<PAGE>   1


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

                       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, 1996


[ ]  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



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



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

        INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]

        INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.  YES  [X]   NO [ ]

        THE AGGREGATE MARKET VALUE OF THE UNITS HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 14, 1997 WAS APPROXIMATELY $34,162,000.

           CLASS:  UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
               OUTSTANDING AT MARCH 14, 1997:   1,672,556 UNITS.

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




                                  Page 1 of 32
<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                                    6

   Item 6.     Selected Financial Data                                    7

   Item 7.     Management's Discussion and Analysis of
               Financial Condition and Results of Operations              8

   Item 8.     Financial Statements and Supplemental Information         11

   Item 9.     Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosures                      26


PART III
--------

   Item 10.    Directors and Executive Officers of the
               Registrant                                                27

   Item 11.    Executive Compensation                                    28

   Item 12.    Security Ownership of Certain Beneficial Owners
               and Management                                            30

   Item 13.    Certain Relationships and Related Transactions            30


PART IV
-------

   Item 14.    Exhibits, Financial Statement Schedule and
               Reports on Form 8-K.                                      31
</TABLE>





                                  Page 2 of 32
<PAGE>   3

                                     PART I


ITEM 1.  BUSINESS

DESCRIPTION OF THE BUSINESS

Hallwood Realty Partners, L.P. ("HRP" or the "Partnership"), a publicly traded
Delaware limited partnership, is engaged in diversified real estate activities,
including the acquisition, ownership and operation of commercial office and
industrial real estate and other real estate related assets. The Partnership's
limited partners' interests ("Units") are traded on the American Stock
Exchange.

As of December 31, 1996, the Partnership owned twelve real estate assets (the
"Properties"), of which seven are office building properties and five are
industrial park properties.  The Properties are located in six states (see Item
2 - Properties).  The Partnership seeks to maximize the value of the Properties
by making capital and tenant improvements, by executing marketing programs to
attract and retain tenants and by reducing operating expenses.

Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is responsible for asset management of the Partnership and its
Properties, including the decision making responsibility for financing,
refinancing, acquiring and disposing of properties.  In addition, HRC provides
general operating and administrative services to the Partnership. Hallwood
Commercial Real Estate, Inc. ("HCRE", formerly named Hallwood Management
Company), another wholly-owned subsidiary of Hallwood, provides property
management services to the Properties.


OCCUPANCY/MAJOR TENANT INFORMATION

In the aggregate, the Properties were 90% occupied at December 31, 1996.  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>
                 1997                       19%
                 1998                       22%
                 1999                       18%
                 2000                       12%
                 2001                        9%
                 Thereafter                 20%
</TABLE>


During 1996 and 1995, two tenants leasing space in the Properties each
contributed more than 10% of the total revenues of the Partnership.  Ford Motor
Company and affiliates ("Ford") leases space in Parklane Towers and Fairlane
Commerce Park and contributed approximately 16% and 18% of revenues in 1996 and
1995, respectively.  The Centers for Disease Control and Prevention, an agency
of the U.S. Department of Health and Human Services, ("CDC") leases space in
Corporate Square and Executive Park and contributed approximately 10% of 1996's
revenues. First National Bank of Maryland leases space in the First Maryland
Building and contributed 12% of 1995's revenues.

As of December 31, 1996, Ford occupied approximately 283,000 square feet of
office space under 14 separate leases at Parklane Towers and approximately
246,000 square feet of office, technical laboratory and industrial space under
8 separate leases at Fairlane Commerce Park.  These leases expire between 1997
and 2001 and most contain renewal options, providing for one to ten year
renewals. As of December 31, 1996, CDC occupied approximately 202,000 square
feet of office space at Executive Park under 3 leases which expire between 1999
and 2003. CDC also occupied approximately 158,000 square feet of office space
at Corporate Square under a lease which expires in 2013.

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





                                  Page 3 of 32
<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 estimated to cost $1,700,000; however, it is not required to
be removed because it is not friable and HRP has an Operations and Maintenance
Program in place.

In July 1990, the Americans with Disabilities Act was passed by the United
States Congress.  HRC 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 employees rendering services
on behalf of HRP and its Properties are employees of HRC 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

At December 31, 1996, HRP owned twelve properties in six states with
approximately 5,167,000 net rentable square feet, of which seven are office
building properties (2,610,000 square feet) and five are industrial park
properties (2,557,000 square feet).


<TABLE>
<CAPTION>
NAME AND LOCATION                  GENERAL DESCRIPTION OF THE PROPERTY
-----------------                  -----------------------------------
<S>                               <C>
OFFICE BUILDING PROPERTIES:       
                                  
Airport Plaza                     Fee simple interest in a 3-story office building constructed in
San Diego, California             1982 containing 48,853 net rentable square feet of space located
                                  on 2 acres of land.  The property was 87% occupied at December
                                  31, 1996.
                                  
Bellevue Corporate Plaza          Fee simple interest in a 10-story office building constructed in
Bellevue, Washington              1980 containing 235,850 net rentable square feet of space located
                                  on 3.6 acres of land.  The property was 86% occupied at December
                                  31, 1996.
                                  
Corporate Square                  Fee simple interest in an 8-building office complex ranging from
Atlanta, Georgia                  one to seven stories, constructed between 1968 and 1973,
                                  containing an aggregate of 445,518 net rentable square feet of
                                  space located on 26 acres of land.  The property was 92% occupied
                                  at December 31, 1996.
</TABLE>





                                  Page 4 of 32
<PAGE>   5


<TABLE>
<CAPTION>
NAME AND LOCATION                  GENERAL DESCRIPTION OF THE PROPERTY
-----------------                  -----------------------------------

OFFICE BUILDING PROPERTIES - CONTINUED:
                                                                      
<S>                               <C>
Executive Park                     Fee simple interest in 26 buildings ranging from one to six
Atlanta, Georgia                   stories, constructed between 1965 and 1972, containing a total of
                                   908,445 net rentable square feet of space located on 70 acres of
                                   land.  The property was 93% occupied at December 31, 1996.
                                  
First Maryland Building            Fee simple interest in a 22-story office building constructed in
Baltimore, Maryland                1972 containing 343,773 net rentable square feet of office space
                                   on 0.6 acres of land.  At December 31, 1996, the property was 90%
                                   occupied.
                                  
Montrose Office Center             Fee simple interest in a 10-story office building constructed in
Rockville, Maryland                1980 containing 147,896 net rentable square feet of space on 3
                                   acres of land.  The property was 98% occupied at December 31,
                                   1996.
                                  
Parklane Towers                    Fee simple interest in twin 15-story office buildings constructed
Dearborn, Michigan                 in 1973 containing 479,501 net rentable square feet of space on
                                   31.8 acres of land.  The property was 93% occupied at December
                                   31, 1996.
                                  
INDUSTRIAL PARK PROPERTIES:       
                                  
Bradshaw Business Parks            Fee simple interest in 21 single-story buildings located at four
Sacramento and                     separate sites containing an aggregate of 452,838 net rentable
Rancho Cordova, California         square feet of office/warehouse space on 31 acres of land and
                                   constructed between 1973 and 1981.  At December 31, 1996, the
                                   property was 94% occupied.
                                  
Fairlane Commerce Park             Fee simple interest in a portion of an office/industrial park
Dearborn, Michigan                 consisting of 13 single-story buildings constructed between 1974
                                   and 1990.  The property consists of 421,422 net rentable square
                                   feet of space on 36 acres of land.  The property was 87% occupied
                                   at December 31, 1996.
                                  
Joy Road Distribution Center       Fee simple interest in a 455,500 square foot warehouse situated
Detroit, Michigan                  on 21 acres and originally constructed in the early 1940's. The
                                   property was 82% occupied at December 31, 1996.
                                  
Raintree Industrial Park           Fee simple interest in an office/industrial complex constructed
Solon, Ohio                        between 1971 and 1978 containing 795,065 net rentable square feet
                                   of space in 14 buildings on 49 acres of land.  The property was
                                   95% occupied at December 31, 1996.
                                  
Seattle Business Parks             Fee simple interest in office/industrial parks located at two
Kent and Tukwila, Washington       separate sites. The buildings were completed between 1972 and
                                   1978 and contain an aggregate of 432,467 net rentable square feet
                                   of space in 18 buildings on 27 acres of land. At December 31,
                                   1996, the property was 81% occupied.
</TABLE>

For information regarding the encumbrances to which the properties are subject
and the status of the 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 4 to the Consolidated Financial
Statements and Schedule III contained in Item 8.





                                  Page 5 of 32
<PAGE>   6
ITEM 3.  LEGAL PROCEEDINGS

The Partnership is from time to time involved in various legal proceedings in
the ordinary course of its business.  Management believes that the resolution
of these matters will not have a material effect on the financial position,
cash flow or operations of the Partnership.


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

No matters were submitted to a vote of the security holders of the Partnership
during the fourth quarter of 1996.


                                    PART II


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


The Partnership's Units are listed on the American Stock Exchange under the
symbol "HRY".  As of March 14, 1997, there were approximately 35,500
unitholders of record of the 1,672,556 Units outstanding.  Each quarter HRC
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 and adjusted for a 1-for-5 reverse
split that was effective at the close of business on March 3, 1995:

<TABLE>
<CAPTION>
                                            Trading Ranges       
                                        ----------------------   
                                           High         Low     
                                           ----         ---     
            <S>                           <C>           <C>     
            1995 -                                              
               1st Quarter                $  12.50      $  9.50 
               2nd Quarter                   14.50        9.625 
               3rd Quarter                  15.375        13.50 
               4th Quarter                   16.75        13.50 
                                                                
                                                                
            1996 -                                              
               1st Quarter                $ 20.375      $ 16.50 
               2nd Quarter                   21.75       19.125 
               3rd Quarter                   30.00       21.625 
               4th Quarter                   29.00        24.50 
</TABLE>





                                  Page 6 of 32
<PAGE>   7
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,                            
                                         -------------------------------------------------------------------------------
                                              1996            1995         1994          1993         1992 
                                              ----           ------       ------        ------       ------
                                                          (in thousands except per unit amounts)
<S>                                       <C>             <C>       <C>             <C>            <C>
Statement of Operations:
------------------------

   Total revenues   (a)                   $  49,612       $  50,829  $   48,615     $  48,065      $  63,356
   Loss before extraordinary item            (9,428)         (9,024)    (18,161)      (18,769)       (28,176)
   Net loss                                  (9,428)         (9,789)    (18,161)      (18,769)       (16,799)
   Net loss per Unit   (b)                    (5.50)          (5.55)     (10.38)       (10.73)         (9.60)
   Cash distributions to
     limited partners                             -               -           -             -              -


Balance Sheet:
--------------

   Real estate, net   (c)                 $ 182,877       $ 192,266   $ 205,212     $ 219,710      $ 226,193
   Total assets                             210,214         225,359     225,418       248,093        246,354
   Mortgages payable                        160,732         166,675     160,296       162,938        148,572
   Partners' capital   (d)                   30,684          41,917      51,522        69,683         88,452
</TABLE>



Notes to Selected Financial Data:

     (a) Total revenues declined in 1993 versus 1992 primarily due to property
         dispositions during 1992.
     (b) Reflects effect of a 1-for-5 reverse split of the outstanding Units
         effective as of the close of business on March 3, 1995.
     (c) Real estate assets declined in each of the years due to depreciation
         and amortization exceeding the additions of tenant and capital
         improvements.
     (d) Partners' capital is allocated 99% to the limited partners and 1% to
         the general partner.





                                  Page 7 of 32
<PAGE>   8
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:
1996 VERSUS 1995 -

REVENUE FROM PROPERTY OPERATIONS in 1996 decreased $1,359,000, or 2.7%, as
compared to 1995.  The following table illustrates the components of the
change:

<TABLE>
              <S>                                <C>
              Rental income, net                  $   (459,000)
              Expense recoveries                      (539,000)
              Other property income                   (361,000)
                                                  ------------ 
                 Net decrease                     $ (1,359,000)
                                                  ============ 
</TABLE>

This change in rental income is primarily due to a reduction in rental rates at
First Maryland Building and decreases in occupancy at Parklane Towers and
Corporate Square, partially offset by a rise in occupancy at Executive Park and
the addition of the Joy Road property in February 1996.  The First Maryland
Building rental rate reduction is discussed in Note 4 to the financial
statements.  Corporate Square's decrease in occupancy was temporary due to the
expiration of a significant lease in late 1995. In early 1996, the space was
re-leased and effective September 25, 1996, the new tenant took possession,
which increased the property's occupancy from 72% to 91%.

During the first quarter of 1995, expense recoveries were abnormally high due
to adjustments made to the amount of real estate recoveries from tenants in the
state of Michigan for the two years prior to 1995. Accordingly, expense
recoveries for 1996 decreased from 1995.  Michigan eliminated certain property
taxes as the major source of school funding in the summer of 1993 and later
reinstated them.

INTEREST INCOME increased $142,000 primarily as a result of increased earnings
on investments of funds held in loan reserve escrow accounts.

PROPERTY OPERATIONS EXPENSES for 1996 increased $1,102,000, or 4.6%, as
compared to 1995, primarily due to higher utility costs, lease commission
amortization, security control costs and repairs to heating and air duct
systems, partially offset by one-time costs for certain professional fees in
1995. The following table illustrates the components of the change:

<TABLE>
                     <S>                                 <C>
                     Administrative costs                 $    49,000
                     Management fees                          (22,000)
                     Marketing and leasing                    328,000
                     Utilities                                191,000
                     Services, including janitorial           203,000
                     Repairs and maintenance                  289,000
                     Real estate taxes                         65,000
                     Insurance                                 (1,000)
                                                          ----------- 
                          Net increase                    $ 1,102,000
                                                          ===========
</TABLE>

INTEREST EXPENSE decreased $2,199,000, or 14.0%, due to (i) an increase of
$1,356,000 in amortization of First Maryland's debt forgiveness, (ii) reduction
in First Maryland's cash interest expense of $998,000 due to lower debt, (iii)
reduction in loan cost amortization of $251,000, and (iv) a net increase of
$406,000 in interest costs associated with all of the mortgages and notes
excluding First Maryland.  This net increase of $406,000 is the result of a
higher average debt level between the years, partially offset by a reduction in
the aggregate average interest rates between the years.

DEPRECIATION AND AMORTIZATION EXPENSE decreased $337,000 primarily due to
reduced building improvement depreciation.

GENERAL AND ADMINISTRATIVE EXPENSES increased $621,000, or 21.6%, in 1996 as
compared to 1995, as the result of certain due diligence costs for a potential
acquisition and increases in business/franchise taxes, certain professional
fees, personnel and other overhead costs.





                                  Page 8 of 32
<PAGE>   9



RESULTS OF OPERATIONS:
1995 VERSUS 1994 -


REVENUE FROM PROPERTY OPERATIONS in 1995 increased $2,200,000, or 4.6%, as
compared to 1994.  The following table illustrates the components of the
change:

<TABLE>
                <S>                            <C>
                Rental income, net             $ 1,053,000
                Expense recoveries                 971,000
                Other property income              176,000
                                               -----------
                   Net increase                $ 2,220,000
                                               ===========
</TABLE>

Rental income increased  due to growth in aggregate occupancy and average
rental rates.  Expense recoveries increased during the period due to
fluctuations in the amount of estimated recoveries primarily at Parklane
Towers, Fairlane Commerce Park and First Maryland Building.  Most of the
variance is the result of unanticipated real estate tax recoveries from tenants
in the state of Michigan.  Michigan eliminated certain property taxes as the
major source of school funding in the summer of 1993 and later reinstated them.

INTEREST INCOME increased $14,000 primarily due to an increase in earnings on
overnight cash investments, partially offset by less mortgage interest as the
result of the collection of a substantial mortgage receivable in December 1994.

PROPERTY OPERATING EXPENSES in 1995 increased $782,000, or 3.4%, as compared to
1994, primarily due to increases in air conditioner and parking lot repairs, as
well as certain maintenance personnel costs, property level professional fees
and lease commission amortization, partially offset by decreases in utilities
and real estate taxes.  The following table illustrates the components of the
change:

<TABLE>
                        <S>                                 <C>
                        Administrative costs                $ (27,000)
                        Management fees                        87,000
                        Marketing and leasing                 238,000
                        Utilities                             (58,000)
                        Services, including janitorial         31,000
                        Repairs and maintenance               676,000
                        Real estate taxes                    (194,000)
                        Insurance                              29,000
                                                            ---------
                          Net increase                      $ 782,000
                                                            =========
</TABLE>

INTEREST EXPENSE increased $463,000, or 3.0%, primarily due to an increase in
debt during the year.  Interest expense in 1995 is net of $338,000 of
amortization of contingent debt forgiveness associated with First Maryland
Building's loan modification (See Note 4 to the Consolidated Financial
Statements contained in Item 8).

DEPRECIATION AND AMORTIZATION EXPENSE decreased $534,000 primarily due to
reduced tenant improvement amortization.

GENERAL AND ADMINISTRATIVE EXPENSES in 1995 increased $387,000, or 15.5%, as
compared to 1994, primarily due to costs related to the Reverse Split and costs
of administering the offer to Unitholders to sell their odd lot HRP holdings.

LOSS ON EARLY EXTINGUISHMENT OF DEBT for 1995 of $765,000 represents
pre-payment penalties incurred with the early pay off of loans associated with
the Nomura Refinancing (see Note 4 to the Consolidated Financial Statements
contained in Item 8) and the write off of certain loan costs.





                                  Page 9 of 32
<PAGE>   10

LIQUIDITY AND CAPITAL RESOURCES


HRP is engaged in diversified real estate activities, including the
acquisition, ownership and operation of commercial office and industrial real
estate and other real estate related assets.  While it is the General Partner's
primary intention to operate HRP's existing real estate investments and to
acquire and operate additional real estate investments, HRC 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.

As of December 31, 1996, HRP had cash and cash equivalents of $3,556,000, as
compared to $14,302,000 as of December 31, 1995.  Therefore, the Partnership's
cash position decreased $10,746,000 during 1996.  The sources of cash for 1996
were $3,597,000 of cash provided by operating activities and $86,000 of
principal collections from a mortgage receivable.  Uses of cash for 1996 were
$5,998,000 of tenant and property improvements, $1,532,000 of payments into an
escrow account for tenant improvements that will be constructed in 1997 at
First Maryland Building, $1,699,000 of property acquisition costs, $2,706,000
of mortgage principal payments, $1,805,000 of limited partner Unit purchases
(see Note 6 to the Consolidated Financial Statements contained in Item 8),
$450,000 of loan reserves for Executive Park, and $239,000 of loan fees and
expenses.

Substantially all of the buildings in eleven of HRP's Properties were
encumbered by and pledged as collateral under non-recourse mortgages as of
December 31, 1996.  During 1996, HRP and its lenders for the First Maryland
Building and Executive Park successfully completed loan extensions and
modifications for the mortgages that matured during the year (see Note 4 to the
Consolidated Financial Statements contained in Item 8).  HRP doesn't have any
mortgage loans maturing or requiring balloon principal payments until the year
2000.  Based upon loan amortizations in effect, HRP is required to pay
$3,084,000 of principal payments in 1997.

During 1997, HRP anticipates tenant improvements and lease commissions to
decrease as compared to the higher than usual level incurred in 1996.  As of
December 31, 1996, HRP had remaining commitments for construction projects of
about $1,200,000.  Additionally, HRP has estimated that 1997 total tenant and
capital improvements (excluding the aforementioned commitments) will equal
approximately $3,700,000 and lease commissions will be about $1,300,000.

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

Each quarter HRC, as General Partner, reviews the Partnership's capacity to
make cash distributions.

This Form 10-K contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of
management for future operations. The forward-looking statements included 
herein are based on current expectations that involve numerous risks and 
uncertainties. Assumptions relating to the foregoing involve judgments with 
respect to, among other things, 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. 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 staements included
in this Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representative by HRP
or any other person that the objectives and plans of HRP will be achieved.





                                 Page 10 of 32
<PAGE>   11


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION


     INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION



<TABLE>
<CAPTION>
     FINANCIAL STATEMENTS:                                                       Page
                                                                                 ----
     <S>                                                                          <C>
      Independent Auditors' Report                                                12
                                                                                 
      Consolidated Balance Sheets as of December 31, 1996 and                    
         December 31, 1995                                                        13
                                                                                 
      Consolidated Statements of Operations for each of the                      
         three years in the period ended December 31, 1996                        14
                                                                                 
      Consolidated Statements of Partners' Capital for each of                   
         the three years in the period ended December 31, 1996                    15
                                                                                 
      Consolidated Statements of Cash Flows for each of the                      
         three years in the period ended December 31, 1996                        16
                                                                                 
      Notes to Consolidated Financial Statements                                  17
                                                                                 
                                                                                 
                                                                                 
                                                                                 
     FINANCIAL STATEMENT SCHEDULE:                                               
                                                                                 
      Schedule III - Real Estate and Accumulated Depreciation                     25
                                                                                 
      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 11 of 32
<PAGE>   12
INDEPENDENT AUDITORS' REPORT





To the Partners,
Hallwood Realty Partners, L.P.
Dallas, Texas


We have audited the accompanying consolidated balance sheets of Hallwood Realty
Partners, L.P. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1996.  Our audits
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 generally accepted auditing
standards.  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, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
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 11, 1997





                                 Page 12 of 32
<PAGE>   13

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




<TABLE>
<CAPTION>
                                                                        DECEMBER 31,           
                                                                  ----------------------
                                                                    1996         1995 
                                                                  ---------    ---------
<S>                                                               <C>          <C>      
ASSETS

Real estate:
  Land                                                            $  56,820    $  56,461
  Buildings and improvements                                        257,913      257,706
  Tenant improvements                                                18,578       16,311
                                                                  ---------    ---------
                                                                    333,311      330,478
  Accumulated depreciation and amortization                        (150,434)    (138,212)
                                                                  ---------    ---------
       Real estate, net                                             182,877      192,266

Cash and cash equivalents                                             3,556       14,302
Accounts receivable                                                   1,606        1,080
Prepaid lease commissions, net                                        6,959        4,518
Lease concessions                                                     2,354        2,498
Loan reserves and escrows                                             7,739        4,966
Loan costs, net                                                       3,691        3,905
Prepaid expenses and other assets, net                                1,432        1,824
                                                                  ---------    ---------

       Total assets                                               $ 210,214    $ 225,359
                                                                  =========    =========


LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
  Mortgages payable                                               $ 160,732    $ 166,675
  Unamortized mortgage payable forgiveness                           10,456        8,912
  Accounts payable and accrued expenses                               4,834        4,940
  Prepaid rent and security deposits                                  2,600        2,685
  Payable to affiliates                                                 908          230
                                                                  ---------    ---------
       Total liabilities                                            179,530      183,442
                                                                  ---------    ---------

COMMITMENTS AND CONTINGENCIES

Partners' capital:
  Limited partners - 1,672,556 and 1,747,765 Units outstanding,
        respectively                                                 30,377       41,498
  General partner                                                       307          419
                                                                  ---------    ---------

       Total partners' capital                                       30,684       41,917
                                                                  ---------    ---------

       Total liabilities and partners' capital                    $ 210,214    $ 225,359
                                                                  =========    =========
</TABLE>




                See notes to consolidated financial statements.





                                 Page 13 of 32
<PAGE>   14

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




<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,        
                                                 --------------------------------
                                                   1996        1995        1994
                                                 --------    --------    --------
<S>                                              <C>         <C>         <C>     
REVENUES:
  Property operations                            $ 48,847    $ 50,206    $ 48,006
  Interest and other                                  765         623         609
                                                 --------    --------    --------
     Total revenues                                49,612      50,829      48,615
                                                 --------    --------    --------

EXPENSES:
  Property operations                              24,932      23,830      23,048
  Interest                                         13,522      15,721      15,258
  Depreciation and amortization                    17,086      17,423      17,957
  General and administrative                        3,500       2,879       2,492
  Litigation and settlement costs                    --          --         8,198
  Minority interest in joint venture and other       --          --          (177)
                                                 --------    --------    --------
     Total expenses                                59,040      59,853      66,776
                                                 --------    --------    --------

LOSS BEFORE EXTRAORDINARY ITEM                     (9,428)     (9,024)    (18,161)

Extraordinary item -
  Loss on early extinguishment of debt               --          (765)       --   
                                                 --------    --------    --------

NET LOSS                                         $ (9,428)   $ (9,789)   $(18,161)
                                                 ========    ========    ========


ALLOCATION OF NET LOSS:
  Limited partners                               $ (9,334)   $ (9,691)   $(17,979)
  General partner                                     (94)        (98)       (182)
                                                 --------    --------    --------
     Total                                       $ (9,428)   $ (9,789)   $(18,161)
                                                 ========    ========    ========


LOSS PER UNIT:
  Loss before extraordinary item                 $  (5.50)   $  (5.12)   $ (10.38)
  Loss on early extinguishment of debt               --          (.43)       --   
                                                 --------    --------    --------
     Net loss                                    $  (5.50)   $  (5.55)   $ (10.38)
                                                 ========    ========    ========


WEIGHTED AVERAGE UNITS OUTSTANDING                  1,698       1,745       1,732
                                                 ========    ========    ========
</TABLE>





                See notes to consolidated financial statements.





                                 Page 14 of 32
<PAGE>   15

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




<TABLE>
<CAPTION>
                                                                                      Limited
                                                                                      Partner
                                            General       Limited                      Units
                                            Partner       Partners        Total      Outstanding
                                           ----------    ----------    ----------    ----------
<S>                                        <C>           <C>           <C>            <C>      
PARTNERS' CAPITAL, JANUARY 1, 1994         $      697    $   68,986    $   69,683     1,732,459

Net loss                                         (182)      (17,979)      (18,161)
                                           ----------    ----------    ----------    ----------

PARTNERS' CAPITAL, DECEMBER 31, 1994              515        51,007        51,522     1,732,459

Purchase of fractional New Units                   (2)         (174)         (176)      (14,694)
Sale and issuance of New Units to
   General Partner                                  4           356           360        30,000
Net loss                                          (98)       (9,691)       (9,789)         --   
                                           ----------    ----------    ----------    ----------

PARTNERS' CAPITAL, DECEMBER 31, 1995              419        41,498        41,917     1,747,765

Purchase of Units                                 (18)       (1,787)       (1,805)      (75,209)
Net loss                                          (94)       (9,334)       (9,428)         --   
                                           ----------    ----------    ----------    ----------

PARTNERS' CAPITAL, DECEMBER 31, 1996       $      307    $   30,377    $   30,684     1,672,556
                                           ==========    ==========    ==========    ==========
</TABLE>




                See notes to consolidated financial statements.





                                 Page 15 of 32
<PAGE>   16
                         HALLWOOD REALTY PARTNERS, L.P.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,         
                                                                  --------------------------------
                                                                    1996        1995        1994
                                                                  --------    --------    --------
<S>                                                               <C>         <C>         <C>      
OPERATING ACTIVITIES:
    Net loss                                                      $ (9,428)   $ (9,789)   $(18,161)
    Adjustments to reconcile net loss
    to net cash provided by operating activities:
        Depreciation and amortization                               17,086      17,423      17,957
        Amortization of mortgage principal forgiveness              (1,693)       (338)       --
        Lease concessions                                              144         688         707
        Minority interest and other                                   --          --          (177)
    Changes in assets and liabilities:
        Receivables                                                   (526)        124         362
        Prepaid lease commissions, net                              (2,441)       (543)        404
        Prepaid expenses and other assets, net                         (32)        666       1,383
        Accounts payable and other liabilities                         487      (5,745)       (307)
                                                                  --------    --------    --------
           Net cash provided by operating activities                 3,597       2,486       2,168
                                                                  --------    --------    --------

INVESTING ACTIVITIES:
    Property and tenant improvements                                (5,998)     (4,477)     (3,459)
    Tenant improvement escrow                                       (1,532)       --          --
    Property acquisition                                            (1,699)       --          --
    Mortgage receivable principal payments                              86          79       1,722
                                                                  --------    --------    --------
           Net cash used for investing activities                   (9,143)     (4,398)     (1,737)
                                                                  --------    --------    --------

FINANCING ACTIVITIES:
    Mortgage principal payments                                     (2,706)     (2,600)     (2,642)
    Mortgage principal proceeds                                       --        88,400        --
    Mortgage principal refinanced                                     --       (70,171)       --
    Loan reserves                                                     (450)     (3,376)       --
    Loan fees and expenses                                            (239)     (4,009)         (9)
    Purchase of Units                                               (1,805)       --          --
    Sale of Units to General Partner                                  --           360        --
    Purchase of fractional Units                                      --          (176)       --   
                                                                  --------    --------    --------
           Net cash provided by (used for) financing activities     (5,200)      8,428      (2,651)
                                                                  --------    --------    --------


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   (10,746)      6,516      (2,200)
BEGINNING CASH AND CASH EQUIVALENTS                                 14,302       7,786      10,006
                                                                  --------    --------    --------
ENDING CASH AND CASH EQUIVALENTS                                  $  3,556    $ 14,302    $  7,786
                                                                  ========    ========    ========
</TABLE>



                See notes to consolidated financial statements.





                                 Page 16 of 32
<PAGE>   17
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996



1.  ORGANIZATION

    Hallwood Realty Partners, L.P. ("HRP" or the "Partnership"), a publicly
    traded Delaware limited partnership, is engaged in diversified real estate
    activities, including the acquisition, ownership and operation of
    commercial office, industrial real estate and other real estate related
    assets. The Partnership's limited partners' interests ("Units") are traded
    on the American Stock Exchange.

    As of December 31, 1996, the Partnership owned twelve real estate assets
    (the "Properties"), of which seven are office building properties and five
    are industrial park properties containing approximately 2,610,000 and
    2,557,000 net rentable square feet, respectively.  The Properties are
    located in six states.  The Partnership seeks to maximize the value of the
    Properties by making capital and tenant improvements, by executing
    marketing programs to attract and retain tenants and by reducing operating
    expenses.

    Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
    corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
    ("Hallwood") is responsible for asset management of the Partnership and its
    Properties, including the decision making responsibility for financing,
    refinancing, acquiring and disposing of properties.  In addition, HRC
    provides general operating and administrative services to the Partnership.
    Hallwood Commercial Real Estate, Inc. ("HCRE", formerly named Hallwood
    Management Company), another wholly-owned subsidiary of Hallwood, provides
    property management services to the Properties.

2.  ACCOUNTING POLICIES

    CONSOLIDATION

    The Partnership fully consolidates into its financial statements majority
    owned entities and reflects a minority interest for those entities not
    fully owned.  As of December 31, 1996, all entities and Properties of the
    Partnership were fully owned.  All significant intercompany balances and
    transactions have been eliminated in consolidation.

    CASH AND CASH EQUIVALENTS

    The Partnership considers highly liquid investments with a remaining
    maturity 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. The Partnership'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 10 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.

    The Partnership 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 accurals 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.
    Partnership's management is not aware of any environmental remediation
    obligations which would materially affect the operations, financial
    position or cash flows of the Partnership.





                                 Page 17 of 32
<PAGE>   18
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996



2.  ACCOUNTING POLICIES - CONTINUED

    OTHER ASSETS

    Lease concessions and commissions are amortized over the terms of the
    respective leases.  Leases in the Properties expire from 1997 to 2013.
    Loan costs are amortized over the terms of the respective loans.  The loans
    mature between 2000 and 2011.  Amortization of lease concessions, included
    in property operations revenues, was $144,000, $688,000 and $707,000 in
    1996, 1995 and 1994, respectively.  Amortization of lease commissions,
    included in property operations expense, was $1,880,000,  $1,588,000 and
    $1,403,000 in 1996, 1995 and 1994, respectively.  Amortization of loan
    costs, included in interest expense, was $453,000, $1,469,000 and $618,000
    in 1996, 1995 and 1994, respectively.

    The following table sets forth the components of prepaid expenses and other
    assets, net on the balance sheet as of the dates indicated (in thousands):

<TABLE>
<CAPTION>
                                                 December 31,       
                                                ---------------
                                                 1996     1995
                                                ------   ------
<S>                                             <C>      <C>   
               Prepaid real estate taxes        $  723   $  716
               Prepaid insurance                   472      553
               Mortgage receivable                  46      132
               Other deposits and prepaids         191      423
                                                ------   ------
                 Total                          $1,432   $1,824
                                                ======   ======
</TABLE>


    INCOME TAXES

    Currently, the Partnership 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 the Partnership and subsidiary entities. These
    business and franchises taxes, included in general and administrative
    expenses, were $206,000, $8,000, and $6,000 in 1996, 1995, and 1994,
    respectively.  The Partnership's tax returns are subject to examination by
    federal and state taxing authorities.  If the Partnership'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 the Partnership as an association taxable as a
    corporation for federal income tax purposes.  Such classification may have
    an adverse effect on the Partnership.

    OTHER

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


3.  TRANSACTIONS WITH RELATED PARTIES

    HRC receives certain fees in connection with the ongoing management of HRP,
    including an asset management fee, acquisition fees and incentive
    disposition fees.  Specifically, HRC 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.





                                 Page 18 of 32
<PAGE>   19
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996



3.  TRANSACTIONS WITH RELATED PARTIES - CONTINUED

    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,
    1999 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, not to exceed 6% of the net
    aggregate rent, and (iii) construction supervision fees for administering
    all construction projects equal to 5% of the total contract costs of each
    capital expenditure or tenant improvement project.

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

<TABLE>
<CAPTION>
                                                     Entity
                                                     Paid or
                                                   Reimbursed              1996           1995            1994
                                                   ----------              ----           ----            ----
           <S>                                        <C>              <C>             <C>             <C>
           Asset management fee                        HRC             $    450        $   446         $   434
           Property management fee                    HCRE                1,433          1,459           1,384
           Lease commissions (a)                      HCRE                2,888          1,501             801
           Construction fees                          HCRE                  382            270             259
           Acquisition fee                             HRC                   17              -               -
           Reimbursement of costs (b)                  HRC                2,321          1,992           2,030
</TABLE>



         (a) As of February, 1997, $667,000 of the lease commissions accrued in
             1996 had not been paid.

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


4.  MORTGAGES PAYABLE

    Substantially all of the buildings in eleven of the Partnership's
    Properties were encumbered and pledged as collateral by six non-recourse
    mortgages aggregating $160,732,000 as of December 31, 1996.  These
    mortgages have interest rates varying from 8.5% to 9.25%, with an effective
    average interest rate of 8.8% and mature between 2000 and 2011.  Certain
    mortgages provide for variable interest rates.  Cash interest payments were
    $14,947,000, $15,396,000, and $15,113,000 in 1996, 1995 and 1994,
    respectively.

    Most of the mortgages require monthly principal payments with balloon
    payments due at maturity. The following table shows for the periods
    presented the principal and balloon payments that are required (in
    thousands), excluding First Maryland Building's mortgage principal
    forgiveness discussed below:

<TABLE>
<CAPTION>
                                                             Total
                              Principal      Balloon        Mortgage
                              Payments       Payments       Payments
                              ---------      --------      ---------
          <S>                 <C>           <C>            <C>
          1997                 $  3,084     $   -          $   3,084
          1998                    3,399         -              3,399
          1999                    3,783         -              3,783
          2000                    3,998         6,054         10,052
          2001                    4,306         -              4,306
          Thereafter             34,400       101,708        136,108
                               --------     ---------      ---------
             Total             $ 52,970     $ 107,762      $ 160,732
                               ========     =========      =========
</TABLE>





                                 Page 19 of 32
<PAGE>   20
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996



4.  MORTGAGES PAYABLE - CONTINUED


    NOMURA REFINANCING -

    On September 29, 1995, a newly formed limited partnership owned 99.9% by
    the Partnership entered into an agreement for an $88,400,000 loan with
    Nomura Asset Capital Corporation.  The loan has a 25 year principal
    amortization period with an interest rate of 8.7% through October 10, 2005
    and 13.7% thereafter.  The non-recourse loan is secured by cross
    collateralized, cross defaulted, perfected first mortgage liens on Airport
    Plaza, Bellevue Corporate Plaza, about 65% of Corporate Square, about 92%
    of Fairlane Commerce Park, Montrose Office Center, Parklane Towers, and
    Raintree Industrial Park.


    FIRST MARYLAND BUILDING -

    Per the loan modification agreement described below, HRP is required to
    spend $2,700,000 for the costs of improvements and the lease commission for
    the lease renewal of First Maryland Building's major tenant. The tenant's
    previous lease was not scheduled to expire until mid-1997, however the
    tenant had been in negotiations with HRP since early 1996 in an effort to
    reduce their rental rate of $25 per square foot per annum, which was
    substantially above the prevailing market rate in downtown Baltimore,
    Maryland.  Concurrently with the loan modification, HRP executed a revised
    ten-year lease with the tenant which calls for rents ranging from $15 to
    $17 per square foot per annum and increases their space from 62% to 71% of
    the property's net rentable space of approximately 343,000 square feet.

    On October 3, 1996, but effective May 1, 1996, the lender for First
    Maryland Building extended the loan to April 30, 2003 with an unchanged
    interest rate of LIBOR plus 3.25% (8.75% as of February 1997) and forgave
    $3,237,000 of the principal balance in addition to the $9,250,000 of
    forgiveness granted in September 1995, resulting in a loan principal
    balance of $25,552,000.  Under this agreement, 49.9% of the property's net
    cash flow must be used to amortize the principal of the loan.

    For financial reporting purposes, the mortgage principal forgiveness is
    treated as a troubled debt restructuring and accordingly, HRP did not
    recognize a gain.  Instead, the the mortgage principal forgiveness remains
    on the balance sheet and is being amortized over the life of the loan.
    Interest expense is computed in such a way that a constant effective
    interest rate (currently equal to approximately 1.7%) is applied to the
    carrying amount of the loan.

    The contingent nature of the forgiveness that was part of the September
    1995 loan modification was removed with the October 1996 loan modification.
    Accordingly, for federal income tax purposes, the total forgiveness of
    $12,487,000 will be reported as a gain to the partners of HRP on their 1996
    Schedule K-1s.  Based on available records, the General Partner believes
    that most individuals who were partners at the time of HRP's formation in
    November 1990 and certain other partners possibly have enough prior years'
    suspended losses to absorb a part, if not all, of this gain.  Partners
    should consult their own tax advisor or preparer to assess the tax
    consequences of this transaction.


    EXECUTIVE PARK -

    Executive Park's mortgage notes matured on June 16, 1996.  On October 8,
    1996, the lender and HRP entered into a renewal and loan modification
    agreement, which extended the maturity date fifteen years to November 15,
    2011 and set the initial interest rate at 8.87%.  The notes are
    self-amortizing and include call options every three years for evaluation
    of financial performance.  The interest rate may be adjusted, within
    certain parameters, at the call option dates.





                                 Page 20 of 32
<PAGE>   21
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996



5.  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 $3,363,000, $3,902,000 and $2,932,000 in 1996, 1995 and
    1994, respectively.  At December 31, 1996, the Properties, in the
    aggregate, were 90% occupied and minimum cash rental payments to be
    received under non-cancelable leases with tenants were as follows (in
    thousands):

<TABLE>
                   <S>                        <C>
                   1997                       $   41,443
                   1998                           34,466
                   1999                           26,925
                   2000                           20,862
                   2001                           12,820
                   Thereafter                     52,741
                                               ---------
                     Total                     $ 189,257
                                               =========
</TABLE>



    During 1996 and 1995, two tenants leasing space in the Properties each
    contributed more than 10% of the total revenues of the Partnership.  Ford
    Motor Company and affiliates ("Ford") leases space in Parklane Towers and
    Fairlane Commerce Park and contributed approximately 16% and 18% of
    revenues in 1996 and 1995, respectively.  The Centers for Disease Control
    and Prevention, an agency of the U.S. Department of Health and Human
    Services, ("CDC") leases space in Corporate Square and Executive Park and
    contributed approximately 10% of 1996's revenues. First National Bank of
    Maryland leases space in the First Maryland Building and contributed 12% of
    1995's revenues.

    As of December 31, 1996, Ford occupied approximately 283,000 square feet of
    office space under 14 separate leases at Parklane Towers and approximately
    246,000 square feet of office, technical laboratory and industrial space
    under 8 separate leases at Fairlane Commerce Park.  These leases expire
    between 1997 and 2001 and most contain renewal options, providing for one
    to ten year renewals. As of December 31, 1996, CDC occupied approximately
    202,000 square feet of office space at Executive Park under 3 leases which
    expire between 1999 and 2003. CDC also occupied approximately 158,000
    square feet of office space at Corporate Square under a lease which expires
    in 2013.

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

6.  PARTNERS' CAPITAL

    REVERSE SPLIT

    On February 27, 1995, the General Partner approved a one-for-five reverse
    split ("Reverse Split") of the outstanding Units of the Partnership ("Old
    Units").  The result is that each five Old Units as of the close of
    business on the effective date of March 3, 1995 were converted into one new
    unit ("New Units").  The New Units began trading on March 6, 1995 at the
    post-Reverse Split price.  All references in the consolidated financial
    statements to the number of Units, per Unit amounts, and market prices of
    the Partnership's Units have been restated to reflect the effect of the
    Reverse Split.

    In anticipation of the need for cash to pay for fractional New Units, the
    General Partner purchased 30,000 New Units from the Partnership on March 6,
    1995 for $11.875 per Unit.  Unitholders received cash in lieu of fractional
    New Units as they exchanged their certificates that they held prior to the
    Reverse Split for new certificates.  The cash paid to Unitholders for their
    fractional New Units was $11.875 (based on five times the average closing
    price of the Old Units on the American Stock Exchange for the five trading
    days preceding the Reverse Split's effective date).  The fractional New
    Units were purchased by the Partnership.  As a result of these
    transactions, the number of outstanding units decreased from 8,662,298 Old
    Units to 1,747,765 New Units.  During the first quarter of 1995, the
    General Partner's capital account was adjusted for the above mentioned
    transactions in order to maintain its 1% general partner interest, in
    accordance with HRP's Partnership Agreement.





                                 Page 21 of 32
<PAGE>   22
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996




6.  PARTNERS' CAPITAL - CONTINUED

    UNIT OPTIONS

    In a separate action taken by the Board of Directors of the General Partner
    on February 27, 1995, a Unit Option Plan providing for the grants of
    options ("Options") to certain executives was approved.  The Unit Option
    Plan calls for up to an aggregate of 86,000 New Units to be available for
    issuance by the Partnership upon the exercise of such Options.  As of
    December 31, 1996, none of the Options have been exercised.  Also approved
    was a loan program that provides for the Partnership, under certain limited
    conditions, to loan to the optionees the amounts necessary to exercise the
    Options.  These nonqualified options were granted at an exercise price of
    $11.875 (equal to five times the closing price on the American Stock
    Exchange on the date before the grant to give effect of the above mentioned
    Reverse Split), to vest to 100% by February 27, 1997 and expire after 10
    years.  The options are considered antidilutive and therefore are not
    included in the calculation of loss per Unit amounts.

    HRP has adopted the disclosure-only provisions of Statement of Financial
    Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based
    Compensation". Accordingly, no compensation cost has been recognized for
    the Options.  Had compensation costs for the Options been determined based
    on the fair value at the grant date for the awards in 1995 consistent with
    the provisions of SFAS No. 123, HRP's net loss and net loss per Unit for
    1996 and 1995 would have been the pro forma amounts indicated below (in
    thousands except per Unit amounts):

<TABLE>
<CAPTION>
                                                   1996            1995    
                                                 ---------      ---------- 
      <S>                                       <C>            <C>         
      Net loss - as reported                    $  (9,428)     $   (9,789) 
      Net loss - pro forma                         (9,623)        (10,146) 
      Net loss per Unit - as reported               (5.50)          (5.55) 
      Net loss per Unit - pro forma                 (5.61)          (5.76) 
</TABLE>


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

    COMMISSION-FREE OFFER

    On June 5, 1995, the Partnership announced a commission-free program for
    Unitholders to sell their interest in the Partnership for holdings of less
    than 100 Units as of the record date of May 31, 1995.  The offer allowed
    eligible Unitholders to sell all, but not less than all, of their Units to
    the Partnership without incurring any brokerage commissions.  The offer
    will benefit the Partnership by reducing the annual Unitholder servicing
    costs incurred for tax reporting, printing, postage and transfer agent
    costs.

    Units were purchased by the Partnership on the first business day (the
    "Purchase Date") on which the Partnership determined that the Unit
    certificate was in proper form and that the Letter of Transmittal form was
    properly completed.  The per Unit price paid by the Partnership was based
    on the average of the closing market prices of the Units for the five
    trading days immediately preceding the Purchase Date, as reported by The
    Wall Street Journal.  On July 10, 1995 the offer expired.  The Partnership
    acquired about 294,000 Units from over 16,600 Unitholders.  As planned, the
    Partnership resold the acquired Units to Hallwood for the amount that the
    Partnership paid for the Units, approximately $4,100,000.

    UNIT PURCHASES

    HRP purchased, in private transactions, 74,760 Units for $1,776,000 in May
    1996 and 449 Units for $12,000 in July 1996.  In addition, the General
    Partner's capital account was adjusted by $18,000 in order to maintain its
    1% general partner interest, in accordance with HRP's Partnership
    Agreement.  Accordingly, HRP's outstanding Units have decreased from
    1,747,765 Units to 1,672,556 Units.





                                 Page 22 of 32
<PAGE>   23
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996



7.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107 - "Disclosures about Fair Value of Financial Instruments",
    requires disclosure of the estimated fair values of certain financial
    instruments.  The estimated fair value amounts have been determined using
    available market information based upon negotiations held by HRC 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 Company 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 reprice
    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, which are
    excluded from the scope of SFAS 107.

    Management has reviewed the carrying values of its mortgages payable in
    connection with interest rates currently available to the Partnership for
    borrowings with similar characteristics and maturities (approximately 8.8%)
    and has determined that they would equal approximately $159,096,000 and
    $166,851,000 (excluding the contingent forgiveness of debt discussed in
    Note 4) of estimated fair value as of December 31, 1996 and 1995,
    respectively.

    As of December 31, 1996 and 1995, 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.


8.  COMMITMENTS AND CONTINGENCIES

    LITIGATION

    On April 14, 1994, the Partnership reached an agreement to settle all
    claims arising out of a class action lawsuit originally filed in July 1990.
    In 1994, the Partnership incurred $8,198,000 of litigation and settlement
    cost expenses.  The Partnership is from time to time involved in various
    legal proceedings in the ordinary course of its business.  Management
    believes that the resolution of these matters will not have a material
    effect on the financial position, cash flow or operations of the
    Partnership.

    ASBESTOS

    Parklane Towers, as well as certain other properties to a lesser extent,
    are known to contain asbestos.  Removal of the asbestos at Parklane Towers
    is estimated to cost $1,700,000; however, it is not required to be removed
    since it is not friable and the Partnership has an Operations and
    Maintenance Program in place.  Federal and state environmental legislation
    or regulations may have an impact on the future operations of Parklane
    Towers or certain other properties if such legislation or regulations
    require the immediate expenditure of funds to comply with applicable
    restrictions or requirements.

    RIGHTS PLAN

    The Partnership 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.  The
    rights will expire on November 30, 2000.  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. The Partnership 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.





                                 Page 23 of 32
<PAGE>   24
                        HALLWOOD REALTY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996



9.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)


 Set forth below is selected quarterly financial data for the years ended
December 31, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                 Quarter Ending             
                                                    -----------------------------------------------
                                                    March 31    June 30   September 30  December 31
                                                    --------    --------  ------------  -----------
                                                       (In thousands except per Unit amounts)
<S>                                                 <C>         <C>         <C>         <C>     
              1995
              ----
Total revenues                                      $ 12,432    $ 12,258    $ 12,277    $ 12,645

Property operations revenues less property
  operations expenses and recurring general
       and administrative expenses                     5,058       5,230       5,179       4,948

Net loss                                              (2,520)     (2,324)     (2,103)     (2,481)
Net loss per Unit                                      (1.43)      (1.35)      (1.24)      (1.48)

              1996
              ----

Total revenues                                      $ 12,809    $ 12,296    $ 12,837    $ 12,887

Property operations revenues less property
   operations expenses and recurring general
       and administrative expenses                     6,107       5,603       5,996       5,791

Loss before extraordinary item                        (2,185)     (2,654)     (2,273)     (1,912)
Net loss                                              (2,185)     (2,654)     (3,038)     (1,912)
Loss before extraordinary item per Unit                (1.25)      (1.50)      (1.30)      (1.07)
Net loss per Unit                                      (1.25)      (1.50)      (1.73)      (1.07)
</TABLE>





                                 Page 24 of 32
<PAGE>   25

                         HALLWOOD REALTY PARTNERS, L.P.
            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                               DECEMBER 31, 1996
                                 (IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                       Costs
                                                                     capitalized
                                                                    subsequent to
                                                  Initial cost       acquisition 
                                                 ------------------ ------------ 
                                                        Buildings     Buildings  
                                                           and          and         
  Description (A)               Encumbrances     Land  improvements improvements 
  ---------------               ------------     ----  ------------ ------------ 
<S>                                <C>        <C>        <C>        <C>     
 OFFICE PROPERTIES:
    Airport Plaza                  $    790   $  1,220   $  4,013   $    317

    Bellevue Corporate Plaza         15,808      7,428     17,617      2,722
    Corporate Square                 13,461      5,493     14,112      7,545
    Executive Park                   29,987     15,243     34,982     10,793
    First Maryland Building          25,460      2,100     43,772      2,619
    Montrose Office Center            6,422      5,096     15,754      3,583
    Parklane Towers                  23,712      3,420     37,592      3,163

 INDUSTRIAL PARK PROPERTIES:
    Bradshaw Business Parks           6,530      5,017     15,563      4,358
    Fairlane Commerce Park           20,946      5,300     18,080      5,140
    Joy Road Distribution Center       --          359      1,340      1,231
    Raintree Industrial Park         11,066      1,191     18,208      1,302
    Seattle Business Parks            6,550      4,953      8,730      3,871

 OFFICE EQUIPMENT                      --         --         --           84
                                   --------   --------   --------   --------
    TOTAL                          $160,732   $ 56,820   $229,763   $ 46,728
                                   ========   ========   ========   ========
</TABLE>
                                                                         
                                                                         

<TABLE>
<CAPTION>
                                        Gross amount at which
                                      carried at close of period        
                                    -------------------------------      
                                              Buildings               Accumulated
                                                 and                  depreciation    Date
 Description (A)                     Land    improvements   Total (B)    (B)(C)     acquired  
 ---------------                   --------- ------------  ----------  ---------   ------------
<S>                               <C>         <C>          <C>         <C>         <C>
 OFFICE PROPERTIES:
    Airport Plaza                  $  1,220   $  4,330      $  5,550   $  4,701     4/30/87            
                                                                                                       
                                                                                                       
    Bellevue Corporate Plaza          7,428     20,339        27,767      4,215     6/30/88            
    Corporate Square                  5,493     21,657        27,150     12,674     8/2/85 & 10/1/92   
    Executive Park                   15,243     45,775        61,018     32,308     12/19/85           
    First Maryland Building           2,100     46,391        48,491     25,119     6/29/84            
    Montrose Office Center            5,096     19,337        24,433      6,833     1/8/88             
    Parklane Towers                   3,420     40,755        44,175     27,922     12/16/84           
                                                                                                       
 INDUSTRIAL PARK PROPERTIES:                                                                           
    Bradshaw Business Parks           5,017     19,921        24,938     10,348     9/24/85            
    Fairlane Commerce Park            5,300     23,220        28,520      9,474     12/30/86 & 7/1/87  
    Joy Road Distribution Center        359      2,571         2,930        103     2/14/96            
    Raintree Industrial Park          1,191     19,510        20,701      9,250     7/17/86            
    Seattle Business Parks            4,953     12,601        17,554      7,455     4/24/86            
                                                                                                       
 OFFICE EQUIPMENT                      --           84            84         32     various            
                                   --------   --------      --------   --------                        
                                                                                                       
    TOTAL                          $ 56,820   $276,491      $333,311   $150,434                        
                                   ========   ========      ========   ========                        
</TABLE>


                  See notes to Schedule III on following page.

                                Page 25 of 32
<PAGE>   26

                         HALLWOOD REALTY PARTNERS, L.P.
                             NOTES TO SCHEDULE III
                               DECEMBER 31, 1996
                                 (IN THOUSANDS)


 (A) PROPERTY LOCATIONS ARE AS FOLLOWS:

       Office Building Properties:
        Airport Plaza - San Diego, California
        Bellevue Corporate Plaza - Bellevue, Washington
        Corporate Square - Atlanta, Georgia
        Executive Park - Atlanta, Georgia
        First Maryland Building - Baltimore, Maryland
        Montrose Office Center - Rockville, Maryland
        Parklane Towers - Dearborn, Michigan

       Industrial Park Properties:
        Bradshaw Business Parks - Sacramento and Rancho Cordova, California
        Fairlane Commerce Park - Dearborn, Michigan
        Joy Road Distribution Center - Detroit, Michigan
        Raintree Industrial Park - Solon, Ohio
        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, 1994          $ 332,333    $ 112,623

                 Additions                         3,459       17,957
                 Retirements                      (3,289)      (3,289)
                                               ---------    ---------

             Balance, December 31, 1994          332,503      127,291

                 Additions                         4,477       17,423
                 Retirements                      (6,502)      (6,502)
                                               ---------    ---------

             Balance, December 31, 1995          330,478      138,212

                 Additions                         7,697       17,086
                 Retirements                      (4,864)      (4,864)
                                               ---------    ---------

             Balance, December 31, 1996        $ 333,311    $ 150,434
                                               =========    =========
</TABLE>

    (C)  COMPUTATION OF DEPRECIATION:

         Depreciation of buildings is computed using the straight-line method
         over estimated useful lives ranging from 10 to 43 years.  Equipment
         and other improvements are depreciated on the straight-line method
         over estimated useful lives ranging from 3 to 23 years.  Tenant
         improvements are capitalized and amortized over the term of the
         respective leases.  Accumulated depreciation also includes loss
         reserves established for anticipated losses on future dispositions.



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

         None.





                                 Page 26 of 32
<PAGE>   27

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


The Partnership has no officers or directors.  HRC, as general partner of the
Partnership, performs all functions ordinarily performed by officers and
directors.  HRC was incorporated in Delaware in January 1990.

BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS OF HRC -

ANTHONY J. GUMBINER, 52, CHAIRMAN OF THE BOARD AND DIRECTOR OF HRC
   Mr. Gumbiner has served as Chairman of the Board of Directors of Hallwood
   since 1981 and as its Chief Executive Officer since April 1984.  He has
   served as Chairman of the Board of Directors from May 1984 to November 1996
   and Chief Executive Officer since February 1987 of the general partner of
   Hallwood Energy Partners, L.P. ("HEP").  He has also served as the managing
   director of Hallwood Holdings S.A. ("HHSA") since March 1984; as a director
   of HRC since 1990; as a director of Hallwood Consolidated Resources
   Corporation ("HCRC") since 1992; and as a director of ShowBiz Pizza Time,
   Inc. ("ShowBiz") since September 1988.  Mr. Gumbiner is also a Solicitor of
   the Supreme Court of Judicature of England.

BRIAN M. TROUP, 49, DIRECTOR OF HRC
   Mr. Troup has served as a director of Hallwood since 1981 and as President
   and Chief Operating Officer of Hallwood since April 1986.  Mr. Troup has
   served as a director of the general partner of HEP since May 1984. He also
   has served as a director of HCRC since 1992; as a director of HHSA since
   March 1984; as a director of HRC since 1990; and as a director of ShowBiz
   since September 1988.  He is an associate of the Institute of Bankers in
   Scotland and a member of the Society of Investment Analysts in the United
   Kingdom.

WILLIAM L. GUZZETTI, 53, PRESIDENT AND DIRECTOR OF HRC
   Mr. Guzzetti has been President and a director of HRC since January 1990.
   He has served as Executive-Vice President of Hallwood since October 1989 and
   as President and a director of HCRC since 1992.  Mr. Guzzetti has been
   President and a director of the general partner of HEP since February 1985.

JOHN G. TUTHILL, 53, EXECUTIVE VICE PRESIDENT AND SECRETARY
   Mr. Tuthill has been the Executive Vice President and Secretary of HRC since
   January 1990.  Mr. Tuthill 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.

JEFFREY D. GENT, 49, VICE PRESIDENT - FINANCE
   Mr. Gent has been the Vice President-Finance of HRC since March 1990, having
   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, 55, DIRECTOR OF HRC
   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.  He is a Fellow of the Royal Institution of Chartered Surveyors
   and holds a B.A. (Hons) Degree.

WILLIAM F. FORSYTH, 47, DIRECTOR OF HRC
   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, 53, DIRECTOR OF HRC
   Mr. Story has been President and Chief Executive Officer of SOCO
   International, Inc., 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.

UDO H. WALTHER, 49, DIRECTOR OF HRC
   Mr. Walther has been President and Chief Executive Officer of Walther Group,
   Inc., a full service design and construction consultancy, and President of
   Precept Builders, Inc. since 1991.  Previously, Mr. Walther was a Partner at
   Trammell Crow Company, Project Manager with HCB Contractors and Marketing
   Vice President for Researched Investments, Ltd.





                                 Page 27 of 32
<PAGE>   28


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)

Section 16(a) of the Securities and Exchange Act of 1934 requires a
registrant's officers and directors, if any, and persons who own more than ten
percent of a registered class of the Partnership's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC") and the American Stock Exchange.  Officers, directors
and greater than ten percent shareholders are required by the SEC regulations
to furnish the Partnership with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Partnership, or written representations that no Forms 5 were required, the
Partnership believes that during the period January 1, 1996 to December 31,
1996, all Section 16(a) filing requirements applicable to its officers and
directors were complied with.

ITEM 11.   EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE INTERLOCKS,  INSIDER PARTICIPATION AND COMPENSATION OF
DIRECTORS

HRC does not have a compensation committee and compensation decisions are made
by the Board of Directors of HRC.  During 1996, Messrs. Gumbiner, Troup and
Guzzetti served on the Board of Directors of HRC and the compensation committee
of Hallwood Energy.  Mr. Gumbiner is also Chief Executive Officer of Hallwood,
HRC and the general partner of HEP.  Mr.  Troup is also President and Chief
Operating Officer of Hallwood.  Mr. Guzzetti is also President and Chief
Operating Officer of HRC, Chief Operating Officer and President of the general
partner of HEP, and Executive Vice President of Hallwood.  Messrs. Crisp and
Forsyth were each paid $20,000 in each of the three years ended December 31,
1996 for director fees.  Messrs. Story and Walther were each paid $20,000 in
1996 and 1995 and $10,000 in 1994 for director fees.

HRC receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and incentive disposition
fees.  Specifically, HRC 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, 1999 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, not to exceed 6% of the net aggregate rent, and (iii) construction
supervision fees for administering all construction projects equal to 5% of the
total contract costs of each capital expenditure or tenant improvement project.

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

<TABLE>
<CAPTION>
                                    Entity
                                    Paid or
                                   Reimbursed             1996            1995            1994
                                   ----------           --------         -------         -------
<S>                                   <C>               <C>              <C>             <C>
Asset management fee                  HRC               $    450         $   446         $   434
Property management fee               HCRE                 1,433           1,459           1,384
Lease commissions (a)                 HCRE                 2,888           1,501             801
Construction fees                     HCRE                   382             270             259
Acquisition fee                       HRC                     17               -               -
Reimbursement of costs (b)            HRC                  2,321           1,992           2,030
</TABLE>


      (a)   As of February, 1997, $667,000 of the lease commissions accrued in
            1996 had not been paid.

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





                                 Page 28 of 32
<PAGE>   29


ITEM 11.   EXECUTIVE COMPENSATION - (CONTINUED)

CASH COMPENSATION OF EXECUTIVE OFFICERS

The Partnership has no executive officers, however, employees of HRC (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 three other executive
officers with earnings that exceeded $100,000 for the year ended December 31,
1996.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                                            Long Term
                                                                Annual Compensation                    Compensation Awards
                                          -----------------------------------------------------------------------------------
                                                                                    Other Annual      Securities Underlying  
Name and Principal Position                Year        Salary (a)       Bonus     Compensation (b)       Options/SARs (c)    
---------------------------                ----        ----------       -----     ----------------  -------------------------
<S>                                        <C>       <C>             <C>             <C>                 <C>
Anthony J. Gumbiner                        1996      $     -         $    -          $     -                -
  Chairman of the Board and                1995            -              -                -             25,800
  Chief Executive Officer                  1994            -              -                -                -

William L. Guzzetti                        1996          200,000         8,333             -                 -
  President and Chief                      1995          200,000         8,333             -             15,000
  Operating Officer                        1994          200,000         8,333             -                 -

John G. Tuthill                            1996          150,360        46,265            3,345              -
  Executive Vice President                 1995          150,360         6,265            8,556          13,000         
  and Secretary                            1994          150,000         6,250            8,969              -              

Jeffrey D. Gent                            1996           90,360        15,648            2,317              -
  Vice President - Finance                 1995           90,360         5,648            6,356           7,000
</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.

    (c)  Represents the number of options granted for Partnership Units under a
         February 1995 plan - see Note 6 to the Consolidated Financial
         Statements. Other than this plan, HRC and HRP do not have any long
         term compensation awards and payouts, such as a stock option plan or
         restricted stock awards.

The following table discloses for each of the executive officers of HRC, who
have been granted options to purchase securities of HRP the number of such
options heldby each of the executive officers and the potential realizable
values for their options at December 31, 1996. None of the executive officers
exercised any options during the year ended December 31, 1996 and HRP has not
granted SARs.

                    AGGREGATED OPTION/SAR EXERCISES IN 1996
                   AND OPTION/SAR VALUES AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                      Value of Unexercised
                                                  Number of Unexercised                   In-the-Money
                                                     Options/SARs at                     Options/SARs at
                                Units               December 31, 1996                    December 31, 1996        
                               Acquired     ---------------------------------   --------------------------------
Name                         on Exercise     Exercisable     Unexercisable       Exercisable       Unexercisable
----                         -----------     -----------     --------------      -----------       -------------
<S>                               <C>            <C>              <C>            <C>                <C>
Anthony J. Gumbiner               0              17,200           8,600          $421,400           $210,700
William L. Guzzetti               0              10,000           5,000           245,000            122,500
John G. Tuthill                   0               8,666           4,334           212,317            106,183
Jeffrey D. Gent                   0               4,666           2,334           114,317             57,183
</TABLE>





                                 Page 29 of 32
<PAGE>   30


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of March 14, 1997 concerning the
number of Units of the Partnership 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 HRC as a group:

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

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

Alan G. Crisp **                                    -                    -

William F. Forsyth **                               -                    -

Anthony J. Gumbiner **                         25,800 (b)              1.5% (b)

William L.  Guzzetti **                        15,100 (c)               *   (c)

Edward T. Story **                                  -                    -

Brian M. Troup **                              17,200 (d)              1.0% (d)

Udo H. Walther **                                   -                    -

All directors and executive officers
as a group (9 persons)                         78,100 (e)              4.7% (e)
</TABLE>

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

*  Represents less than l% of the outstanding Units.

** Represents the following address: c/o Hallwood Realty Corporation,
   3710 Rawlins, Suite 1500, Dallas, Texas, 75219.

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

    (b)  Comprised of currently exercisable options to purchase 25,800 Units.

    (c)  Includes currently exercisable options to purchase 15,000 Units.

    (d)  Comprised of currently exercisable options to purchase 17,200 Units.

    (e)  Includes currently exercisable options to purchase 78,000 Units.




ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For information covered by this item, see Notes 3 and 6 to the Registrant's
financial statements included in Item 8 hereof.





                                 Page 30 of 32
<PAGE>   31

                                    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 1996 or in
     1997 prior to the filing of this Form 10-K for the year ended December 31,
     1996.

(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 31 of 32
<PAGE>   32

                                   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 CORPORATION
                                           GENERAL PARTNER


DATE: March 14, 1997                   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, 1996, has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
              Signature                          Title
              ---------                          -----
<S>                                          <C>
/s/ ANTHONY J.  GUMBINER                Chairman of the Board and Director,
-------------------------------------   Hallwood Realty Corporation  
Anthony J. Gumbiner                     (Chief Executive Officer)  
                                                                   
                                        
/s/ WILLIAM L.  GUZZETTI                President and Director,
-------------------------------------   Hallwood Realty Corporation 
William L. Guzzetti                     (Chief Operating Officer)  
                                                                   
                                        
                                        
/s/ JOHN G.  TUTHILL                    Executive Vice President and Secretary,
-------------------------------------   Hallwood Realty Corporation  
John G. Tuthill                                                    
                                        
                                        
/s/ JEFFREY D.  GENT                    Vice President - Finance,
-------------------------------------   Hallwood Realty Corporation   
Jeffrey D. Gent                         (Chief Accounting Officer) 
                                                                   
                                        
                                        
/s/ALAN G. CRISP                        Director,
-------------------------------------   Hallwood Realty Corporation
Alan G. Crisp                                                      
                                        
                                        
/s/ WILLIAM F.  FORSYTH                 Director,
-------------------------------------   Hallwood Realty Corporation
William F. Forsyth                                                 
                                        
                                        
/s/ EDWARD T.  STORY                    Director,
-------------------------------------   Hallwood Realty Corporation
Edward T. Story                                                    
                                        
                                        
/s/ BRIAN M.  TROUP                     Director,
-------------------------------------   Hallwood Realty Corporation
Brian M. Troup                                                     
                                        
                                        
/s/ UDO H.  WALTHER                     Director,
-------------------------------------   Hallwood Realty Corporation
Udo H. Walther                                                       
</TABLE>





                                 Page 32 of 32
<PAGE>   33


                         HALLWOOD REALTY PARTNERS, L.P.
                                 EXHIBIT INDEX


<TABLE>   
<CAPTION> 
Exhibit   
Number                                          Exhibit
------                                          -------
<S>    <C>        <C>
 3.1   (a)        Certificate of Limited Partnership of Hallwood Realty Partners, L.P., dated January 10, 1990.
          
 3.2   (a)        Amended and Restated Agreement of Limited Partnership of Hallwood Realty Partners, L.P., dated June
                  7, 1990.
          
 4.1              Unit Purchase Rights Agreement, dated as of November 30, 1990, between the Partnership and The
                  First National Bank of Boston, as Rights Agent (filed as part of Exhibit 1 to Current Report of
                  Form 8-K, dated November 30, 1990, and which is incorporated herein by reference - File No.1 -
                  10643).  (4.1)
          
10.1 (b)          Management Agreement between Equitec/San Diego  and Hallwood Management Company dated July 1, 1994.
          
10.2 (b)          Management Agreement between Equitec/Bellevue Investors and Hallwood Management Company dated July
                  1, 1994.
          
10.3 (b)          Management Agreement between BBP General Partnership and Hallwood Management Company dated July 1,
                  1994.
          
10.4 (b)          Management Agreement between Hallwood Real Estate Investors Fund XV and Hallwood Management Company
                  dated July 1, 1994.
          
10.5 (b)          Management Agreement between Executive Park Ventures and Hallwood Management Company dated July 1,
                  1994.
          
10.6 (b)          Management Agreement between Equitec Dearborn Real Estate Investors and Hallwood Management Company
                  dated July 1, 1994.
          
10.7 (b)          Management Agreement between Hallwood Income Real Estate Investors A and Hallwood Management
                  Company dated July 1, 1994.
          
10.8 (b)          Management Agreement between Hallwood Real Estate Investors Fund XVI Hallwood Management Company
                  dated July 1, 1994.
          
10.9 (b)          Management Agreement between First Associates Limited Partnership and Hallwood Management Company
                  dated July 1, 1994.
          
10.10 (b)         Management Agreement between Montrose Center Limited Partnership and Hallwood Management Company
                  dated July 1, 1994.
</TABLE>
<PAGE>   34
                         HALLWOOD REALTY PARTNERS, L.P.
                          EXHIBIT INDEX - (Continued)



<TABLE>   
<CAPTION> 
Exhibit   
Number                                          Exhibit
------                                          -------
<S>               <C>
10.11 (b)         Management Agreement between Hallwood Real Estate Investors Fund XIV and Hallwood Management
                  Company dated July 1, 1994.
          
10.12 (b)         Management Agreement between Hallwood Real Estate Investors Fund XVI and Hallwood Management
                  Company dated July 1, 1994.
          
10.13 (b)         Management Agreement between SBP General and Hallwood Management Company dated July 1, 1994.
          
10.14 (b)         1995 Unit Option Plan for Hallwood Realty Partners, L.P.
          
10.15 (b)         1995 Unit Option Plan Loan Program for Hallwood Realty Partners, L.P.
          
10.16             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.)
          
10.17             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.)
          
27                Financial Data Schedule

__________

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

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