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

                                    Form 10-Q

MARK ONE
[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
              EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended March 31, 1998

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

                          Commission File Number 1-8921



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



              Delaware                                                84-0987088
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                            Identification Number)

 4582 South Ulster Street Parkway
                  Suite 1700
             Denver, Colorado                                              80237
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (303) 850-7373

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 registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).

Number of Units outstanding as of May 12, 1998

Class A                 10,011,854
Class B                    143,773
Class C                  2,464,063





                                  Page 1 of 19


<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)
                                                  (In thousands)



                                                                      March 31,                December 31,
                                                                         1998                      1997

CURRENT ASSETS
<S>                                                                 <C>                         <C>       
    Cash and cash equivalents                                       $    6,577                  $    6,622
    Accounts receivable:
       Oil and gas revenues                                              6,356                       8,772
       Trade                                                             4,452                       4,609
    Due from affiliates                                                    140                         588
    Prepaid expenses and other current assets                            1,619                       1,551
                                                                     ---------                   ---------
         Total                                                          19,144                      22,142
                                                                      --------                    --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
    method):
       Proved mineral interests                                        627,703                     624,621
       Unproved mineral interests - domestic                             2,466                       2,315
    Furniture, fixtures and other                                        3,373                       3,513
                                                                     ---------                   ---------
         Total                                                         633,542                     630,449

    Less accumulated depreciation, depletion,
       amortization and property impairment                          (539,532)                   (536,118)
                                                                      -------                     -------
         Total                                                          94,010                      94,331
                                                                      --------                    --------

OTHER ASSETS
    Investment in common stock of HCRC                                  14,954                      15,048
    Deferred expenses and other assets                                      52                          82
                                                                   -----------                 -----------
         Total                                                          15,006                      15,130
                                                                      --------                    --------

TOTAL ASSETS                                                          $128,160                    $131,603
                                                                       =======                     =======














<FN>

                                         (Continued on the following page)
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)
                                            (In thousands except Units)



                                                                              March 31,              December 31,
                                                                                1998                      1997

CURRENT LIABILITIES
<S>                                                                          <C>                       <C>      
    Accounts payable and accrued liabilities                                 $  17,399                 $  19,915
    Net working capital deficit of affiliate                                        35                       448
    Current portion of contract settlement                                                                 2,752
                                                                         -------------                 ---------
         Total                                                                  17,434                    23,115
                                                                              --------                  --------

NONCURRENT LIABILITIES
    Long-term debt                                                              20,986                    34,986
    Deferred liability                                                           1,147                     1,180
                                                                             ---------                 ---------
         Total                                                                  22,133                    36,166
                                                                              --------                  --------

           Total Liabilities                                                    39,567                    59,281
                                                                              --------                  --------

MINORITY INTEREST IN AFFILIATES                                                  3,071                     3,258
                                                                             ---------                 ---------

COMMITMENTS AND CONTINGENCIES (NOTE 5)

PARTNERS' CAPITAL
    Class A Units -  10,011,854  and  9,977,254  Units  issued in 1998 and 1997,
      respectively; 9,121,612 and 9,077,949
      outstanding  in 1998 and 1997, respectively                               65,893                    66,184
    Class B Subordinated Units - 147,773 Units outstanding
      in 1998 and 1997                                                           1,424                     1,411
    Class C Units - 2,464,063 and 664,063 Units outstanding
      in 1998 and 1997, respectively                                            21,388                     4,868
    General partner                                                              3,726                     3,580
    Treasury Units - 890,242 and 899,305 Units in 1998 and
      1997, respectively                                                        (6,909)                    (6,979)
                                                                             ---------                  ---------
         Partners' Capital - Net                                                85,522                     69,064
                                                                              --------                   --------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                                       $128,160                   $131,603
                                                                               =======                    =======













<FN>

               The accompanying notes are an integral part of the
                             financial statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                                          HALLWOOD ENERGY PARTNERS, L. P.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (Unaudited)
                                        (In thousands except per Unit data)



                                                                                  For the Three Months Ended
                                                                                          March 31,
                                                                                1998                     1997

REVENUES:
<S>                                                                          <C>                      <C>     
    Gas revenue                                                              $  6,744                 $  7,473
    Oil revenue                                                                 3,090                    4,511
    Pipeline, facilities and other                                                700                      763
    Interest                                                                      140                      123
                                                                            ---------                ---------
                                                                               10,674                   12,870
                                                                              -------                  -------

EXPENSES:
    Production operating                                                        3,061                    2,789
    Facilities operating                                                          152                      178
    General and administrative                                                  1,165                    1,224
    Depreciation, depletion and amortization                                    3,539                    2,952
    Interest                                                                      644                      851
                                                                             --------                 --------
                                                                                8,561                    7,994
                                                                              -------                  -------

OTHER INCOME (EXPENSES):
    Equity in earnings (loss) of HCRC                                             (94)                     980
    Minority interest in net income of affiliates                                (313)                    (560)
    Litigation settlement                                                          45
                                                                            ---------
                                                                                 (362)                     420
                                                                             --------                 --------

NET INCOME                                                                      1,751                    5,296

CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT)                                        616                      166
                                                                             --------                 --------

NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
    CLASS A AND CLASS B LIMITED PARTNERS                                    $   1,135                 $  5,130
                                                                             ========                  =======

ALLOCATION OF NET INCOME:

General partner                                                             $     310                $     627
                                                                             ========                 ========
Class A and Class B Limited partners                                        $     825                 $  4,503
                                                                             ========                  =======
    Per Class A Unit and Class B Unit - basic                             $       .09              $       .49
                                                                           ==========               ==========
    Per Class A Unit and Class B Unit - diluted                           $       .09              $       .48
                                                                           ==========               ==========
    Weighted average Class A Units and Class B Units
       outstanding                                                              9,237                    9,222
                                                                             ========                  =======







<FN>

               The accompanying notes are an integral part of the
                             financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (Unaudited)
                                                  (In thousands)


                                                                                For the Three Months Ended
                                                                                        March 31,
                                                                               1998                   1997

OPERATING ACTIVITIES:
<S>                                                                           <C>                    <C>     
    Net income                                                                $  1,751               $  5,296
    Adjustment to reconcile net income to net cash provided
       by operating activities:
          Depreciation, depletion and amortization                               3,539                  2,952
          Depreciation charged to affiliates                                        63                     55
          Asset disposals                                                         (188)
          Amortization of deferred loan costs and other assets                      30                     20
          Noncash interest expense                                                  15                     57
          Equity in (earnings) loss of HCRC                                         94                   (980)
          Minority interest in net income                                          313                    560
          Undistributed (earnings) loss of affiliates                              253                   (123)
          Recoupment of take-or-pay liability                                      (33)                   (45)

    Changes in  operating  assets and  liabilities  provided  (used) cash net of
       noncash activity:
          Oil and gas revenues receivable                                        2,416                  2,215
          Trade receivables                                                        157                  1,011
          Due from affiliates                                                        8
          Prepaid expenses and other current assets                                (68)                   (33)
          Accounts payable and accrued liabilities                              (2,516)                 1,127
          Due to affiliates                                                                               331
                                                                          ------------             ----------
                Net cash provided by operating activities                        5,834                 12,443
                                                                              --------               --------

INVESTING ACTIVITIES:
    Additions to property, plant and equipment                                    (714)                  (469)
    Exploration and development costs incurred                                  (2,555)                (1,708)
    Proceeds from sales of property, plant and equipment                            20
    Other investing activities                                                                            (70)
                                                                          ------------             ----------
                Net cash used in investing activities                           (3,249)                (2,247)
                                                                              --------               --------

FINANCING ACTIVITIES:
    Payments of long-term debt                                                 (14,000)
    Distributions paid                                                          (2,253)                (1,914)
    Distribution paid by consolidated affiliates to minority interest             (500)                  (445)
    Payment of contract settlement                                              (2,767)
    Proceeds from the issuance of Class C Units net of syndication              16,520
costs
    Capital contribution from the general partner                                  171
    Exercise of Unit Options                                                       199
    Other                                                                                                  (4)
                                                                          ------------            -----------
                Net cash used in financing activities                           (2,630)                (2,363)
                                                                              --------               --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                                   (45)                 7,833

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                              6,622                  5,540
                                                                              --------               --------

END OF PERIOD                                                                $   6,577               $ 13,373
                                                                              ========                =======
<FN>

    The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>


                                          HALLWOOD ENERGY PARTNERS, L. P.
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                    (Unaudited)



NOTE 1    -   GENERAL

Hallwood Energy  Partners,  L. P. ("HEP") is a publicly traded Delaware  limited
partnership  engaged in the  development,  acquisition and production of oil and
gas properties in the continental  United States.  HEP's objective is to provide
its  partners  with  an  attractive   return   through  a  combination  of  cash
distributions and capital appreciation.  To achieve its objective,  HEP utilizes
operating  cash flow,  first,  to reinvest in operations to maintain its reserve
base and production;  second, to make stable cash  distributions to Unitholders;
and third,  to grow HEP's  reserve base over time.  HEP's future  growth will be
driven by a combination of development of existing projects, exploration for new
reserves and select acquisitions. The general partner of HEP is HEPGP Ltd.

The  activities  of HEP are  conducted  through HEP  Operating  Partners,  L. P.
("HEPO") and EDP Operating,  Ltd. ("EDPO").  HEP is the sole limited partner and
HEPGP Ltd. is the sole general partner of HEPO and of EDPO.  Solely for purposes
of simplicity  herein,  unless  otherwise  indicated,  all  references to HEP in
connection with the ownership, exploration, development or production of oil and
gas properties include HEPO and EDPO.

The interim financial data are unaudited; however, in the opinion of the general
partner,  the interim data include all  adjustments,  consisting  only of normal
recurring adjustments,  necessary for a fair presentation of the results for the
interim periods.  These financial  statements should be read in conjunction with
the financial  statements and accompanying  notes included in HEP's December 31,
1997 Annual Report on Form 10-K.

Accounting Policies

Consolidation

HEP  fully  consolidates  entities  in which it owns a greater  than 50%  equity
interest  and  reflects  a  minority  interest  in  the  consolidated  financial
statements.  HEP accounts for its interest in 50% or less owned  affiliated  oil
and gas partnerships  and limited  liability  companies using the  proportionate
consolidation method of accounting. HEP's investment in approximately 46% of the
common  stock of its  affiliate,  Hallwood  Consolidated  Resources  Corporation
("HCRC"), is accounted for under the equity method.

The  accompanying  financial  statements  include  the  activities  of HEP,  its
subsidiaries  Hallwood  Petroleum,  Inc.  ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood  Oil"), and majority owned affiliates,  the May Limited  Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2 and 1984-3 ("Mays").

Computation of Net Income Per Unit

During February 1997, the Financial  Accounting Standards Board issued Statement
of Financial  Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related  interpretations.  It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution,  and  requires  dual  presentation  of basic and  diluted  EPS for all
entities with complex capital  structures.  Diluted EPS is computed similarly to
fully  diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending  after  December  15,  1997,  including  interim  periods,  and  requires
restatement  of all  prior  period  EPS data  presented.  HEP  adopted  SFAS 128
effective  December  31,  1997,  and has  restated  all  prior  period  EPS data
presented to give retroactive effect to the new accounting standard.


<PAGE>


Basic  income  (loss) per Class A and Class B Unit is computed  by dividing  net
income (loss) attributable to the Class A and Class B limited partners' interest
(net income  excluding  income (loss)  attributable  to the general  partner and
Class C Units) by the weighted average number of Class A Units and Class B Units
outstanding  during  the  periods.  Diluted  income per Class A and Class B Unit
includes the  potential  dilution  that could occur upon  exercise of options to
acquire Class A Units,  computed  using the treasury  stock method which assumes
that the increase in the number of Units is reduced by the number of Units which
could  have been  repurchased  by the  Partnership  with the  proceeds  from the
exercise  of the options  (which  were  assumed to have been made at the average
market price of the Class A Units during the reporting period).

The  following  table  reconciles  the number of Units  outstanding  used in the
calculation of basic and diluted income (loss) per Class A and Class B Unit.
<TABLE>
<CAPTION>

                                                                        Income           Units          Per Unit
                                                                           (In thousands except per Unit)

For the Three Months Ended March 31, 1998
<S>                                                                   <C>                <C>                <C> 
   Net income per Class A Unit and Class B Unit - basic               $   825            9,237              $.09
                                                                                                             ===
   Effect of Unit Options                                                                   86
                                                                       ------            -----
     Net Income per Class A Unit and Class B Unit - diluted           $   825            9,323              $.09
                                                                       ======            =====               ===

For the Three Months Ended March 31, 1997
   Net income per Class A Unit and Class B Unit -basic                $ 4,503            9,222              $.49
                                                                                                             ===
   Effect of Unit Options                                                                  162
                                                                       ------            -----
     Net Income per Class A Unit and Class B Unit - diluted           $ 4,503            9,384              $.48
                                                                       ======            =====               ===
</TABLE>

Treasury Units

HEP owns  approximately 46% of the outstanding  common stock of HCRC, while HCRC
owns approximately 19% of HEP's Class A Units. Consequently, HEP has an interest
in 890,242 and 899,305 of its own Units at March 31, 1998 and December 31, 1997,
respectively.  These  Units are treated as  treasury  Units in the  accompanying
financial statements.

Recently Issued Accounting Pronouncements

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130 "Reporting  Comprehensive  Income" ("SAFS
130"). SAFS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues,  expenses, gains, and losses) in a full set
of general-purpose  financial statements.  SFAS 130 requires that all items that
are  required to be  recognized  under  accounting  standards as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods  provided for  comparative  purposes is required.
The Partnership  adopted SFAS 130 on January 1, 1998. The  Partnership  does not
have any items of other  comprehensive  income for the three month periods ended
March 31, 1998 and 1997.  Therefore,  total comprehensive income was the same as
net income for those periods.

Reclassifications

Certain  reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.




<PAGE>


NOTE 2    -   DEBT

During the first quarter of 1997, HEP and its lenders amended and restated HEP's
Second  Amended  and  Restated  Credit   Agreement  (as  amended,   the  "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit  Agreement,  HEP has a borrowing base of $49,000,000 at May 12, 1998.
HEP had amounts  outstanding at March 31, 1998 of  $16,700,000  under the Credit
Agreement and $4,286,000  under an Amended and Restated Note Purchase  Agreement
("Note Purchase Agreement").  HEP's unused borrowing base totaled $28,014,000 at
May  12,  1998.  When  the  acquisition  of the  volumetric  production  payment
described  in Note 6 is  consummated,  HEP's  borrowing  base will  increase  to
$61,000,000.

Borrowings  under the Note  Purchase  Agreement  bear interest an annual rate of
11.85%,  which is payable  quarterly.  Annual  principal  payments of $4,286,000
began  April  30,  1992,  and the debt was paid in full on April 30,  1998.  HEP
funded the payment due in April 1998  through  additional  borrowings  under the
Credit  Agreement;  thus,  no  portion  of  HEP's  Note  Purchase  Agreement  is
classified as current as of March 31, 1998.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 1.875%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 6.9%
at March 31, 1998. Interest is payable monthly, and quarterly principal payments
of $1,312,000 commence May 31, 1999.

The borrowing base for the Credit Facilities is redetermined  semiannually.  The
Credit  Facilities are secured by a first lien on approximately  80% in value of
HEP's oil and gas properties.  Additionally, aggregate distributions paid by HEP
in any 12 month  period are limited to 50% of cash flow from  operations  before
working  capital  changes and  distributions  received from  affiliates,  if the
principal amount of debt of HEP is 50% or more of the borrowing base.  Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations before
working capital changes and 65% of distributions  received from  affiliates,  if
the principal amount of debt is less than 50% of the borrowing base.

HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for 1998 and  $10,000,000  for each of 1999 and 2000.  HEP does not use
the hedges for  trading  purposes,  but rather for the  purpose of  providing  a
measure of  predictability  for a portion of HEP's  interest  payments under its
Credit Agreement,  which has a floating  interest rate. In general,  it is HEP's
goal to hedge 50% of the principal amount of its debt for the next two years and
25% for each year of the remaining  term of the debt.  HEP has entered into four
hedges,  one of which is an  interest  rate  collar  pursuant to which it pays a
floor rate of 7.55% and a ceiling  rate of 9.85%,  and the  others are  interest
rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts received or
paid upon settlement of these transactions are recognized as interest expense at
the time the interest payments are due.


NOTE 3    -   STATEMENTS OF CASH FLOWS

Cash paid for interest during the three months ended March 31, 1998 and 1997 was
$599,000 and $774,000, respectively.


NOTE 4    -   CLASS C UNIT ISSUANCE

On February  17,  1998,  HEP closed its public  offering of 1.8 million  Class C
Units, priced at $10.00 per Unit. Proceeds to HEP, net of underwriting expenses,
were  approximately  $16,520,000.  HEP used  $14,000,000  of the net proceeds to
repay borrowings  under its Credit Agreement and applied the remaining  proceeds
toward the  repayment of HEP's  outstanding  contract  settlement  obligation at
December 31, 1997 of $2,752,000.




<PAGE>


NOTE 5    -   LEGAL PROCEEDINGS

On December 3, 1997,  Arcadia  Exploration  and Production  Company  ("Arcadia")
filed a Demand for Arbitration with the American Arbitration Association against
Hallwood Energy Partners,  L.P., Hallwood  Consolidated  Resources  Corporation,
E.M.  Nominee  Partnership  Company and  Hallwood  Consolidated  Partners,  L.P.
(collectively referred to herein as "Hallwood"), claiming that Hallwood breached
a Purchase and Sale Agreement dated August 25, 1997, between Arcadia and HEP and
HCRC.  Arcadia's  Demand  for  Arbitration  seeks  specific  performance  of the
agreement  which  Arcadia  claims  requires  Hallwood  to  purchase  oil and gas
properties from Arcadia for approximately  $27 million.  HEP and HCRC terminated
the agreement  because of environmental  and title problems with the properties.
Additionally, Arcadia seeks incidental and special damages, prejudgment interest
and  attorneys'  fees and costs.  Hallwood  filed its  Answering  Statement  and
Counterclaim   asserting  that  it  properly  terminated  and/or  rescinded  the
Agreement and seeking refund of Hallwood's  earnest money  deposit,  prejudgment
interest,  attorneys'  fees and costs.  HEP's  management  intends to vigorously
defend the claims  asserted  by Arcadia  and  intends to  vigorously  pursue the
counterclaim  against  Arcadia.  This matter is currently set for hearing before
the arbitrators in May 1998.

Concise Oil and Gas Partnership  ("Concise"),  a wholly owned  subsidiary of the
Partnership,  is a defendant in a lawsuit styled Dr. Allen J.  Ellender,  Jr. et
al. vs. Goldking Production Company, et al., filed in the Thirty-Second Judicial
District Court, Terrebonne Parish,  Louisiana on May 30, 1996. The approximately
150 plaintiffs in this  proceeding are seeking  unspecified  damages for alleged
breaches of certain oil, gas and mineral leases in the Northeast Montegut Field,
Terrebonne Parrish,  Louisiana.  In addition,  they are asking for an accounting
from  Concise  for  production  of natural  gas for the period of time from 1983
through November 1987. Specifically,  as to the claims against Concise, the suit
alleges  that  Concise  failed to obtain  the  prices to which it was  allegedly
entitled  for  natural  gas sold in this  field in the 1980s  under a  long-term
natural gas sales  contract.  The  plaintiffs,  royalty and  overriding  royalty
owners,  allege that as a result of the alleged imprudent  marketing  practices,
they are  entitled  to their  share of the  prices  which  Concise  should  have
obtained.  Plaintiffs  have  also  sued  approximately  35 other  companies  and
individuals,  and allege that Concise is jointly and  severally  liable with the
rest of the  defendants for the claims raised by the  plaintiffs.  The judge has
recently  ruled  against  the  plaintiffs  on their  claim of joint and  several
liability,  and has also ruled that the  applicable  statute of  limitations  is
three years, rather than ten years as the plaintiffs claimed.  The trial date in
this case is set for February  1999.  The  Partnership  believes that the claims
asserted  against  Concise are without  merit and intends to  vigorously  defend
against them.

In addition to the litigation  noted above, the Partnership and its subsidiaries
are from time to time subject to routine  litigation  and claims  incidental  to
their business, which the Partnership believes will be resolved without material
effect on the Partnership's financial condition, cash flows or operations.


NOTE 6    -   SUBSEQUENT EVENT

On May 8, 1998,  HEP signed an  agreement  to purchase a  volumetric  production
payment in 34 coal bed methane wells located in La Plata County,  Colorado.  HEP
plans to fund its $17,257,000 share of the acquisition price from operating cash
flow and borrowings under its Credit Agreement.  The production  payment will be
owned by a limited  liability  company  owned  equally by HEP and its  affiliate
HCRC.  The  acquisition  is scheduled to close at the end of May.  HEP's lenders
have agreed to  increase  HEP's  borrowing  base under its Credit  Agreement  to
$61,000,000 when the acquisition is consummated.




<PAGE>


ITEM 2    -   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

Cash Flow

HEP generated $5,834,000 of cash flow from operating activities during the first
three months of 1998.

Cash was used primarily for:

           Payments of long-term debt of $14,000,000

           Additions to property and development costs incurred of $3,269,000

           Payment of contract settlement of $2,767,000 and

           Distributions to Unitholders of $2,253,000

When  combined  with  proceeds  from  the  issuance  of  Class C  Units,  net of
syndication costs, of $16,520,000,  the general partner capital  contribution of
$171,000,  the exercise of Unit options of $199,000 and miscellaneous other cash
activity  during the period,  the result was a decrease of $45,000 in HEP's cash
from $6,622,000 at December 31, 1997 to $6,577,000 at March 31, 1998.

Exploration and Development Projects

Through March 31, 1998, HEP incurred $3,269,000 in direct property additions and
exploration and  development  costs.  The costs were comprised of  approximately
$2,555,000  for  domestic   exploration   and   development   expenditures   and
approximately $714,000 for property acquisitions.  HEP's 1998 capital budget has
been set at $25,000,000 and includes  projects in more than 35 areas,  including
167 development,  exploration and seismic projects. A description of significant
exploration and development projects to date in 1998 follows.

Greater Permian Region

During the first quarter of 1998, HEP expended  approximately  $1,520,000 of its
capital budget in the Greater  Permian Region located in Texas and Southeast New
Mexico.  HEP spent  approximately  $360,000  drilling nine development wells and
four  exploration  wells and acquiring  undeveloped  acreage and  geological and
geophysical data. Seven (54%) of the wells drilled were successful. A discussion
of several of the larger projects within the region follows.

HEP spent  approximately  $165,000  successfully  recompleting four wells in the
Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico.

In 1997, HEP acquired 74 square miles of proprietary  3-D seismic data in Jones,
Taylor and Nolan Counties, Texas, in a project area originated in 1995. In 1997,
HEP drilled 10 exploration  wells,  seven of which were  successful.  During the
first  quarter  of  1998,  HEP  continued  work  in the  area  by  drilling  two
exploration  wells, one of which was successful.  Seven  additional  exploration
projects  are in  progress.  Costs  incurred  by HEP in 1998  are  approximately
$535,000.

In 1997, HEP purchased an interest in proprietary  3-D seismic data and selected
acreage  within an 85 square mile area.  During the first  quarter of 1998,  HEP
attempted  completion  on one  exploration  well began in 1997 and  drilled  one
additional  development  well.  Both wells were  unsuccessful.  HEP is currently
participating  in  the  drilling  of  one  exploration  well  and  has  incurred
approximately  $255,000 in this area in 1998.  HEP also plans to  participate in
two nonoperated development projects in the area during 1998.

HEP has  delayed  drilling  16 West  Texas  Spraberry  and  Clearfork  formation
development  wells to permit HEP to further  evaluate  the effects of both lower
oil prices and declining drilling costs.

Other  projects  begun  in 1997 in the  Greater  Permian  Region  have  cost HEP
approximately $430,000 in 1998.

Rocky Mountain Region

HEP expended  approximately $615,000 of its capital budget in the Rocky Mountain
Region  located in Colorado,  Montana,  North  Dakota,  Northwest New Mexico and
Wyoming.  During the first  quarter of 1998,  HEP spent  approximately  $335,000
recompleting two development wells, one of which was successful and drilling one
unsuccessful  well.  A  discussion  of the  larger  projects  within  the region
follows.

HEP incurred approximately $125,000 on one unsuccessful  recompletion attempt in
San Juan County, New Mexico.  HEP has begun a project to significantly  increase
gas gathering,  processing and  compression  capacity for its New Mexico coalbed
methane properties. Work should be completed in the third quarter and production
increases are expected.

In the Lone Tree area of Montana, HEP drilled one unsuccessful  exploration well
for a cost of approximately $205,000.

Development  drilling is  anticipated  to begin on HEP's  Piceance Basin Douglas
Arch  Properties  in the  second  quarter  of 1998.  Three of the 16  identified
locations will be drilled in the first segment of this project.

HEP plans to drill an exploration well to test the Muddy/Minnelusa  formation in
Campbell County,  Wyoming in the third quarter. HEP has a 29.5% working interest
in the well.

HEP plans to drill three development wells in Toole County, Montana in the third
quarter. HEP has a 50% working interest in this project.

Other  projects  begun  in 1997 in the  Rocky  Mountain  Region  have  cost  HEP
approximately $240,000 in 1998.

On May 8, 1998,  HEP signed an  agreement  to purchase a  volumetric  production
payment in 34 coal bed methane wells located in La Plata County,  Colorado.  HEP
plans to fund its $17,257,000 share of the acquisition price from operating cash
flow and borrowings under its Credit Agreement.  The production  payment will be
owned by a limited  liability  company  owned  equally by HEP and its  affiliate
HCRC.  The  acquisition  is scheduled to close at the end of May.  HEP's lenders
have agreed to  increase  HEP's  borrowing  base under its Credit  Agreement  to
$61,000,000 when the acquisition is consummated.

Gulf Coast Region

During first quarter 1998,  HEP expended  approximately  $750,000 of its capital
budget in the Gulf Coast  Region in  Louisiana  and South and East Texas.  Costs
associated  with  plugging  two  nonoperated   nearshore   platform  wells  were
approximately $505,000.

Drilling  is  expected  to begin in the third  quarter on two  recently  defined
operated exploration projects.  HEP has a 32.5% working interest in a project to
evaluate the Buda, Woodbine, and Dexter formations, and a 17.5% working interest
in a project to test the Frio formation.

Mid-Continent Region

HEP expended  approximately  $180,000 of its capital budget in the Mid-Continent
Region located in Oklahoma and Kansas.


<PAGE>


HEP is participating in an exploration prospect in Carter County, Oklahoma. This
nonoperated project is a 19,000 feet deep multi-formation structural test and is
currently in the completion  phase. The operator was unable to test the targeted
Hunton and Viola formation  objectives,  and secondary uphole objectives are now
being  evaluated.  The  drilling  costs  for the  first  quarter  of  1998  were
approximately $125,000.

Approximately  $35,000 was  incurred in 1998 by HEP to complete  one  successful
exploration well in the Anadarko Basin.

Weak crude oil prices have delayed  development  drilling plans for HEP's Kansas
properties;  however,  most of the  scheduled  workovers and  recompletions  are
proceeding.

Other

The  remaining  $204,000  of  HEP's  1998  capital   expenditures  were  devoted
principally  to  drilling  one  unsuccessful  exploration  well in Yolo  County,
California and to other miscellaneous projects. HEP is also participating in two
additional  nonoperated  3-D  projects  underway  in nearby  Solano  and  Colusa
Counties.

HEP's partner on the Peruvian  offshore Z-3 Block anticipates that it will begin
seismic data  acquisition  in June or July.  HEP will not incur capital costs on
this project until actual drilling operations begin.

Class C Unit Issuance

On February  17,  1998,  HEP closed its public  offering of 1.8 million  Class C
Units, priced at $10.00 per Unit. Proceeds to HEP, net of underwriting expenses,
were  approximately  $16,520,000.  HEP used  $14,000,000  of the net proceeds to
repay borrowings  under its Credit Agreement and applied the remaining  proceeds
toward the  repayment of HEP's  outstanding  contract  settlement  obligation at
December 31, 1997 of $2,752,000.

Distributions

HEP declared  distributions  of $.13 per Class A Unit and $.25 per Class C Unit,
payable on May 15, 1998 to Unitholders of record on March 31, 1998.

Distributions  on the Class B Units are suspended if the Class A Units receive a
distribution  of less than $.20 per Class A Unit per  calendar  quarter.  In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.

Financing

During the first quarter of 1997, HEP and its lenders amended and restated HEP's
Second  Amended  and  Restated  Credit   Agreement  (as  amended,   the  "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit  Agreement,  HEP has a borrowing base of $49,000,000 at May 12, 1998.
HEP has amounts  outstanding at March 31, 1998 of  $16,700,000  under the Credit
Agreement and $4,286,000  under an Amended and Restated Note Purchase  Agreement
("Note Purchase Agreement").  HEP's unused borrowing base totaled $28,014,000 at
May  12,  1998.  When  the  acquisition  of the  volumetric  production  payment
described  above  is   consummated,   HEP's  borrowing  base  will  increase  to
$61,000,000.

Borrowings  under the Note  Purchase  Agreement  bear interest an annual rate of
11.85%,  which is payable  quarterly.  Annual  principal  payments of $4,286,000
began  April  30,  1992,  and the debt was paid in full on April 30,  1998.  HEP
funded the payment due in April 1998  through  additional  borrowings  under the
Credit  Agreement;  thus,  no  portion  of  HEP's  Note  Purchase  Agreement  is
classified as current as of March 31, 1998.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 1.875%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 6.9%
at March 31, 1998. Interest is payable monthly, and quarterly principal payments
of $1,312,000, commence May 31, 1999.


<PAGE>


The borrowing base for the Credit Facilities is redetermined  semiannually.  The
Credit  Facilities are secured by a first lien on approximately  80% in value of
HEP's oil and gas properties.  Additionally, aggregate distributions paid by HEP
in any 12 month  period are limited to 50% of cash flow from  operations  before
working  capital  changes and  distributions  received from  affiliates,  if the
principal amount of debt of HEP is 50% or more of the borrowing base.  Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations before
working capital changes and 65% of distributions  received from  affiliates,  if
the principal amount of debt is less than 50% of the borrowing base.

HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for 1998 and  $10,000,000  for each of 1999 and 2000.  HEP does not use
the hedges for  trading  purposes,  but rather for the  purpose of  providing  a
measure of  predictability  for a portion of HEP's  interest  payments under its
Credit Agreement,  which has a floating  interest rate. In general,  it is HEP's
goal to hedge 50% of the principal amount of its debt for the next two years and
25% for each year of the remaining  term of the debt.  HEP has entered into four
hedges,  one of which is an  interest  rate  collar  pursuant to which it pays a
floor rate of 7.55% and a ceiling  rate of 9.85%,  and the  others are  interest
rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts received or
paid upon settlement of these transactions are recognized as interest expense at
the time the interest payments are due.

Cautionary Statement Regarding Forward-Looking Statements

In the  interest  of  providing  the  Partnership's  Unitholders  and  potential
investors with certain information  regarding the Partnership's future plans and
operations, certain statements set forth in the Form 10-Q relate to management's
future plans and  objectives.  Such statements are  forward-looking  statements.
Although any forward-looking statements contained in this Form 10-Q or otherwise
expressed by or on behalf of the  Partnership  are, to the  knowledge and in the
judgment of the officers and directors of the General Partner, expected to prove
true  and come to  pass,  management  is not able to  predict  the  future  with
absolute certainty.  Forward-looking  statements involve known and unknown risks
and  uncertainties  which may cause the  Partnership's  actual  performance  and
financial  results in future periods to differ  materially  from any projection,
estimate or forecasted  result.  These risks and  uncertainties  include,  among
other things, volatility of oil and gas prices,  competition,  risks inherent in
the Partnership's  oil and gas operations,  the inexact nature of interpretation
of seismic and other  geological and  geophysical  data,  imprecision of reserve
estimates, the Partnership's ability to replace and expand oil and gas reserves,
and such  other  risks  and  uncertainties  described  from  time to time in the
Partnership's  periodic  reports and filings  with the  Securities  and Exchange
Commission. Accordingly,  Unitholders and potential investors are cautioned that
certain events or circumstances  could cause actual results to differ materially
from those projected.

Inflation and Changing Prices

Prices

Prices obtained for oil and gas production depend upon numerous factors that are
beyond  the  control  of HEP,  including  the  extent of  domestic  and  foreign
production,  imports of foreign  oil,  market  demand,  domestic  and  worldwide
economic and political  conditions,  and  government  regulations  and tax laws.
Prices for both oil and gas fluctuated  significantly  throughout 1997 and 1998.
The following  table presents the weighted  average prices received each quarter
by HEP and the effects of the hedging transactions discussed below.
<TABLE>
<CAPTION>

                                    Oil                    Oil                    Gas                    Gas
                               (excluding the        (including the         (excluding the         (including the
                                 effects of            effects of             effects of             effects of
                                  hedging                hedging                hedging                hedging
                               transactions)          transactions)          transactions)          transactions)
                                 (per bbl)              (per bbl)              (per mcf)              (per mcf)

<S>             <C>                <C>                    <C>                     <C>                    <C>  
First quarter - 1997               $22.10                 $21.08                  $2.89                  $2.52
Second quarter - 1997               17.71                  17.71                   2.02                   1.98
Third quarter - 1997                18.40                  18.47                   2.25                   2.13
Fourth quarter - 1997               18.72                  18.69                   2.92                   2.56
First quarter - 1998                14.80                  15.30                   2.11                   2.07
</TABLE>


HEP has entered into numerous financial  contracts to hedge the price of its oil
and  natural  gas.  The purpose of the hedges is to provide  protection  against
price  decreases  and  to  provide  a  measure  of  stability  in  the  volatile
environment  of oil and natural gas spot pricing.  The amounts  received or paid
upon  settlement of these  contracts are recognized as oil or gas revenue at the
time the hedged volumes are sold.

The following table provides a summary of HEP's outstanding financial contracts:

                                               Oil

                                  Percent of Production            Contract
            Period                           Hedged              Floor Price

                                                                  (per bbl)

Last nine months of 1998                    23%                     $16.62
1999                                         2%                      15.38

Between  9% and 100% of the oil  volumes  hedged in each year are  subject  to a
participating  hedge  whereby HEP will receive the contract  price if the posted
futures  price is lower than the contract  price,  and will receive the contract
price  plus 25% of the  difference  between  the  contract  price and the posted
futures price if the posted  futures  price is greater than the contract  price.
Between 59% and 100% of the volumes  hedged in each year are subject to a collar
agreement whereby HEP will receive the contract price if the spot price is lower
than the contract price,  the cap price if the spot price is higher than the cap
price,  and the spot price if that price is between the  contract  price and the
cap price. The cap prices range from $17.00 to $18.85.



<PAGE>




                                                 Gas

                                  Percent of Production            Contract
            Period                            Hedged             Floor Price

                                                                  (per mcf)

Last nine months of 1998                    48%                      $2.06
1999                                        37%                       2.01
2000                                        29%                       2.14
2001                                        21%                       2.14
2002                                        10%                       2.42
Between  23% and 100% of the gas  volumes  hedged in each year are  subject to a
collar  agreement  whereby HEP will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price,  and the spot price if that price is between the  contract  price
and the cap price. The cap prices range from $2.59 to $2.93.

During the second quarter through April 25, 1998 the weighted  average oil price
(for  barrels not  hedged) was  approximately  $14.25 per barrel.  The  weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $2.15 per mcf.

Inflation

Inflation did not have a material  impact on HEP in 1997 and is not  anticipated
to have a material impact in 1998.

Results of Operations

The  following  tables are  presented  to contrast  HEP's  revenue,  expense and
earnings for discussion purposes.  Significant fluctuations are discussed in the
accompanying  narrative.  The "direct  owned"  column  represents  HEP's  direct
royalty and  working  interests  in oil and gas  properties.  The "Mays"  column
represents the results of operations of six May Limited  Partnerships  which are
consolidated  with HEP. In 1998 and 1997, HEP owned  interests which ranged from
57.5% to 68.2% of the Mays.


<PAGE>
<TABLE>
<CAPTION>


                                  TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
                                            (In thousands except price)


                                          For the Quarter Ended March 31, 1998              For the Quarter Ended March 31, 1997
                                          ------------------------------------              ------------------------------------
                                              Direct                                   Direct
                                               Owned       Mays       Total            Owned              Mays               Total

<S>                                          <C>          <C>       <C>              <C>                 <C>               <C>  
Gas production (mcf)                           2,945        320       3,265            2,609               359               2,968
Oil production (bbl)                             187         15         202              192                22                 214

Average gas price (per mcf)                  $  2.02    $  2.47     $  2.07          $  2.41           $  3.28             $  2.52
Average oil price (per bbl)                   $15.30     $15.27      $15.30           $20.90            $22.68              $21.08

Gas revenue                                  $ 5,952    $   792     $ 6,744          $ 6,295           $ 1,178             $ 7,473
Oil revenue                                    2,861        229       3,090            4,012               499               4,511
Pipeline, facilities and other revenue           700                    700              763                                   763
Interest income                                  122         18         140              106                17                 123
                                             -------  ---------     -------         --------         ---------             -------

   Total revenue                               9,635      1,039      10,674           11,176             1,694              12,870
                                              ------     ------      ------           ------            ------              ------

 Production operating expense                  2,940        121       3,061            2,633               156               2,789
 Facilities operating expense                    152                    152              178                                   178
 General and administrative expense            1,066         99       1,165            1,115               109               1,224
 Depreciation, depletion, and amortization     3,217        322       3,539            2,611               341               2,952
 Interest expense                                644                    644              851                                   851
 Equity in (income) loss of HCRC                  94                     94             (980)                                 (980)
 Minority interest                                          313         313                                560                 560
 Litigation settlement                           (45)                   (45)
                                            -------- ----------    --------           -------           -------             -------

   Total expense                               8,068        855       8,923            6,408             1,166               7,574
                                              ------     ------      ------           ------            ------              ------

     Net income                              $ 1,567    $   184     $ 1,751          $ 4,768          $    528             $ 5,296
                                              ======     ======      ======           ======           =======              ======


</TABLE>


<PAGE>


First Quarter of 1998 Compared to First Quarter of 1997

Gas Revenue

Gas revenue decreased $729,000 during the first quarter of 1998 as compared with
the first  quarter of 1997.  The  decrease  is the  result of a decrease  in the
average gas price from $2.52 per mcf in 1997 to $2.07 per mcf in 1998  partially
offset by an increase in production  from 2,968,000 mcf in 1997 to 3,265,000 mcf
in 1998.  The increase in  production  is primarily  due to workover  procedures
performed during the second quarter of 1997.

The effect of HEP's hedging  transactions  during the first quarter of 1998, was
to  decrease  HEP's  average  gas  price  from  $2.11  per mcf to $2.07 per mcf,
representing a $131,000 reduction in revenue from hedging transactions.

Oil Revenue

Oil revenue  decreased  $1,421,000  during the first quarter of 1998 as compared
with the first  quarter of 1997.  The  decrease  is the result of a decrease  in
production  from  214,000  barrels  in 1997 to  202,000  barrels  in 1998  and a
decrease  in the  average  oil price from $21.08 per barrel in 1997 to $15.30 in
1998.  The  decrease in oil  production  is primarily  due to normal  production
declines.

The effect of HEP's hedging  transactions,  as described  under  "Inflation  and
Changing  Prices,"  during the first  quarter  of 1998,  was to  increase  HEP's
average oil price from $14.80 per barrel to $15.30 per  barrel,  resulting  in a
$101,000 increase in revenue from hedging transactions.

Pipeline, Facilities and Other

Pipeline,  facilities and other revenue consists  primarily of facilities income
from two gathering  systems  located in New Mexico,  revenues  derived from salt
water  disposal  and  incentive  payments  related to certain  wells in San Juan
County,  New Mexico.  Pipeline,  facilities and other revenue  decreased $63,000
during the first  quarter of 1998 as compared with the first quarter of 1997 due
to fluctuations in numerous  miscellaneous items, none of which are individually
significant.

Interest Income

Interest income  increased  $17,000 during the first quarter of 1998 as compared
with the first quarter of 1997 due to a higher average cash balance during 1998.

Production Operating Expense

Production operating expense increased $272,000 during the first quarter of 1998
as  compared  with  the  first  quarter  of  1997,  primarily  due to  increased
maintenance  activity and increased production taxes resulting from the increase
in gas production discussed above.

Facilities Operating Expense

Facilities  operating expense  represents the costs of operating and maintaining
two gathering systems located in New Mexico.  Costs decreased $26,000 during the
first quarter of 1998 as compared  with the first quarter of 1997  primarily due
to decreased maintenance activity during 1998.

General and Administrative

General  and   administrative   expense   includes  costs  incurred  for  direct
administrative  services  such as legal,  audit and  reserve  reports as well as
allocated  internal overhead incurred by the operating company on behalf of HEP.
These expenses  decreased $59,000 during the first quarter of 1998 primarily due
to  a  net  decrease  in  numerous   miscellaneous  items,  none  of  which  are
individually significant.


<PAGE>


Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense increased $587,000 during the
first quarter of 1998 as compared  with the first quarter of 1997.  The increase
is primarily the result of a higher  depletion  rate in 1998 due to the increase
in production previously discussed.

Interest Expense

Interest expense decreased $207,000 during the first quarter of 1998 as compared
with the first quarter of 1997,  primarily as a result of lower outstanding debt
during 1998.

Equity in Earnings (Loss) of HCRC

Equity in earnings (loss) of HCRC decreased  $1,074,000 during the first quarter
of 1998 as compared  with the first  quarter of 1997.  The decrease is primarily
due to HCRC's decreased oil and gas revenue resulting from decreased  production
and prices.

Minority Interest in Net Income of Affiliates

Minority interest in net income of affiliates represents  unaffiliated partners'
interest in the net income of the May Partnerships.  The decrease of $247,000 is
due to a decrease in the net income of the May Partnerships  resulting primarily
from lower oil and gas prices and decreased production on their properties.

Litigation Settlement

Litigation  settlement  income during the first quarter of 1998  represents  the
settlement of a take-or-pay contract claim.


<PAGE>


PART II    -  OTHER INFORMATION


ITEM 1     -  LEGAL PROCEEDINGS

           Reference  is made to Item 8 - Notes 12 and 13 of Form 10-K for the 
           year  ended  December  31,  1997 and Note 5 of this Form 10-Q.


ITEM 2     -  CHANGES IN SECURITIES

              None.


ITEM 3     -  DEFAULTS UPON SENIOR SECURITIES

              None.


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

              None.


ITEM 5     -  OTHER INFORMATION

              None.


ITEM 6     -  EXHIBITS AND REPORTS ON FORM 8-K

              Exhibit

              4.5 Correction  to  the  First   Amendment  to  the  Third  
                  Amended  and  Restated Limited Partnership Agreement of 
                  Hallwood Energy Partners, L. P.


<PAGE>


SIGNATURE

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Partnership  has duly  caused  this  report to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                          By:  HEPGP LTD.
                                               General Partner

                                               By:  HALLWOOD G. P., INC.
                                                    General Partner



Date:   May 12, 1998                           By:  /s/Thomas J. Jung
     --------------------                         -----------------------------
                                                  Thomas J. Jung, Vice President
                                                    (Chief Financial Officer)