fiduciary duty claims brought against it; and (iv) the general partner's outside
directors were entitled to judgment dismissing all claims brought against them.

A five-day trial was held in January 2001. The Court requested post-trial
briefings, which should be completed by mid- April 2001. Given the nature of the
plaintiff's claims and the usual uncertainties in litigation, we are not able to
predict the outcome of the litigation or whether any of the claims or defenses
will ultimately be successful.

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. The complaint further
alleged that defendants, by acquiring more than 15% of the outstanding HRP
units, have triggered certain rights under its Unit Purchase Rights Agreement,
for which HRP was seeking declaratory relief. HRP was seeking various forms of
relief, including declaratory judgments, divestiture, corrective disclosures, a
"cooling-off" period and damages, including costs and disbursements.

Discovery was completed in December 2000 and trial was held in February 2001. On
February 23, 2001, the Court rendered a decision in favor of the defendants and
on February 28, 2001, the Court ordered the complaint dismissed. HRP is in the
process of determining whether to proceed with an appeal and no final decision
as to such plans has been made.

HRP is from time to time involved in various other 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 2000.



                                  Page 6 of 40
<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 14, 2001, there were approximately 28,000 unitholders
owning the 1,589,948 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>
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

2000 -
    1st Quarter         $50.75     $41.88
    2nd Quarter          48.00      34.25
    3rd Quarter          46.50      33.25
    4th Quarter          46.25      40.00
</TABLE>



                                  Page 7 of 40
<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,
                                                       ------------------------------------------------------------------
                                                          2000           1999          1998          1997         1996
                                                       ---------      ---------     ---------     ---------     ---------
                                                                      (in thousands except per unit amounts)

<S>                                                    <C>            <C>           <C>           <C>           <C>
STATEMENTS OF OPERATIONS:

Total revenues                                         $  67,292      $  59,645     $  56,680     $  53,899     $  49,612
Income (loss) before extraordinary item                       90          4,062         6,246         2,357        (9,428)
Net income (loss)                                           (299)         4,062        11,593         2,357        (9,428)

Income (loss) per unit and equivalent unit :
   Basic -
      Income (loss) before extraordinary item               0.06           2.40          3.70          1.40         (5.50)
      Net income (loss)                                    (0.18)          2.40          6.86          1.40         (5.50)

   Assuming dilution -
      Income (loss) before extraordinary item               0.05           2.31          3.55          1.35         (5.50)
      Net income (loss) per unit                           (0.18)          2.31          6.59          1.35         (5.50)


BALANCE SHEETS:

Real estate, net(a)                                    $ 206,392      $ 192,814     $ 175,779     $ 179,028     $ 182,877
Total assets                                             254,504        230,386       214,023       207,134       210,214
Mortgages payable                                        200,096        171,312       162,078       157,911       160,732
Partners' capital(b)                                      44,490         48,696        44,634        33,041        30,684
</TABLE>


Notes to Selected Financial Data:

     (a)  During 1999 and 2000 through acquisition and construction activity,
          HRP 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 40
<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:

2000 VERSUS 1999 -

REVENUE FROM PROPERTY OPERATIONS in 2000 increased $7,587,000, or 12.9%,
compared to 1999. The following table illustrates the components of the change:


<TABLE>
<S>                            <C>
Rental income, net             $6,638,000
Other property income             949,000
                               ----------
   Net increase                $7,587,000
                               ==========
</TABLE>


Net rental income increased as the result of overall higher rental rates, the
August 1999 to January 2000 acquisitions of Riverbank Plaza, Gulley Road
Industrial Park, and Fountain View Business Center, and the completion of a new
building at Corporate Square in mid-2000 (collectively these four properties are
referred as "New Properties). These increases to rental income were partially
offset by a decline in average occupancy, in the aggregate, between years from
93.1% to 89.4%. The decrease in average occupancy was primarily due to Joy Road
Distribution Center's drop from 98% occupancy at year-end 1999 to 28% occupancy
at year-end 2000. As of December 31, 2000, HRP had leases executed and in place
for approximately 90% of the portfolio's net rentable square feet. Other
property income increased primarily due to increases in tenant expense
recoveries.

INTEREST INCOME increased $60,000 as a result of additional earnings on
overnight investments due to slightly higher interest rates, partially offset by
lower average cash balances available for investment.

PROPERTY OPERATING EXPENSES for 2000 increased $2,612,000, or 10.9%, compared to
1999. The increase is comprised primarily of the following components:

     o    Operating costs with respect to the New Properties contributed
          $1,362,000 towards the overall increase.

     o    Professional fees increased primarily due to $539,000 of costs for
          research and analysis of potential property development projects.

     o    Combined, all other operating costs increased $711,000, or about 3%,
          between the years.

INTEREST EXPENSE for 2000 increased $1,742,000, or 12.7%, compared to 1999 as a
result of an increase in mortgage interest of $1,442,000 (including $1,453,000
for the New Properties) due to a higher average mortgage balance, in the
aggregate and, due to a lesser extent, an increase in loan cost amortization and
other interest of $300,000.

DEPRECIATION AND AMORTIZATION EXPENSE increased $2,478,000, or 20.7%, due to
$1,137,000 of depreciation for the New Properties and increases of $584,000 of
depreciation and $757,000 of lease commission amortization for comparable
properties.

GENERAL AND ADMINISTRATIVE EXPENSES for 2000 increased $1,229,000, or 32.2%,
compared to 1999, as a result of $601,000 of non-cash compensation generated
from the exercise of unit options in May 2000, (see Note 8 to the consolidated
financial statements), $414,000 of higher professional fees incurred with
proposed acquisitions, and $284,000 of increases to travel, insurance and
miscellaneous costs and expenses.

LITIGATION COSTS were $5,663,000 and $2,105,000 for 2000 and 1999, respectively,
and are related to the lawsuits described in Item 3 and Note 10 to the
consolidated financial statements.

LOSS ON EARLY EXTINGUISHMENT OF DEBT of $389,000 in 2000 is from the early
payoff of the loan secured by Bradshaw Business Parks and is comprised of a
prepayment penalty of $286,000 and the writeoff of $103,000 of unamortized loan
costs associated with the retired loan.



                                  Page 9 of 40
<PAGE>   10


RESULTS OF OPERATIONS   (CONTINUED) -

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.

     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 $673,000, or 21.4%,
compared to 1998, primarily as a result of higher personnel, occupancy and
travel costs.

LITIGATION COSTS were $2,105,000 and $134,000 for 1999 and 1998, respectively,
and are related to the lawsuits described in Item 3 and Note 10 to the
consolidated financial statements.



                                 Page 10 of 40
<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 increased $8,125,000 during 2000 to $16,457,000 as of
December 31, 2000. The sources of cash during the year were $12,880,000 of cash
provided by operating activities; $50,623,000 of mortgage principal proceeds;
and $213,000 from the exercise and issuance of unit options. The uses of cash
were $18,346,000 of mortgage principal repayments from mortgage proceeds;
$10,933,000 of property and tenant improvements; $7,791,000 of property
acquisition costs; $8,811,000 of property development costs; $4,721,000 of costs
to purchase units; $3,493,000 of scheduled mortgage principal payments;
$1,210,000 of loan fees and expenses; and $286,000 of mortgage prepayment
penalty.

In addition to the commitment described below with regards to Executive Park,
HRP has estimated and budgeted tenant and capital improvements of $7,800,000 and
lease commissions of about $2,500,000 for 2001.

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 or developments will be proceeds from the sale, financing or
refinancing 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 AT EXECUTIVE PARK -

In early 2001, HRP demolished a 1-story office building at its Executive Park
property in Atlanta, Georgia that contained 18,000 net rentable square feet. In
order to do so, HRP had to gain release of the prior building from Executive
Park's mortgage lien by substituting such collateral with the purchase of
$608,000 of United States Treasury Bonds, which have various maturity dates
through December 2007. In February 2001, HRP began constructing a 5-story office
building containing 122,000 net rentable square feet. The estimated construction
and development costs for the base building and tenant improvements are
approximately $21,000,000 (excluding the existing land cost). A lease for the
entire building is anticipated in the second quarter of 2001, with occupancy
expected in early 2002. Financing of the development will be a combination of
existing cash and a construction loan that HRP anticipates closing in the second
quarter of 2001.

PROPERTY DEVELOPMENT AT CORPORATE SQUARE -

During the second quarter of 2000, HRP completed new construction of a 6-story
office building containing approximately 151,000 net rentable square feet that
was commenced in the second quarter of 1999. It was constructed on undeveloped
land within the Corporate Square complex in Atlanta, Georgia. A 20-year lease
with the General Services Administration for the entire building was executed in
1999 and the tenant began paying rent August 2000.

The building construction, tenant improvements, lease commissions and loan costs
totaled $18,779,000 (excluding the original land cost). In 1999, HRP incurred,
in connection with the leasing of the entire project, $2,982,000 of lease
commissions.

An interim-construction loan was secured in August 1999 that funded $12,621,000
of the costs ($6,998,000 in 1999 and $5,623,000 in 2000). On August 31, 2000,
HRP secured permanent financing of $21,500,000. The loan's monthly payment is
based on a twenty-year amortization period and matures August 15, 2020 and has a
fixed interest rate of 7.97%. The loan proceeds repaid the interim-construction
loan and replenished working capital for the completed project.



                                  Page 11 of 40
<PAGE>   12



LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

MORTGAGES -

Substantially all of the buildings in HRP's real estate properties were
encumbered and pledged as collateral by twelve non-recourse mortgages
aggregating $200,096,000 as of December 31, 2000. These mortgages have interest
rates varying from 6.97% to 9.68% (with an effective average interest rate of
8.3%) and mature between 2002 and 2020, although no mortgages have scheduled
balloon payments until 2005. Based upon loan amortizations in effect, HRP is
required to pay $5,367,000 of principal payments in 2001.

In December 2000, HRP refinanced Bradshaw Business Park's existing loan with a
new lender. The interest rate was reduced to 8.1% from 8.5% and the maturity
date was extended over ten years to a call option date in February 2011. The
monthly principal payments amortize the loan over 20 years. The loan proceeds of
$12,500,000 were used (i) to pay the outstanding principal balance of $5,724,000
with the former lender, (ii) to pay transaction costs of $267,000, (iii) to pay
a prepayment penalty of $286,000, (iv) to fund $288,000 of loan reserves, and
(v) to add $5,935,000 to general working capital.

ACCOUNTING STANDARDS -

Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 [as amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" and SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities (an amendment of
FASB Statement No. 133)] establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, will be required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair-value hedge, the
changes in the fair value of the derivative and the hedged item will be
recognized in earnings. If the derivative is designated as a cash-flow hedge,
changes in the fair value of the derivative will be recorded in other
comprehensive income and will be recognized in the income statement when the
hedged item affects earnings. These statements define new requirements for
designation and documentation of hedging relationships as well as ongoing
effectiveness assessments in order to use hedge accounting. For a derivative
that does not qualify as a hedge, changes in fair value will be recognized in
earnings.

HRP adopted these statements on January 1, 2001. In connection with this
adoption, all derivatives within HRP were identified pursuant to SFAS No. 133
requirements. HRP determined it had one derivative, an interest rate cap. Since
this derivative was designated as a cash flow hedge, changes in the fair value
of the derivative will be recognized in other comprehensive income until the
hedged item is recognized in earnings. Hedge effectiveness will be measured
based on the relative changes in the fair value between the derivative contract
and the hedged item over time. Any changes in fair value resulting from
ineffectiveness, as defined by SFAS No. 133, will be recognized immediately in
current earnings. The interest rate cap is highly effective and accordingly, the
impact on HRP's financial statements from the adoption of these standards is the
amount of the difference between the carrying value of $267,000 and the
estimated fair value of $75,000.

HRP's interest rate cap was purchased in July 2000 in connection with the sale
of its interest rate swap agreement (see Item 7A and Note 6 to the consolidated
financial statements for more information).

The Derivatives Implementation Group continues to address certain implementation
issues that may have an impact on the application of this accounting standard.
Management of HRP is unable to determine the effects of such issues at this
time.

INFLATION -

Inflation did not have a significant impact on HRP in 2000, 1999, and 1998 and
is not anticipated to have a material impact in 2001.



                                 Page 12 of 40
<PAGE>   13


LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

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, objectives and expectations. 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.


ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000. In
1998, HRP had entered into the interest rate swap agreement to reduce its
exposure to changes in interest rates. It was designated as a hedge against
variable interest exposure relating to the $25,000,000 mortgage loan, secured by
Allfirst Building, which matures April 30, 2006. This interest rate swap
agreement, which was settled monthly, effectively fixed the loan's interest rate
at 6.78%, as opposed to the mortgage loan interest rate of LIBOR plus 1.30% (or
7.94% at the time of the swap agreement sale). The proceeds were designated for
general working capital purposes.

Also on July 27, 2000 and in connection with the sale of the swap agreement, HRP
purchased an interest rate cap for Allfirst Building's mortgage loan for
$288,000, which will limit HRP's exposure to changing interest rates at a
maximum of 10%. This interest rate cap, which has a notional amount of
$25,000,000 with terms consistent with the Allfirst Building's mortgage loan,
had a carrying value of $267,000 and an estimated fair value of $75,000 as of
December 31, 2000. Allfirst Building's interest rate was 8.12% as of December
31, 2000.

Substantially all of the mortgages payable contain fixed interest rates.
Accordingly, changes in LIBOR or prime rates do not significantly impact the
amount of interest paid by HRP. Assuming a 1% change in LIBOR or prime rates,
interest paid by HRP would increase or decrease by approximately
$275,000 on an annual basis.



                                 Page 13 of 40
<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, 2000 and 1999                    16

  Consolidated Statements of Operations for the years
     ended December 31, 2000, 1999 and 1998                                       17

  Consolidated Statements of Partners' Capital for the years
     ended December 31, 2000, 1999 and 1998                                       18

  Consolidated Statements of Cash Flows for the years
     ended December 31, 2000, 1999 and 1998                                       19

  Notes to Consolidated Financial Statements                                      20



FINANCIAL STATEMENT SCHEDULE:

  Schedule III - Real Estate and Accumulated Depreciation                         33

  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 40
<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, 2000 and 1999, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 2000. Our audit for
the year ended December 31, 2000 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 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 9, 2001 (Except for Note 10,
as to which the date is February 28, 2001)



                                 Page 15 of 40
<PAGE>   16



                         HALLWOOD REALTY PARTNERS, L.P.
                           CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT UNIT AMOUNTS)


<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                       ------------------------
                                                                          2000           1999
                                                                       ---------      ---------
<S>                                                                    <C>            <C>
ASSETS

Real estate:
  Land                                                                 $  60,236      $  58,378
  Buildings and improvements                                             293,742        282,013
  Tenant improvements                                                     23,284         17,924
                                                                       ---------      ---------
                                                                         377,262        358,315
  Accumulated depreciation and amortization                             (170,870)      (165,501)
                                                                       ---------      ---------
        Real estate, net                                                 206,392        192,814

Cash and cash equivalents                                                 16,457          8,332
Accounts receivable                                                        3,211          2,287
Lease commissions, net                                                    11,035         10,653
Loan reserves and escrows                                                  7,109          7,073
Loan costs, net                                                            3,879          3,607
Prepaid expenses and other assets                                          6,421          5,620
                                                                       ---------      ---------

        Total assets                                                   $ 254,504      $ 230,386
                                                                       =========      =========


LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
  Mortgages payable                                                    $ 200,096      $ 171,312
  Accounts payable and accrued expenses                                    5,570          6,013
  Prepaid rent, security deposits and other                                4,192          2,578
  Payable to affiliates, net                                                 156          1,787
                                                                       ---------      ---------
        Total liabilities                                                210,014        181,690
                                                                       ---------      ---------

Commitments and contingencies

Partners' capital:
  Limited partners -
      1,589,948 and 1,672,556 units outstanding, respectively             44,045         48,209
  General partner                                                            445            487
                                                                       ---------      ---------
        Total partners' capital                                           44,490         48,696
                                                                       ---------      ---------

        Total liabilities and partners' capital                        $ 254,504      $ 230,386
                                                                       =========      =========
</TABLE>


                See notes to consolidated financial statements.


                                 Page 16 of 40
<PAGE>   17



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


<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED DECEMBER 31,
                                                                   ----------------------------------
                                                                     2000          1999         1998
                                                                   --------      --------     --------
<S>                                                                <C>           <C>          <C>
REVENUES:
   Property operations                                             $ 66,324      $ 58,737     $ 55,810
   Interest                                                             968           908          870
                                                                   --------      --------     --------
      Total revenues                                                 67,292        59,645       56,680
                                                                   --------      --------     --------

EXPENSES:
   Property operations                                               26,574        23,962       22,261
   Interest                                                          15,443        13,701       12,781
   Depreciation and amortization                                     14,476        11,998       12,114
   General and administrative                                         5,046         3,817        3,144
   Litigation costs                                                   5,663         2,105          134
                                                                   --------      --------     --------
      Total expenses                                                 67,202        55,583       50,434
                                                                   --------      --------     --------

INCOME BEFORE EXTRAORDINARY ITEM                                         90         4,062        6,246

Extraordinary item -
   Net gain (loss) on early extinguishments of debt                    (389)           --        5,347
                                                                   --------      --------     --------

NET INCOME (LOSS)                                                  $   (299)     $  4,062     $ 11,593
                                                                   ========      ========     ========


ALLOCATION OF NET INCOME (LOSS):
   Limited partners                                                $   (296)     $  4,021     $ 11,477
   General partner                                                       (3)           41          116
                                                                   --------      --------     --------
      Total                                                        $   (299)     $  4,062     $ 11,593
                                                                   ========      ========     ========


NET INCOME (LOSS) PER UNIT
AND POTENTIAL UNIT:
   Earnings per unit - basic
      Income before extraordinary item                             $   0.06      $   2.40     $   3.70
      Net gain (loss) on early extinguishments of debt                (0.24)           --         3.16
                                                                   --------      --------     --------
         Net income (loss)                                         $  (0.18)     $   2.40     $   6.86
                                                                   ========      ========     ========

   Earnings per unit - assuming dilution
      Income before extraordinary item                             $   0.05      $   2.31     $   3.55
      Net gain (loss) on early extinguishments of debt                (0.23)           --         3.04
                                                                   --------      --------     --------
         Net income (loss)                                         $  (0.18)     $   2.31     $   6.59
                                                                   ========      ========     ========

WEIGHTED AVERAGE UNITS
USED IN COMPUTING NET INCOME (LOSS)
PER UNIT AND POTENTIAL UNIT:
   Basic                                                              1,620         1,673        1,673
                                                                   ========      ========     ========
   Assuming dilution                                                  1,674         1,740        1,741
                                                                   ========      ========     ========
</TABLE>


                 See notes to consolidated financial statements.



                                 Page 17 of 40
<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, 1998             $      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

Exercise and issuance of unit options                   8             806             814          17,200

Purchase of units                                     (47)         (4,674)         (4,721)        (99,808)

Net loss                                               (3)           (296)           (299)             --
                                               ----------      ----------      ----------      ----------

PARTNERS' CAPITAL, DECEMBER 31, 2000           $      445      $   44,045      $   44,490       1,589,948
                                               ==========      ==========      ==========      ==========
</TABLE>



                 See notes to consolidated financial statements.



                                 Page 18 of 40
<PAGE>   19



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

<TABLE>
<CAPTION>
                                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                                   ------------------------------------
                                                                     2000          1999          1998
                                                                   --------      --------      --------
<S>                                                                <C>           <C>           <C>
OPERATING ACTIVITIES:
     Net income (loss)                                             $   (299)     $  4,062      $ 11,593
     Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
         Depreciation and amortization                               14,476        11,998        12,114
         Non-qualified unit option compensation                         601            --            --
         Net (gain) loss on early extinguishments of debt               389            --        (5,347)
         Amortization of mortgage principal forgiveness                  --            --        (1,485)
         Effective rent adjustments                                    (569)         (778)         (444)
     Changes in assets and liabilities:
         Receivables                                                   (924)         (831)         (294)
         Lease commission payments                                   (5,021)       (4,272)       (2,369)
         Prepaid expenses, loan reserves and other assets               567          (250)          255
         Accounts payable and other liabilities                       3,660        (1,055)           55
                                                                   --------      --------      --------
            Net cash provided by operating activities                12,880         8,874        14,078
                                                                   --------      --------      --------

INVESTING ACTIVITIES:
     Property and tenant improvements                               (10,933)       (7,024)       (6,603)
     Property development cost                                       (8,811)       (6,427)           --
     Property acquisitions                                           (7,791)       (5,454)           --
                                                                   --------      --------      --------
            Net cash used in investing activities                   (27,535)      (18,905)       (6,603)
                                                                   --------      --------      --------

FINANCING ACTIVITIES:
     Mortgage principal proceeds                                     50,623         6,998        66,500
     Mortgage principal refinanced                                  (18,346)           --       (59,577)
     Mortgage prepayment penalties                                     (286)           --        (1,855)
     Mortgage principal payments                                     (3,493)       (2,913)       (2,756)
     Loan reserves                                                       --            --          (550)
     Loan fees and expenses                                          (1,210)         (219)       (1,405)
     Exercise and issuance of unit options                              213            --            --
     Purchase of units                                               (4,721)           --            --
                                                                   --------      --------      --------
            Net cash provided by financing activities                22,780         3,866           357
                                                                   --------      --------      --------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      8,125        (6,165)        7,832
BEGINNING CASH AND CASH EQUIVALENTS                                   8,332        14,497         6,665
                                                                   --------      --------      --------
ENDING CASH AND CASH EQUIVALENTS                                   $ 16,457      $  8,332      $ 14,497
                                                                   ========      ========      ========
</TABLE>


                 See notes to consolidated financial statements.



                                 Page 19 of 40
<PAGE>   20
                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



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, 2000, there were 1,589,948 units outstanding.

     As of December 31, 2000, HRP owned fifteen real estate assets (the
     "Properties"), located in six states containing 5,576,000 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 indirectly 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 indirectly wholly-owned subsidiary of Hallwood, provides
     property management, leasing and construction supervision 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, 2000,
     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 or useful
     life, if shorter.

     HRP capitalizes all costs related to the development and construction of
     its projects, including interest of $493,000 and $124,000 in 2000 and 1999,
     respectively. 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 40
<PAGE>   21


                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



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 2001 to 2020. Loan
     costs are amortized over the terms of the respective loans. The loans
     mature between 2002 and 2020. Amortization of lease commissions, included
     in depreciation and amortization expense, was $3,158,000, $2,286,000, and
     $2,232,000 in 2000, 1999, and 1998, respectively. Amortization of loan
     costs, included in interest expense, was $855,000, $536,000, and $456,000
     in 2000, 1999, and 1998, respectively. The caption "Prepaid expenses and
     other assets" on the Consolidated Balance Sheets includes 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. Amortization of effective rent income
     adjustments, included in property operations revenues, was $569,000,
     $778,000, and $444,000 in 2000, 1999, and 1998, respectively.

     HRP has adopted Staff Accounting Bulletin No. 101 "Revenue Recognition in
     Financial Statements" and its adoption did not have a significant impact on
     HRP's financial position and results of operations.


     INTEREST RATE AGREEMENTS

     HRP has used an interest rate swap as a hedge against interest exposure of
     variable rate debt. HRP's only interest rate swap was sold in July 2000.
     Differences between amounts paid or received in this interest rate
     agreement, which was designated as a hedge, was included in interest
     expense as the payments were made or received. HRP was exposed to
     credit-related gains or losses in the event of non-performance by
     counterparties, however none of the counterparties failed to meet their
     obligations during the term of the agreement. In July 2000, in connection
     with the sale of the interest rate swap, HRP purchased an interest rate cap
     derivative that limits its interest rate exposure on its mortgage for
     Allfirst Building (see Notes 6 and 9 for more information).


     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 $182,000, $243,000,
     and $248,000 in 2000, 1999, and 1998, 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 40
<PAGE>   22



                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



2.   ACCOUNTING POLICIES - (CONTINUED)


     COMPUTATION OF NET INCOME (LOSS) 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>
                                                                 2000        1999        1998
                                                                ------      ------      ------
<S>                                                              <C>         <C>         <C>
Weighted average units outstanding - basic                       1,620       1,673       1,673
Issuance of units from options                                      75          86          86
Repurchase of units from unit option proceeds                      (21)        (19)        (18)
                                                                ------      ------      ------
Weighted average units outstanding - assuming dilution           1,674       1,740       1,741
                                                                ======      ======      ======
</TABLE>


     ACCOUNTING PRONOUNCEMENTS AND OTHER

     The preparation of consolidated financial statements in conformity with
     accounting principles generally accepted in the United States of America
     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. Certain reclassifications have been made in the prior year
     amounts to conform to the classifications used in the current year. The
     reclassifications had no effect on previously reported results.

     Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting
     for Derivative Instruments and Hedging Activities" is effective for all
     fiscal years beginning after June 15, 2000. SFAS No. 133 [as amended by
     SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities
     - Deferral of the Effective Date of FASB Statement No. 133" and SFAS No.
     138 "Accounting for Certain Derivative Instruments and Certain Hedging
     Activities (an amendment of FASB Statement No. 133)] establishes accounting
     and reporting standards for derivative instruments, including certain
     derivative instruments embedded in other contracts and for hedging
     activities. All derivatives, whether designated in hedging relationships or
     not, will be required to be recorded on the balance sheet at fair value. If
     the derivative is designated as a fair-value hedge, the changes in the fair
     value of the derivative and the hedged item will be recognized in earnings.
     If the derivative is designated as a cash-flow hedge, changes in the fair
     value of the derivative will be recorded in other comprehensive income and
     will be recognized in the income statement when the hedged item affects
     earnings. These statements define new requirements for designation and
     documentation of hedging relationships as well as ongoing effectiveness
     assessments in order to use hedge accounting. For a derivative that does
     not qualify as a hedge, changes in fair value will be recognized in
     earnings.

     HRP adopted these statements on January 1, 2001. In connection with this
     adoption, all derivatives within HRP were identified pursuant to SFAS No.
     133 requirements. HRP determined it had one derivative, an interest rate
     cap (see Notes 6 and 9 for more information). Since this derivative was
     designated as a cash flow hedge, changes in the fair value of the
     derivative will be recognized in other comprehensive income until the
     hedged item is recognized in earnings. Hedge effectiveness will be measured
     based on the relative changes in the fair value between the derivative
     contract and the hedged item over time. Any changes in fair value resulting
     from ineffectiveness, as defined by SFAS No. 133, will be recognized
     immediately in current earnings. The interest rate cap is highly effective
     and accordingly, the impact on HRP's financial statements from the adoption
     of these standards is the amount of the difference between the carrying
     value of $267,000 and the estimated fair value of $75,000.

     The Derivatives Implementation Group continues to address certain
     implementation issues that may have an impact on the application of this
     accounting standard. Management of HRP is unable to determine the effects
     of such issues at this time.



                                 Page 22 of 40
<PAGE>   23

                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



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 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 (in thousands):

<TABLE>
<CAPTION>
                                   Entity
                                  Paid or
                                 Reimbursed    2000       1999       1998
                                 ----------  -------     ------     ------
<S>                             <C>         <C>        <C>        <C>
Asset management fee               Realty     $  581     $  514     $  495
Acquisition fee                    Realty         74        105         --
Reimbursement of costs (a)         Realty      2,974      2,941      2,320
Property management fee            HCRE        1,914      1,693      1,608
Lease commissions (b)              HCRE        2,605      4,933      1,964
Construction fees                  HCRE          917        891        314
</TABLE>

     (a)  These costs are mostly recorded as general and administrative expenses
          and represent reimbursement to Realty, at cost, for partnership level
          salaries and compensation, 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 were related to the development project at Corporate Square
          and were paid in 2000. See Note 5.


4.   STATEMENTS OF CASH FLOWS

     Cash interest payments were $13,831,000 (net of capitalized interest of
     $523,000), $13,114,000 (net of capitalized interest of $94,000), and
     $13,934,000 in 2000, 1999, and 1998, respectively.

     Supplemental disclosure of noncash investing and financing activities are
     as follows -

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

          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 40

<PAGE>   24

                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



5.   PROPERTY TRANSACTIONS


     PROPERTY DEVELOPMENT AT EXECUTIVE PARK -

     In early 2001, HRP demolished a 1-story office building at its Executive
     Park property in Atlanta, Georgia that contained 18,000 net rentable square
     feet. In order to do so, HRP had to gain release of the prior building from
     Executive Park's mortgage lien by substituting such collateral with the
     purchase of $608,000 of United States Treasury Bonds, which have various
     maturity dates through December 2007. In February 2001, HRP began
     constructing a 5-story office building containing 122,000 net rentable
     square feet. The estimated construction and development costs for the base
     building and tenant improvements are approximately $21,000,000 (excluding
     the existing land cost). A lease for the entire building is anticipated in
     the second quarter of 2001, with occupancy expected in early 2002.
     Financing of the development will be a combination of existing cash and a
     construction loan that HRP anticipates closing in the second quarter of
     2001.

     PROPERTY DEVELOPMENT AT CORPORATE SQUARE  -

     During the second quarter of 2000, HRP completed new construction of a
     6-story office building containing approximately 151,000 net rentable
     square feet that was commenced in the second quarter of 1999. It was
     constructed on undeveloped land within the Corporate Square complex in
     Atlanta, Georgia. A 20-year lease with the General Services Administration
     for the entire building was executed in 1999 and the tenant began paying
     rent August 2000.

     The building construction, tenant improvements, lease commissions and loan
     costs totaled $18,779,000 (excluding the original land cost). In 1999, HRP
     incurred, in connection with the leasing of the entire project, $2,982,000
     of lease commissions.

     An interim-construction loan was secured in August 1999 that funded
     $12,621,000 of the costs ($6,998,000 in 1999 and $5,623,000 in 2000). On
     August 31, 2000, HRP secured permanent financing of $21,500,000. The loan's
     monthly payment is based on a twenty-year amortization period and matures
     August 15, 2020 and has a fixed interest rate of 7.97%. The loan proceeds
     repaid the interim-construction loan and replenished working capital for
     the completed project.

     ACQUISITIONS -

     On January 26, 2000, HRP acquired three 3-story office buildings in San
     Diego, California (Fountain View Business Center) containing approximately
     89,000 net rentable square feet on 4.3 acres of land. The acquisition cost
     was $7,791,000. HRP obtained financing for $5,500,000 of the purchase price
     with a new loan. The loan's monthly payment is based on a twenty-year
     amortization, matures in ten years and has a fixed interest rate of 8.17%.
     The property was 97% occupied as of December 31, 2000.

     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 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%. The
     property was 98% occupied as of December 31, 2000.

     In August 1999, HRP acquired two 3-story office buildings in San Diego,
     California (Riverbank Plaza) containing approximately 40,000 net rentable
     square feet on 1.6 acres of land for $2,354,000 in cash. The property was
     unoccupied from December 1999 through April 2000 during a $1,765,000
     property and tenant improvement renovation. In May 2000, HRP closed on a
     mortgage for the property generating $2,500,000 of loan proceeds. The
     loan's monthly payment is based on a twenty-year amortization, matures in
     ten years and has a fixed interest rate of 8.29%. The property was 100%
     occupied as of December 31, 2000.



                                 Page 24 of 40
<PAGE>   25

                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



6.   MORTGAGES PAYABLE

     Substantially all of the buildings in HRP's real estate properties were
     encumbered and pledged as collateral by twelve non- recourse mortgages
     aggregating $200,096,000 as of December 31, 2000 and $171,312,000 as of
     December 31, 1999. These mortgages have interest rates varying from 6.97%
     to 9.68% (with an effective average interest rate of 8.3%) and mature
     between 2002 and 2020, although no mortgages have scheduled balloon
     payments until 2005. Most of the mortgages require monthly principal
     payments with balloon payments due at maturity. The following table shows
     for the years presented the principal and balloon payments that are
     required (in thousands):


<TABLE>
<CAPTION>
                                                        Total
                       Principal       Balloon         Mortgage
                       Payments        Payments        Payments
                       ---------      ---------       ---------
<S>                    <C>            <C>            <C>
2001                   $   5,367      $      --      $    5,367
2002                       5,127             --           5,127
2003                       4,480             --           4,480
2004                       4,838             --           4,838
2005                       4,403         74,515          78,918
Thereafter                27,221         74,145         101,366
                       ---------      ---------      ----------
   Total               $  51,436      $ 148,660      $  200,096
                       =========      =========      ==========
</TABLE>


The following table sets forth, by real estate property, the mortgages payable
balances, maturity dates, and interest rates as of December 31, 2000 (in
thousands):


<TABLE>
<CAPTION>
                                          Mortgages   Maturity          Interest
                                           Payable      Date               Rate
                                       ----------     ----------        --------
<S>                                    <C>            <C>                  <C>
Airport Plaza                          $      748     10-11-2005           8.70%
Allfirst Building                          25,000      4-30-2006           8.12% (a)
Bellevue Corporate Plaza                   14,964     10-11-2005           8.70%
Bradshaw Business Parks                    12,500       2-1-2011           8.10%
Corporate Square                           21,500      8-15-2020           7.97%
Corporate Square                            8,136     10-11-2005           8.70%
Corporate Square                            3,036       8-1-2005          8.625%
Executive Park                             32,902      4-11-2008           7.32%
Fairlane Commerce Park                     19,827     10-11-2005           8.70%
Fountain View Business Center               5,406      2-10-2010           8.17%
Gulley Road Industrial Park                 4,806      5-11-2011          7.375%
Joy Road Distribution Center                2,500      7-31-2002           9.68% (b)
Montrose Office Center                      6,079     10-11-2005           8.70%
Parklane Towers                            22,445     10-11-2005           8.70%
Raintree Industrial Park                   10,474     10-11-2005           8.70%
Riverbank Plaza                             2,475      2-10-2010           8.29%
Seattle Business Parks                      7,298       6-7-2008           6.97%
                                       ----------
   Total                               $  200,096
                                       ==========
</TABLE>


          (a) LIBOR plus 1.30%

          (b) Prime plus 0.50% or LIBOR plus 3.0%



                                 Page 25 of 40
<PAGE>   26



                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



6.   MORTGAGES PAYABLE  - (CONTINUED)

     The following discussions only pertain to financing and refinancing
     activities of HRP during the three years ended December 31, 2000.

     BRADSHAW BUSINESS PARKS -

     In December 2000, HRP refinanced Bradshaw Business Park's existing loan
     with a new lender. The interest rate was reduced to 8.1% from 8.5% and the
     maturity date was extended over ten years to a call option date in February
     2011. The monthly principal payments amortize the loan over 20 years. The
     loan proceeds of $12,500,000 were used (i) to pay the outstanding principal
     balance of $5,724,000 with the former lender, (ii) to pay transaction costs
     of $267,000, (iii) to pay a prepayment penalty of $286,000, (iv) to fund
     $288,000 of loan reserves, and (v) to add $5,935,000 to general working
     capital. The prepayment penalty along with the writeoff of $103,000 of
     unamortized loan costs associated with the retired loan were expensed and
     are included in the Consolidated Statements of Operations as an
     extraordinary item.

     JOY ROAD  -

     In August 2000, HRP received $3,000,000 of loan proceeds from a promissory
     term note secured by Joy Road Distribution Center in Detroit, Michigan. The
     principal payments amortize the loan over 24 months. The loan matures July
     31, 2002 and has a variable interest rate of either prime plus 0.50% or
     LIBOR plus 3.0%. The loan proceeds were for general working capital
     purposes.

     Also in August 2000, HRP closed on a $2,000,000 revolving line of credit.
     The line of credit matures July 31, 2001, has a variable interest rate of
     either prime plus 0.50% or LIBOR plus 3.0%, and requires monthly interest
     payments but no principal amortization. As of December 31, 2000, HRP had
     not borrowed against this facility.

     RIVERBANK PLAZA -

     In May 2000, HRP closed on a new mortgage generating $2,500,000 of loan
     proceeds and is secured by Riverbank Plaza, which was acquired in August
     1999 in a cash transaction. The loan's monthly payment is based on a
     twenty-year amortization, matures in ten years and has a fixed interest
     rate of 8.29%. The loan proceeds were for general working capital purposes.

     FOUNTAIN VIEW -

     In January 2000, HRP obtained financing of $5,500,000 in connection with
     the acquisition of Fountain View Business Center (three 3-story office
     buildings in San Diego, California). The loan has a monthly payment based
     on a twenty-year amortization, matures in ten years and has a fixed
     interest rate of 8.17%.

     CORPORATE SQUARE -

     An interim-construction loan was secured in August 1999 that funded
     $12,621,000 of a development project at Corporate Square (see Note 5 for
     further information) . The loan provided $6,998,000 in 1999 and $5,623,000
     in 2000. On August 31, 2000, HRP secured permanent financing of
     $21,500,000. The loan's monthly payment is based on a twenty-year
     amortization period and matures August 15, 2020 and has a fixed interest
     rate of 7.97%. The loan proceeds repaid the interim-construction loan and
     replenished working capital for the completed project.

     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. It was designated as a hedge against variable interest exposure
     relating to the loan with a notional amount of $25,000,000 terminating on
     April 30, 2006. This agreement, which was settled monthly, effectively
     fixed 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.



                                 Page 26 of 40
<PAGE>   27



                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



6.   MORTGAGES PAYABLE  - (CONTINUED)

     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 Operations as an
     extraordinary item in 1998.

     On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000.
     This interest rate swap agreement effectively fixed the loan's interest
     rate at 6.78%, as opposed to the mortgage loan interest rate of LIBOR plus
     1.30% (or 7.94% at the time of the swap agreement sale). The proceeds were
     designated for general working capital purposes. For financial reporting
     purposes, the proceeds are being amortized over the life of the loan into
     interest expense. As of December 31, 2000, the unamortized balance,
     included on the balance sheet in "Prepaid rent, security deposits and
     other", was $1,481,000.

     Also on July 27, 2000 and in connection with the sale of the swap
     agreement, HRP purchased an interest rate cap for Allfirst Building's
     mortgage loan for $288,000, which will limit HRP's exposure to changing
     interest rates at a maximum of 10%. This interest rate cap, which has a
     notional amount of $25,000,000, has terms consistent with the Allfirst
     Building's mortgage loan. Allfirst Building's interest rate was 8.12% as of
     December 31, 2000.

     The interest rate cap is a derivative and was designated as a cash flow
     hedge, changes in the fair value of the derivative will be recognized in
     other comprehensive income until the hedged item is recognized in earnings.
     Hedge effectiveness will be measured based on the relative changes in the
     fair value between the derivative contract and the hedged item over time.
     Any changes in fair value resulting from ineffectiveness, as defined by
     SFAS No. 133, will be recognized immediately in current earnings.

     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 Operations as an extraordinary item in 1998.

     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 Operations as an extraordinary item in 1998.




                                 Page 27 of 40
<PAGE>   28



                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



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 $3,315,000, $2,539,000, and $2,591,000 in 2000, 1999, and
     1998, respectively. At December 31, 2000, the Properties, in the aggregate,
     were 90% occupied. The following table sets forth the minimum cash rental
     payments to be received under non-cancelable leases with tenants and
     minimum cash rental payments that may be received under leases with early
     termination rights (in thousands):


<TABLE>
<CAPTION>
                                          Payments
                           Non-         with Early
                        cancelable      Termination
                         Payments         Rights           Total
                        ----------      -----------     ----------
<S>                      <C>              <C>           <C>
2001                     $  54,443        $   2,625     $   57,068
2002                        47,030            2,424         49,454
2003                        37,290            2,596         39,886
2004                        28,251            3,191         31,442
2005                        20,109            3,041         23,150
Thereafter                  78,907           16,065         94,972
                         ---------         --------      ---------
   Total                 $ 266,030         $ 29,942      $ 295,972
                         =========         ========      =========
</TABLE>


     During 2000 and 1999, two tenants leasing space contributed 10% or more of
     HRP's revenues. Ford Motor Company and affiliates ("Ford") leases space in
     Parklane Towers and Fairlane Commerce Park. Ford accounted for 11% and 13%
     of revenues in 2000 and 1999, respectively. The General Services
     Administration ("GSA") leases space in Corporate Square and Executive Park.
     GSA accounted for 12% and 10% of revenues in 2000 and 1999, respectively.

     As of December 31, 2000, Ford occupied 200,000 square feet of office space
     under 8 leases at Parklane Towers and 224,000 square feet of office,
     technical laboratory and industrial space under 7 leases at Fairlane
     Commerce Park. These leases expire between 2001 and 2005 and most contain
     renewal options, providing for one to ten year renewals. As of December 31,
     2000, GSA occupied 269,000 square feet of office space at Executive Park
     under 5 leases which expire between 2001 and 2007 and 309,000 square feet
     of office space at Corporate Square under 2 leases which expire in 2003 and
     2020.

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



                                 Page 28 of 40
<PAGE>   29


                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



8.   PARTNERS' CAPITAL

     In 1995, HRP issued options totaling 86,000 units to certain executives of
     Realty and HCRE with an exercise price of $11.875 per unit. The options
     were vested over a three year period ending in 1997. The options expire on
     February 27, 2005 and generally, the optionees may borrow the amounts
     necessary to exercise the options. As of December 31, 2000, 17,200 options
     had been exercised (all during 2000), none have been canceled and 68,800
     options remained exercisable. No options have been granted since the
     adoption of the disclosure only provisions of SFAS No. 123 - "Accounting
     for Stock Based Compensation".

     As part of the resignation of Brian Troup as an officer and director of
     Hallwood and HRP's general partner on December 21, 1999, Hallwood
     transferred 82,608 units of HRP that it owned to a trust controlled by Mr.
     Troup. On May 12, 2000, Mr. Troup exercised his unit options to purchase
     17,200 HRP units at the option plan's exercise price of $11.875 per unit,
     which generated $601,000 of non-cash compensation. Also on May 12, 2000,
     HRP purchased and retired all of Mr. Troup's above-mentioned 99,808 units
     at $46.825 per unit (the average of the closing market prices of the units
     for the twenty trading days prior to the purchase). As a result of these
     transactions, HRP's outstanding units have decreased from 1,672,556 to
     1,589,948.


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 8.0%
     and 8.2% as of December 31, 2000 and 1999, respectively) and has determined
     that the estimated fair value as of December 31, 2000 and 1999 would equal
     approximately $200,564,000 and $167,212,000, respectively.

     The estimated fair value and carrying value of HRP's interest rate cap as
     of December 31, 2000 was $75,000 and $267,000, respectively, base on a
     quote obtained from the issuer of the cap agreement.

     As of December 31, 2000 and 1999, 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 29 of 40
<PAGE>   30


                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



10.  COMMITMENTS AND CONTINGENCIES

     LITIGATION

     Beginning in 1997, HRP has been a defendant in two lawsuits that were
     brought by Gotham Partners, L.P. in the Delaware Court of Chancery.

     The first suit was filed on February 27, 1997 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), and it
     sought access to certain books and records of HRP and was subsequently
     settled, allowing certain access.

     The second action was filed on June 20, 1997 in 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). This
     action alleges claims of breach of fiduciary duties, breach of HRP's
     partnership agreement, and fraud in connection with certain transactions
     involving HRP's units in the mid 1990's. Hallwood is alleged to have aided
     and abetted the alleged breaches. On June 21, 2000, after completing fact
     discovery, all parties moved for summary judgment on several issues. In
     September and October, 2000, the Delaware court issued three separate
     written opinions resolving the summary judgment motions. In the opinions,
     the court ruled that trial would be required as to all issues, except that
     (i) Gotham was found to have standing to pursue its derivative claims; (ii)
     defendants were entitled to judgment dismissing the fraud claim; (iii) the
     general partner was entitled to judgment dismissing the breach of fiduciary
     duty claims brought against it; and (iv) the general partner's outside
     directors were entitled to judgment dismissing all claims brought against
     them.

     A five-day trial was held in January 2001. The Court requested post-trial
     briefings, which should be completed by mid- April 2001. Given the nature
     of the plaintiff's claims and the usual uncertainties in litigation, we are
     not able to predict the outcome of the litigation or whether any of the
     claims or defenses will ultimately be successful.

     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. The complaint further alleged
     that defendants, by acquiring more than 15% of the outstanding HRP units,
     have triggered certain rights under its Unit Purchase Rights Agreement, for
     which HRP was seeking declaratory relief. HRP was seeking various forms of
     relief, including declaratory judgments, divestiture, corrective
     disclosures, a "cooling-off" period and damages, including costs and
     disbursements.

     Discovery was completed in December 2000 and trial was held in February
     2001. On February 23, 2001, the Court rendered a decision in favor of the
     defendants and on February 28, 2001, the Court ordered the complaint
     dismissed. HRP is in the process of determining whether to proceed with an
     appeal and no final decision as to such plans has been made.

     HRP is from time to time involved in various other 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.



                                 Page 30 of 40
<PAGE>   31


                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



10.  COMMITMENTS AND CONTINGENCIES - (CONTINUED)

     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.

     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-mentioned lawsuit.

     OTHER

     In addition to the commitment previously described in Note 5 with regards
     to Executive Park, HRP has estimated and budgeted tenant and capital
     improvements of $7,800,000 and lease commissions of about $2,500,000 for
     2001.


11.  SUBSEQUENT EVENTS

     In January 2001, HRP sold one of the warehouse buildings at Seattle
     Business Parks that contained 63,000 net rentable square feet for a gross
     selling price of $3,287,000. The sale resulted in approximately $3,035,000
     of net proceeds to HRP and a net gain of about $2,150,000. Also in January
     2001, HRP sold one building at Fairlane Commerce Park that contained less
     than 2,000 net rentable square feet for a gross selling price of $575,000.
     The sale resulted in approximately $526,000 of net proceeds to HRP and a
     net gain of about $153,000. The combined carrying value of the assets was
     approximately $1,258,000.



                                 Page 31 of 40
<PAGE>   32

                         HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       THREE YEARS ENDED DECEMBER 31, 2000



12.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Set forth below is selected quarterly financial data for the years ended
     December 31, 2000 and 1999 (in thousands except per unit amounts) :


<TABLE>
<CAPTION>
                                                                                Quarter Ending
                                                         --------------------------------------------------------
                                                          March 31       June 30       September 30   December 31
                                                         ----------     ----------     ------------   -----------
<S>                                                      <C>            <C>            <C>            <C>
                   2000

 Total revenues                                          $   16,169     $   16,203     $   17,171     $   17,749

 Property operations revenues less property
 operations expenses, general and administrative
 expenses and litigation costs(a)                             8,041          7,125          7,712          6,163

 Income (loss) before extraordinary item(a)(b)                1,450            533            659         (2,552)
 Net income (loss)(a)                                         1,450            533            659         (2,941)

 Earnings per unit - basic
     Income (loss) before extraordinary item                    .86            .32            .41          (1.59)
     Extinguishment of debt(b)                                   --             --             --           (.24)
     Net income (loss)(a)                                       .86            .32            .41          (1.83)
 Earnings per unit - assuming dilution(c)
     Income (loss) before extraordinary item                    .83            .31            .40          (1.59)
     Extinguishment of debt(b)                                   --             --             --           (.24)
     Net income (loss)(a)                                       .83            .31            .40          (1.83)


                   1999

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

 Property operations revenues less property
 operations expenses, general and administrative
 expenses and litigation costs(d)                             7,397          7,302          7,399          6,755

 Net income(d)                                                1,214          1,182          1,239            427

 Net income per unit - basic(d)                                 .72            .70            .73            .25
 Net income per unit - assuming dilution(d)                     .69            .67            .70            .24
</TABLE>


(a)  Litigation costs were $616, $1,292, $1,359 and $2,396 in the first, second,
     third, and fourth quarters of 2000, respectively, and accordingly affected
     these amounts. (See Note 10 to the Consolidated Financial Statements for
     more information about the litigation).

(b)  The extraordinary item in the fourth quarter of 2000 is a loss on early
     extinguishment of debt of $389.

(c)  Unit options are considered antidilutive in the fourth quarter of 2000 and
     therefore are not taken into consideration in the computation of earnings
     per unit assuming dilution.

(d)  Litigation costs were $180, $430, $700 and $795 in the first, second,
     third, and fourth quarters of 1999, respectively, and accordingly affected
     these amounts. (See Note 10 to the Consolidated Financial Statements for
     more information about the litigation).



                                 Page 32 of 40
<PAGE>   33



                         HALLWOOD REALTY PARTNERS, L.P.
             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 2000
                                 (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                       $    748     $    300     $  4,013     $    329     $    300     $  4,342     $  4,642
   Allfirst Building                     25,000        2,100       43,772        3,863        2,100       47,635       49,735
   Bellevue Corporate Plaza              14,964        7,428       17,617        2,751        7,428       20,368       27,796
   Bradshaw Business Parks               12,500        5,018       15,563        5,147        5,018       20,710       25,728
   Corporate Square                      32,672        6,142       14,112       23,615        6,142       37,727       43,869
   Executive Park                        32,902       15,243       34,982        8,920       15,243       43,902       59,145
   Fairlane Commerce Park                19,827        5,191       18,080        6,039        5,191       24,119       29,310
   Fountain View Business Center          5,406        1,858        5,933          421        1,858        6,354        8,212
   Gulley Road Industrial Park            4,806        1,227        7,022          116        1,227        7,138        8,365
   Joy Road Distribution Center           2,500          359        1,340        2,107          359        3,447        3,806
   Montrose Office Center                 6,079        5,096       15,754        3,510        5,096       19,264       24,360
   Parklane Towers                       22,445        3,420       37,592        8,189        3,420       45,781       49,201
   Raintree Industrial Park              10,474        1,191       18,208        1,368        1,191       19,576       20,767
   Riverbank Plaza                        2,475          710        1,644        1,784          710        3,428        4,138
   Seattle Business Parks                 7,298        4,953        8,730        4,233        4,953       12,963       17,916
   Corporate office - FF&E                   --           --           --          272           --          272          272
                                       --------     --------     --------     --------     --------     --------     --------

   TOTAL                               $200,096     $ 60,236     $244,362     $ 72,664     $ 60,236     $317,026     $377,262
                                       ========     ========     ========     ========     ========     ========     ========
<CAPTION>


                                       Accumulated
                                      depreciation     Date
Description (A)                         (B)(C)        acquired
----------------                      ------------    --------
<S>                                     <C>          <C>
   Airport Plaza                        $  3,818     4/30/87
   Allfirst Building                      29,462     6/29/84
   Bellevue Corporate Plaza                6,515     6/30/88
   Bradshaw Business Parks                12,330     9/24/85
   Corporate Square                       15,051     8/2/85 & 10/1/92
   Executive Park                         31,978     12/19/85
   Fairlane Commerce Park                 11,898     12/30/86 & 7/1/87
   Fountain View Business Center             252     1/26/00
   Gulley Road Industrial Park               410     10/29/99
   Joy Road Distribution Center              793     2/14/96
   Montrose Office Center                  8,728     1/8/88
   Parklane Towers                        30,232     12/16/84
   Raintree Industrial Park               10,726     7/17/86
   Riverbank Plaza                           309     8/19/99
   Seattle Business Parks                  8,244     4/24/86
   Corporate office - FF&E                   124     various
                                        --------

   TOTAL                                $170,870
                                        ========
</TABLE>


                  See notes to Schedule III on following page.



                                 Page 33 of 40
<PAGE>   34




                         HALLWOOD REALTY PARTNERS, L.P.
                              NOTES TO SCHEDULE III
                                DECEMBER 31, 2000
                                 (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
Fountain View Business Center         San Diego, California
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, 1998            $ 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

    Additions                          24,896         11,318
    Retirements                        (5,949)        (5,949)
                                    ---------      ---------

Balance, December 31, 2000          $ 377,262      $ 170,870
                                    =========      =========
</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
          or useful life, if shorter.



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

          None.



                                 Page 34 of 40
<PAGE>   35


                                    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, 56, 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 served as a director and Chairman of the Board
     since 1981 and Chief Executive Officer since 1984 of Hallwood. He has also
     served as Hallwood's President and Chief Operating Officer since December
     21, 1999. He has served as Chairman of the Board and Chief Executive Office
     of Hallwood Energy Corporation and its predecessors ("HEC") since 1987 and
     as a director of Hallwood Holdings S.A. since 1984. Mr. Gumbiner is also a
     solicitor of the Supreme Court of Judicature of England.

WILLIAM L. GUZZETTI, 57, PRESIDENT AND DIRECTOR OF REALTY
     Mr. Guzzetti has been President, Chief Operating Officer and a director of
     Realty since January 1990. He has 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 1985 and in that capacity devotes a portion of his
     time to the activities of HEC. He is a member of The Florida Bar and the
     State Bar of Texas.

JOHN G. TUTHILL, 57, 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, 52, 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, 53, 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, 59, 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 and is a Master of
     Literature from Oxford University.

WILLIAM F. FORSYTH, 51, 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, 57, 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 35 of 40
<PAGE>   36
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, 2000 to December 31, 2001, 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 2000, Messrs. Gumbiner and
Guzzetti served on the Board of Directors of Realty. Mr. Gumbiner is also Chief
Executive Officer of Hallwood, Realty, and HEC. 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 $25,000, $20,000, and $20,000 in 2000, 1999, and 1998,
respectively, for director fees. Mr. Walther was paid $20,000 in 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 (in thousands):

<TABLE>
<CAPTION>
                                   Entity
                                   Paid or
                                 Reimbursed    2000       1999       1998
                                 ----------   ------     ------     ------
<S>                              <C>          <C>        <C>        <C>
Asset management fee               Realty     $  581     $  514     $  495
Acquisition fee                    Realty         74        105         --
Reimbursement of costs(a)          Realty      2,974      2,941      2,320
Property management fee             HCRE       1,914      1,693      1,608
Lease commissions(b)                HCRE       2,605      4,933      1,964
Construction fees                   HCRE         917        891        314
</TABLE>


(a)  These costs are mostly recorded as general and administrative expenses and
     represent reimbursement to Realty, at cost, for partnership level salaries
     and compensation, 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
     were related to the development project at Corporate Square and were paid
     in 2000.


                                 Page 36 of 40
<PAGE>   37



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,
2000. Bonuses and other annual compensation are with respect to years presented
and are usually paid in the following year.


<TABLE>
<CAPTION>
                                                  SUMMARY COMPENSATION TABLE

                                                      Annual Compensation
                                       -----------------------------------------------
                                                                          Other Annual
Name and Principal Position            Year     Salary(a)    Bonus     Compensation(b)
---------------------------            ----     ---------   --------   ---------------
<S>                                    <C>      <C>          <C>          <C>
Anthony J. Gumbiner                    2000     $     --     $150,000     $     --
Chairman of the Board and              1999           --      150,000           --
Chief Executive Officer                1998           --           --           --

William L. Guzzetti                    2000      200,000       32,333           --
President and Chief                    1999      200,000       32,333           --
Operating Officer                      1998      200,000       28,833           --

John G. Tuthill                        2000      150,360       68,265        7,895
Executive Vice President               1999      150,360       68,265        7,923
and Secretary                          1998      150,360       56,265        8,282

Udo H. Walther                         2000      150,000       68,250        7,895
Senior Vice President                  1999      150,000       68,250           --
                                       1998       25,000        6,250           --

Jeffrey D. Gent                        2000      115,000       19,471        6,245
Vice President - Finance               1999      108,541       18,784        6,206
                                       1998      104,366       15,523        8,017
</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 and HCRE 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, 2000. None of the executive officers
exercised any options during the year ended December 31, 2000 and HRP has not
granted SARs.


                     AGGREGATED OPTION/SAR EXERCISES IN 2000
                   AND OPTION/SAR VALUES AT DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                                         Value of Unexercised
                                                   Number of Unexercised                     In-the-Money
                                                        Options at                            Options at
                                Units                December 31, 2000                     December 31, 2000
                              Acquired        -------------------------------         -----------------------------
Name                         on Exercise      Exercisable       Unexercisable          Exercisable    Unexercisable
----                         -----------      -----------       -------------          -----------    -------------
<S>                              <C>              <C>               <C>                   <C>             <C>
Anthony J. Gumbiner              0                25,800            0                     $886,875        $ 0
William L. Guzzetti              0                15,000            0                      515,625          0
John G. Tuthill                  0                13,000            0                      446,875          0
Jeffrey D. Gent                  0                 7,000            0                      240,625          0
</TABLE>



                                 Page 37 of 40
<PAGE>   38

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


The following table sets forth information as of March 14, 2001 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(f)                            Class
      -------------------                                   ------------                         -----
<S>                                                           <C>                                 <C>
      HWG, LLC                                                330,432                             20.8%
      c/o The Hallwood Group Incorporated
      3710 Rawlins, Suite 1500
      Dallas, Texas 75219

      Gotham Partners, L.P.  and                              247,994                             15.6%
      Gotham Partners, L.P. III
      237 Park Avenue, 9th Floor
      New York, NY 10017(a)

      Interstate Properties                                   167,700                             10.5%
      Park 80 West, Plaza II
      Saddle Brook, NJ 07662(a)

      Alan G. Crisp(b)                                             --                               --

      William F. Forsyth(b)                                        --                               --

      Anthony J. Gumbiner(b)                                   25,800 (c)                          1.6% (c)

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

      Edward T. Story(b)                                           --                               --

      All directors and executive officers
      as a group (8 persons)                                   60,900 (e)                          3.7% (e)
</TABLE>


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

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

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

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

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

     (f)  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 38 of 40
<PAGE>   39



                                     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 2000 or in
     2001 prior to the filing of this Form 10-K for the year ended December 31,
     2000.

(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 39 of 40
<PAGE>   40


                                   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, 2001               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, 2000, has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the date indicated.

<TABLE>
<CAPTION>

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

<S>                                                     <C>                                            <C>
/s/ ANTHONY J.  GUMBINER                                Chairman of the Board and Director,            March 15, 2001
--------------------------------------------------      Hallwood Realty, LLC
Anthony J. Gumbiner                                     (Chief Executive Officer)


/s/ WILLIAM L.  GUZZETTI                                President and Director,                        March 15, 2001
--------------------------------------------------      Hallwood Realty, LLC
William L. Guzzetti                                     (Chief Operating Officer)


/s/ JEFFREY D.  GENT                                    Vice President - Finance,                      March 15, 2001
--------------------------------------------------      Hallwood Realty, LLC
Jeffrey D. Gent                                         (Chief Accounting Officer)


/s/ALAN G. CRISP                                        Director,                                      March 15, 2001
--------------------------------------------------      Hallwood Realty, LLC
Alan G. Crisp


/s/ WILLIAM F.  FORSYTH                                 Director,                                      March 15, 2001
--------------------------------------------------      Hallwood Realty, LLC
William F. Forsyth


/s/ EDWARD T. STORY                                     Director,                                      March 15, 2001
--------------------------------------------------      Hallwood Realty, LLC
Edward T. Story

</TABLE>


                                 Page 40 of 40

<PAGE>   41

                         HALLWOOD REALTY PARTNERS, L.P.
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number                                               Exhibit
------                                               -------

<S>                    <C>
3.1                   Certificate of Limited Partnership of Hallwood Realty Partners, L.P., dated January 10, 1990.
                      (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.)

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

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).  (Incorporated by reference from exhibit 4.1 filed with Annual Report on Form
                      10-K for the fiscal year ended December 31, 1999.)

4.2                   Amendment No. 1 to Unit Purchase Rights Agreement dated February 14, 2000   (Incorporated
                      by reference from exhibit 4.2 filed with Annual Report on Form 10-K for the fiscal year ended
                      December 31, 1999.)

10.1*                 1995 Unit Option Plan for Hallwood Realty Partners, L.P. (Incorporated by reference as the
                      exhibit indicated and filed with Annual Report on Form 10-K for the fiscal year ended
                      December 31, 1994.)

10.2*                 1995 Unit Option Plan Loan Program for Hallwood Realty Partners, L.P.  (Incorporated by
                      reference as the exhibit indicated and filed with Annual Report on Form 10-K for the fiscal year
                      ended December 31, 1994.)

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.) (Incorporated by reference from exhibit 10.5
                      filed with Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)
</TABLE>


* Constitutes a management compensation plan.