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 June 30, 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 August 14, 1998

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





                                  Page 1 of 24


<PAGE>
<TABLE>
<CAPTION>


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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



                                                                       June 30,                December 31,
                                                                         1998                      1997

CURRENT ASSETS
<S>                                                                 <C>                         <C>       
    Cash and cash equivalents                                       $    7,866                  $    6,622
    Accounts receivable:
       Oil and gas revenues                                              6,347                       8,772
       Trade                                                             4,781                       4,609
    Due from affiliates                                                    362                         588
    Prepaid expenses and other current assets                            1,522                       1,551
    Net working capital of affiliate                                       168
                                                                    ----------
         Total                                                          21,046                      22,142
                                                                      --------                    --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
    method):
       Proved mineral interests                                        649,284                     624,621
       Unproved mineral interests - domestic                             2,591                       2,315
    Furniture, fixtures and other                                        3,390                       3,513
                                                                     ---------                   ---------
         Total                                                         655,265                     630,449

    Less accumulated depreciation, depletion,
       amortization and property impairment                           (545,273)                   (536,118)
                                                                       -------                     -------
         Total                                                         109,992                      94,331
                                                                       -------                    --------

OTHER ASSETS
    Investment in common stock of HCRC                                  12,725                      15,048
    Deferred expenses and other assets                                      32                          82
                                                                   -----------                 -----------
         Total                                                          12,757                      15,130
                                                                      --------                    --------

TOTAL ASSETS                                                          $143,795                    $131,603
                                                                       =======                     =======













<FN>

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

<TABLE>
<CAPTION>

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



                                                                              June 30,               December 31,
                                                                                1998                      1997

CURRENT LIABILITIES
<S>                                                                          <C>                       <C>      
    Accounts payable and accrued liabilities                                 $  21,112                 $  19,915
    Current portion of long-term debt                                            2,388
    Net working capital deficit of affiliate                                                                 448
    Current portion of contract settlement                                                                 2,752
                                                                         -------------                 ---------
         Total                                                                  23,500                    23,115
                                                                              --------                  --------

NONCURRENT LIABILITIES
    Long-term debt                                                              35,812                    34,986
    Deferred liability                                                           1,114                     1,180
                                                                             ---------                 ---------
         Total                                                                  36,926                    36,166
                                                                              --------                  --------

           Total Liabilities                                                    60,426                    59,281
                                                                              --------                  --------

MINORITY INTEREST IN AFFILIATES                                                  2,969                     3,258
                                                                             ---------                 ---------

COMMITMENTS AND CONTINGENCIES (NOTE 8)

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                               60,984                    66,184
    Class B Subordinated Units - 143,773 Units outstanding
      in 1998 and 1997                                                           1,367                     1,411
    Class C Units - 2,464,063 and 664,063 Units outstanding
      in 1998 and 1997, respectively                                            21,385                     4,868
    General partner                                                              3,573                     3,580
    Treasury Units - 890,242 and 899,305 Units in 1998 and
      1997, respectively                                                        (6,909)                    (6,979)
                                                                              --------                  ---------
         Partners' Capital - Net                                                80,400                     69,064
                                                                              --------                   --------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                                       $143,795                   $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
                                                                                           June 30,
                                                                                1998                     1997

REVENUES:
<S>                                                                          <C>                      <C>     
    Gas revenue                                                              $  6,994                 $  4,961
    Oil revenue                                                                 2,640                    3,082
    Pipeline, facilities and other                                                976                      786
    Interest                                                                      186                      136
                                                                             --------                ---------
                                                                               10,796                    8,965
                                                                               ------                  -------

EXPENSES:
    Production operating                                                        3,093                    2,728
    General and administrative                                                  1,084                    1,030
    Depreciation, depletion and amortization                                    3,078                    2,540
    Impairment of oil and gas properties                                        2,600
    Interest                                                                      549                      748
                                                                             --------                 --------
                                                                               10,404                    7,046
                                                                               ------                  -------

OTHER INCOME (EXPENSES):
    Equity in earnings (loss) of HCRC                                          (2,229)                     266
    Minority interest in net income of affiliates                                (271)                    (332)
    Litigation settlement                                                        (600)                     273
                                                                             --------                 --------
                                                                               (3,100)                     207
                                                                              --------                --------

NET INCOME (LOSS)                                                              (2,708)                   2,126

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

NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL
    PARTNER, CLASS A AND CLASS B LIMITED
    PARTNERS                                                                 $ (3,324)                $  1,960
                                                                              =======                  =======

ALLOCATION OF NET INCOME (LOSS):

General partner                                                            $      340                $     249
                                                                            =========                 ========
Class A and Class B Limited partners                                        $  (3,664)                $  1,711
                                                                             ========                  =======
    Per Class A Unit and Class B Unit - basic                             $      (.40)              $      .18
                                                                           ==========                =========
    Per Class A Unit and Class B Unit - diluted                           $      (.40)              $      .18
                                                                           ==========                =========
    Weighted average Class A Units and Class B Units
       outstanding                                                              9,265                    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 OPERATIONS
                                   (Unaudited)
                       (In thousands except per Unit data)



                                                                                   For the Six Months Ended
                                                                                           June 30,
                                                                                1998                     1997

REVENUES:
<S>                                                                           <C>                      <C>    
    Gas revenue                                                               $13,738                  $12,434
    Oil revenue                                                                 5,730                    7,593
    Pipeline, facilities and other                                              1,676                    1,549
    Interest                                                                      326                      259
                                                                             --------                 --------
                                                                               21,470                   21,835
                                                                               ------                   ------

EXPENSES:
    Production operating                                                        6,306                    5,695
    General and administrative                                                  2,249                    2,254
    Depreciation, depletion and amortization                                    6,617                    5,492
    Impairment of oil and gas properties                                        2,600
    Interest                                                                    1,193                    1,599
                                                                              -------                  -------
                                                                               18,965                   15,040
                                                                               ------                   ------

OTHER INCOME (EXPENSES):
    Equity in earnings (loss) of HCRC                                          (2,323)                   1,246
    Minority interest in net income of affiliates                                (584)                    (892)
    Litigation settlement                                                        (555)                     273
                                                                             --------                 --------
                                                                               (3,462)                     627
                                                                              -------                 --------

NET INCOME (LOSS)                                                                (957)                   7,422

CLASS C UNIT DISTRIBUTIONS ($.50 PER UNIT)                                      1,232                      332
                                                                              -------                 --------

NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL
    PARTNER, CLASS A AND CLASS B LIMITED PARTNERS
                                                                             $ (2,189)                $  7,090
                                                                              =======                  =======

ALLOCATION OF NET INCOME (LOSS):

General partner                                                            $      650                $     876
                                                                            =========                 ========
Class A and Class B Limited partners                                         $ (2,839)                $  6,214
                                                                              =======                  =======
    Per Class A Unit and Class B Unit - basic                              $     (.31)              $      .67
                                                                            =========                =========
    Per Class A Unit and Class B Unit - diluted                            $     (.31)              $      .67
                                                                            =========                =========
    Weighted average Class A Units and Class B Units
       outstanding                                                              9,251                    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 Six Months Ended
                                                                                         June 30,
                                                                               1998                   1997

OPERATING ACTIVITIES:
<S>                                                                           <C>                  <C>       
    Net income (loss)                                                         $   (957)            $    7,422
    Adjustments to reconcile net income to net cash provided
       by operating activities:
          Depreciation, depletion and amortization                               6,617                  5,492
          Impairment of oil and gas properties                                   2,600
          Depreciation charged to affiliates                                       126                    110
          Asset disposals                                                         (188)
          Amortization of deferred loan costs and other assets                      50                     41
          Noncash interest expense                                                  15                    116
          Equity in (earnings) loss of HCRC                                      2,323                 (1,246)
          Minority interest in net income                                          584                    892
          Undistributed (earnings) loss of affiliates                              282                    (73)
          Recoupment of take-or-pay liability                                      (67)                  (296)

    Changes in  operating  assets and  liabilities  provided  (used) cash net of
       noncash activity:
          Oil and gas revenues receivable                                        2,425                  3,395
          Trade receivables                                                       (172)                 1,300
          Due from affiliates                                                     (725)
          Prepaid expenses and other current assets                                 29                   (263)
          Accounts payable and accrued liabilities                               1,197                    484
          Due to affiliates                                                                              (489)
                                                                           -----------               --------
                Net cash provided by operating activities                       14,139                 16,885
                                                                                ------                 ------

INVESTING ACTIVITIES:
    Additions to property, plant and equipment                                 (18,563)                (1,759)
    Exploration and development costs incurred                                  (6,221)                (4,920)
    Proceeds from sales of property, plant and equipment                            91                     85
    Other investing activities                                                                            (70)
                                                                           -----------             ----------
                Net cash used in investing activities                          (24,693)                (6,664)
                                                                                ------               --------

FINANCING ACTIVITIES:
    Proceeds from long-term debt                                                21,500
    Proceeds from the issuance of Class C Units net of syndication              16,517
costs
    Payments of long-term debt                                                 (18,285)                (5,285)
    Distributions paid                                                          (4,664)                (3,612)
    Payment of contract settlement                                              (2,767)
    Distribution paid by consolidated affiliates to minority interest             (873)                (1,188)
    Exercise of Unit Options                                                       199
    Capital contribution from the general partner                                  171
    Other                                                                                                (114)
                                                                           -----------             ----------
                Net cash provided by (used in) financing activities             11,798                (10,199)
                                                                                ------                 ------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                        1,244                     22

CASH AND CASH EQUIVALENTS:

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

END OF PERIOD                                                                 $  7,866               $  5,562
                                                                               =======                =======
<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,  exploration, 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 (Loss) 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. The
Unit options have been  ignored in the  computation  of diluted loss per Class A
and Class B Unit in 1998 and for the six  months  ended  June 30,  1997  because
their inclusion would be antidilutive.
<TABLE>
<CAPTION>


                                                                        Income           Units          Per Unit
                                                                           (In thousands except per Unit)

For the Three Months Ended June 30, 1998
<S>                                                                   <C>                <C>              <C>   
   Net loss per Class A Unit and Class B Unit - basic                 $(3,664)           9,265            $(.40)
                                                                       -------           -----             ====
     Net Loss per Class A Unit and Class B Unit - diluted             $(3,664)           9,265            $(.40)
                                                                       ======            =====             ====

For the Six Months Ended June 30, 1998
   Net loss per Class A Unit and Class B Unit - basic                 $(2,839)           9,251            $(.31)
                                                                       ------            -----             ====
     Net Loss per Class A Unit and Class B Unit - diluted             $(2,839)           9,251            $(.31)
                                                                       ======            =====             ====

For the Three Months Ended June 30, 1997
   Net income per Class A Unit and Class B Unit - basic                $1,711            9,222             $ .18
                                                                                                            ====
   Effect of Unit Options                                                                  113
                                                                    ---------          -------
     Net Income per Class A Unit and Class B Unit - diluted            $1,711            9,335             $ .18
                                                                        =====            =====              ====

For the Six Months Ended June 30, 1997
   Net income per Class A Unit and Class B Unit -basic                 $6,214            9,222             $ .67
                                                                        -----            -----              ====
     Net Income per Class A Unit and Class B Unit - diluted            $6,214            9,222             $ .67
                                                                        =====            =====              ====
</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 June 30, 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" ("SFAS
130"). SFAS 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 and six month periods
ended June 30, 1998 and 1997. Therefore, total comprehensive income was the same
as net income for those periods.



During June 1998, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 133 "Accounting for Derivative  Instruments
and  Hedging  Activities"  ("SFAS  133").  SFAS 133  establishes  standards  for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts  (collectively  referred  to as  derivatives)  and for  hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities  in the statement of financial  position and measure those
instruments  at fair value.  If certain  conditions are met, a derivative may be
specifically  designated  as (a) a hedge of the  exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted  transaction,  or
(c) a hedge of the foreign  currency  exposure of a net  investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated  forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation.  The Partnership is required to
adopt SFAS 133 on January 1, 2000. The Partnership has not completed the process
of evaluating the impact that will result from adopting SFAS 133.

Reclassifications

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


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 $61,000,000.  HEP had amounts
outstanding at June 30, 1998 of $38,200,000. HEP's unused borrowing base totaled
$22,800,000 at August 14, 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 7.2%
at June 30, 1998. Interest is payable monthly,  and quarterly principal payments
of $2,387,500 commence May 31, 1999.

The borrowing base for the Credit  Agreement is redetermined  semiannually.  The
Credit  Agreement  is 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 six months  ended June 30, 1998 and 1997 was
$1,129,000 and $1,443,000, respectively.




<PAGE>


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  $16,517,000.  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.


NOTE 5    -   ACQUISITION

In July 1996, HEP and its affiliate, HCRC acquired interests in 38 wells located
primarily  in  LaPlata  County,  Colorado.  An  unaffiliated  large  East  Coast
financial institution formed an entity to utilize the tax credits generated from
the wells.  The project was financed by an  affiliate  of Enron Corp.  through a
volumetric  production  payment.  During May 1998, a limited  liability  company
owned equally by HEP and HCRC purchased the volumetric  production  payment from
Enron. HEP funded its $17,257,000  share of the acquisition price from operating
cash flow and borrowings under its Credit Agreement.


NOTE 6 -      IMPAIRMENT OF OIL AND GAS PROPERTIES

During the second quarter of 1998, HEP recorded an impairment of its oil and gas
properties because capitalized costs at June 30, 1998 exceeded the present value
(discounted  at 10%) of estimated  future net  revenues  from proved oil and gas
reserves, based on prices at that date of $13.00 per barrel of oil and $1.90 per
mcf of gas.


NOTE 7 -      UNIT OPTION PLAN

During  the second  quarter  of 1998,  HEP  adopted a Class C Unit  Option  Plan
covering 120,000 Class C Units.  The options were granted  effective May 5, 1998
at an exercise  price of $10.00 per Unit.  One-half of the options vested on the
date of grant,  and the remainder  vest on the first  anniversary of the date of
grant.

On May 5, 1998,  HEP also  granted  25,500  Class A Unit  options at an exercise
price of  $6.625  per  Unit.  These  options  were  not  granted  pursuant  to a
previously  existing plan but are subject to terms and  conditions  identical to
those in HEP's 1995 Unit Option  Plan.  One-third  of the options  vested on the
date of grant,  and the remainder vest one-half on the first  anniversary of the
date of grant and one-half on the second anniversary of the date of grant.


NOTE 8 -  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.  The matter was heard by the  arbitrators
during May and July 1998. The arbitrators have not yet rendered a decision.

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.  Concise and
counsel for the plaintiffs  have reached an agreement in principle to settle the
portion of the case against Concise in  consideration  of the payment by Concise
of $600,000.  This amount has been accrued as litigation  settlement  expense in
the  accompanying  financial  statements.   Upon  execution  of  the  settlement
agreement, Concise will be dismissed with prejudice from the lawsuit.

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.


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  $14,139,000  of cash flow from  operating  activities  during the
first six months of 1998.

The other primary cash inflows were:

          o   Proceeds from long-term debt of $21,500,000;

          o   Proceeds from the issuance of Class C Units, net of syndication 
               costs, of $16,517,000;

          o   Exercise of Unit Options of $199,000; and

          o Capital contribution from the general partner of $171,000.

Cash was used primarily for:

           Payments of long-term debt of $18,285,000;

           Additions to property and development costs incurred of $24,784,000;

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

           Distributions to Unitholders of $4,664,000.

When combined with  miscellaneous  other cash  activity  during the period,  the
result was an increase of $1,244,000  in HEP's cash from  $6,622,000 at December
31, 1997 to $7,866,000 at June 30, 1998.



<PAGE>


Exploration and Development Projects and Acquisitions

Through June 30, 1998, HEP incurred  $24,784,000 in direct  property  additions,
development,  exploitation,  and exploration  costs. The costs were comprised of
$18,563,000 for property acquisitions and approximately  $6,221,000 for domestic
exploration  and  development  expenditures.  The  expenditures  resulted in the
drilling,  recompletion,  or workover of 29 development wells and 23 exploration
wells.  Twenty-six  development  wells (90%) and 14 exploration wells (61%) were
successfully  completed as producers,  for an overall success rate of 77%. HEP's
1998  capital  budget was  initially  set at  $25,000,000  but was  increased to
$37,000,000  to allow for the  purchase  of the  volumetric  production  payment
discussed  below.  The remaining  budget for 1998 includes 39 future projects in
more than 21 areas.  Significant  acquisition,  exploration,  exploitation,  and
development projects for 1998 are discussed below.

Rocky Mountain Region

HEP  expended  approximately  $19,510,000  of its  capital  budget  in the Rocky
Mountain Region located in Colorado, Montana, North Dakota, Northwest New Mexico
and Wyoming. Of this amount,  approximately  $17,257,000 was for the purchase of
the  volumetric   production   payment  discussed  below.  In  1998,  HEP  spent
approximately  $922,000  successfully  recompleting  five  operated  development
wells,  drilling one unsuccessful  operated exploration well, and drilling three
additional  operated wells which are still  underway.  A discussion of the major
projects in the Region follows.

San Juan Basin  Project - Colorado.  In July 1996,  HEP and its  affiliate  HCRC
acquired interests in 38 wells located primarily in LaPlata County, Colorado. An
unaffiliated large East Coast financial  institution formed an entity to utilize
tax credits  generated from the wells.  The project was financed by an affiliate
of Enron Corp.  through a  volumetric  production  payment.  During May 1998,  a
limited liability company,  owned equally by HEP and HCRC,  purchased from Enron
the  volumetric  production  payment.  HEP funded its  $17,257,000  share of the
acquisition  price  from  operating  cash flow and  borrowings  under its Credit
Agreement. At the time of the purchase, HEP entered into a financial contract to
hedge the volumes subject to the production payment at an average price of $2.11
per mmbtu.  Under the terms of the original  1996  transaction,  HEP was already
responsible  for all  costs  associated  with the  wells.  HPI has  managed  and
operated the wells since July 1996, and has increased the wells' production from
14 to 26 mmcf per day through successful  workover and gas gathering  facilities
improvement programs.  The acquisition has increased HEP's current average daily
production by 6.75 mmcf per day.

San Juan Basin Project - New Mexico.  Costs  associated with a gathering  system
for HEP's New Mexico coalbed methane properties totaled  approximately  $938,000
during 1998.  HEP expects the  gathering  system to  significantly  increase gas
gathering, processing and compression capacity for the associated properties.
Work should be completed in third quarter of 1998.

Colorado Western Slope Project. HEP is in the process of drilling two 5,500 foot
Dakota  Formation  wells in the Piceance Basin in Colorado and Utah.  Currently,
HEP owns an average 29% working interest in the wells.  Both wells are presently
being  completed,  and HEP  expects to begin  sales of  production  in the third
quarter of 1998.  In 1998,  HEP also  successfully  recompleted  one well in the
Basin.  Total costs for the three wells through June 30, 1998 are  approximately
$331,000.  HEP plans to drill two more wells in 1998 depending upon drilling rig
availability.  Increased natural gas prices and improved stimulation  technology
make the Basin an attractive area for HEP.

West Sioux Pass Prospect.  In the West Sioux area of Richland  County,  Montana,
HEP  drilled  one   unsuccessful   12,405  foot  operated  Red  River  Formation
exploration well for a cost of approximately $252,000. HEP continues to evaluate
the project using the additional data obtained from the exploratory well.

East Kevin  Field  Project.  Drilling is  currently  underway  for one  operated
development well in the Horizontal Nisku Formation in Toole County, Montana. HEP
has a 50% working interest in the project and has spent  approximately  $170,000
in 1998. HEP plans to drill two  additional  wells in the third quarter of 1998.
HEP will consider drilling  additional  locations after it evaluates the results
of the first three wells.


<PAGE>


Greater Permian Region

During the first six months of 1998,  HEP expended  approximately  $2,675,000 of
its capital budget in the Greater  Permian Region located in Texas and Southeast
New Mexico. HEP spent approximately  $2,010,000 for drilling,  recompletion,  or
workover of 18 development  wells,  drilling 17 exploration wells, and acquiring
undeveloped  acreage and geological and geophysical data.  Twenty-seven (77%) of
the wells drilled or recompleted were successful.  The major projects within the
Region are discussed below.

Catclaw   Draw/Carlsbad  Area  Projects.   HEP  spent   approximately   $401,000
successfully  recompleting  seven  operated wells in the  Carlsbad/Catclaw  Draw
areas in Lea, Eddy and Chaves Counties,  New Mexico.  HEP incurred an additional
$250,000 in 1998 for  drilling  costs  associated  with an  operated  8,300 foot
Delaware  development well which is currently being tested.  Several  additional
drilling locations exist in the area. HEP plans to apply for drilling permits in
1998 and to drill the wells in 1999.

Merkle Project. 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.  Target  zones in this area  include  the Canyon  Reef,  Strawn,  Flippan,
Tannehill,  and Ellenberger Formations ranging in depth from 2,500 feet to 6,000
feet. In 1998, HEP drilled 11 exploration  wells, nine of which were successful.
Costs  incurred  by HEP in 1998  for the 11  wells  drilled  were  approximately
$835,000.  HEP owns an average 28.5% working  interest in the wells.  Four wells
are currently underway,  and HEP has 33 potential locations for future drilling.
HEP  anticipates  drilling only four  additional  wells in the remainder of 1998
because of present low crude oil prices.

Griffin  Project.   In  1998,  HEP  purchased  land  for  $95,000  and  incurred
approximately $410,000 to drill three exploration wells and one development well
in Gaines County, Texas. None of the four nonoperated 7,500 foot Leonardian Sand
wells were  successful.  HEP is still  evaluating  five  prospects  within  this
project. HEP owns an average 22% working interest in the wells.

Gulf Coast Region

During the first six months of 1998,  HEP expended  approximately  $1,985,000 of
its  capital  budget in the Gulf Coast  Region in  Louisiana  and South and East
Texas. The following are major projects within the Region.

Mirasoles Project. In 1998, HEP incurred  approximately  $430,000 for land costs
related to the Mirasoles  project in Kenedy County,  Texas. In the third quarter
of 1998,  HEP  plans  to test  the Frio  Formation  by  drilling  a 17,000  foot
exploration  well.  HEP has a 17.5%  working  interest in this large  structural
prospect defined by 63 square miles of proprietary 3-D seismic data.

Bell Project.  HEP has a 30% working interest in an operated project to evaluate
the Buda, Carrizo,  Woodbine,  and Dexter sands in Houston County,  Texas. HEP's
drilling  costs in 1998 for a 9,200  foot  horizontal  well  were  approximately
$350,000. The well found the shallower reservoirs to be non-productive,  and HEP
is presently  drilling in the Buda section.  In 1998, HEP incurred an additional
$70,000 for the purchase of land.

Mercy Field Project.  HEP  participated in a successful  10,450 foot nonoperated
development well in the Wilcox formation  located in San Jacinto County,  Texas.
Costs incurred in 1998 are approximately $180,000. No additional Mercy fieldwork
is anticipated in the remainder of 1998.

Whitewater  Field.  HEP's  share of 1998  costs  associated  with  plugging  two
nonoperated near shore platform wells were approximately $600,000. This field is
now abandoned, and no additional work is anticipated.

Mid-Continent Region

HEP expended  approximately  $360,000 of its capital budget in the Mid-Continent
Region  located in Oklahoma  and Kansas.  Major  projects  within the Region are
discussed below.


<PAGE>


Stealth Project. HEP is participating in an Arkoma Basin exploration prospect in
Carter  County,  Oklahoma.  This  nonoperated  project  is a  19,000  feet  deep
multi-formation  structural test of the Hunton,  Viola,  Sycamore,  and Springer
Formations and is currently in the completion  phase. The operator was unable to
test the  targeted  Hunton  and Viola  Formation  objectives  and found that the
Sycamore  produced at  subcommercial  gas rates.  The  operator is  evaluating a
Springer  recompletion.  1998 year to date  drilling  costs  were  approximately
$165,000 for HEP's 5% working interest.

El Reno  Project.  HEP incurred  approximately  $135,000 in 1998 to complete one
successful exploration well in Canadian County, Oklahoma. The well was completed
in the Red Fork Formation, and HEP has a 35% working interest.

Kansas Area. HEP successfully  recompleted two development  wells in Kansas at a
cost of $28,000 during 1998.  Due to sustained  weak crude oil prices,  however,
eight development projects have been deferred.

Other

The  remaining   $254,000  of  HEP's  1998  capital   expenditures  was  devoted
principally  to  drilling  one  unsuccessful  exploration  well in Yolo  County,
California and to other miscellaneous projects. HEP is also participating in two
nonoperated  3-D  projects  underway  in  nearby  Solano  and  Colusa  Counties,
California.

Peru  Block Z-3  Project.  HEP's  partner  on the  Peruvian  offshore  Z-3 Block
completed 1,200 miles of seismic data acquisition to supplement existing seismic
data. Data processing is currently underway.  HEP has a 7.5% working interest in
this project,  but will not incur capital costs until actual drilling operations
begin. The production-sharing contract calls for drilling operations to begin no
later than January 2001.

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  $16,517,000.  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 August 14, 1998 to Unitholders of record on June 30, 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 $61,000,000.  HEP had amounts
outstanding at June 30, 1998 of $38,200,000. HEP's unused borrowing base totaled
$22,800,000 at August 14, 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 7.2%
at June 30, 1998. Interest is payable monthly,  and quarterly principal payments
of $2,387,500, commence May 31, 1999.


<PAGE>


The borrowing base for the Credit  Agreement is redetermined  semiannually.  The
Credit  Agreement  is 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  this  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, estimated or predicted.

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.


<PAGE>


<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>  
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
Second quarter - 1998               13.03                  13.82                   2.08                   2.06
</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:
<TABLE>
<CAPTION>

                                               Oil

                                  Percent of Production            Contract
            Period                           Hedged              Floor Price

                                                                  (per bbl)

<S>                                         <C>                     <C>   
Last six months of 1998                     23%                     $16.62
1999                                         2%                      15.38
</TABLE>

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>



<TABLE>
<CAPTION>



                                                 Gas

                                  Percent of Production            Contract
            Period                            Hedged             Floor Price

                                                                  (per mcf)

<S>                                        <C>                      <C>  
Last six months of 1998                     60%                      $2.07
1999                                        48%                       2.05
2000                                        47%                       2.10
2001                                        42%                       2.08
2002                                        35%                       2.14
</TABLE>

Between  15% 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 third quarter  through August 2, 1998 the weighted  average oil price
(for  barrels not  hedged) was  approximately  $12.50 per barrel.  The  weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $2.10 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 June 30, 1998            For the Quarter Ended June 30, 1997
                                              -----------------------------------            -----------------------------------
                                              Direct                                          Direct                    
                                              Owned         Mays          Total               Owned         Mays          Total

<S>                                           <C>            <C>          <C>              <C>            <C>          <C>  
Gas production (mcf)                             3,099          297          3,396            2,220          286          2,506
Oil production (bbl)                               178           13            191              158           16            174

Average gas price (per mcf)                   $   2.01     $   2.53       $   2.06         $   1.93     $   2.36       $   1.98
Average oil price (per bbl)                    $ 13.88      $ 13.00        $ 13.82          $ 17.52      $ 19.63        $ 17.71

Gas revenue                                    $ 6,244      $   750        $ 6,994          $ 4,285      $   676        $ 4,961
Oil revenue                                      2,471          169          2,640            2,768          314          3,082
Pipeline, facilities and other revenue             976                         976              786                         786
Interest income                                    169           17            186              113           23            136
                                               -------     --------        -------          -------     --------       --------

   Total revenue                                 9,860          936         10,796            7,952        1,013          8,965
                                                ------      -------         ------           ------       ------         ------

 Production operating expense                    2,975          118          3,093            2,602          126          2,728
 General and administrative expense                993           91          1,084              941           89          1,030
 Depreciation, depletion, and amortization       2,825          253          3,078            2,267          273          2,540
 Impairment of oil and gas properties            2,600                       2,600
 Interest expense                                  549                         549              748                         748
 Equity in (income) loss of HCRC                 2,229                       2,229             (266)                       (266)
 Minority interest                                              271            271                           332            332
 Litigation settlement                             600                         600             (243)         (30)          (273)
                                             ---------  ------------     ---------          -------       ------       --------

   Total expense                                12,771          733         13,504            6,049          790          6,839
                                                ------    ---------         ------           ------       ------         ------

     Net income (loss)                        $ (2,911)  $      203       $ (2,708)         $ 1,903      $   223        $ 2,126
                                               =======    =========        =======           ======       ======         ======
</TABLE>

<TABLE>
<CAPTION>

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


                                              For the Six Months Ended June 30, 1998          For the Six Months Ended June 30, 1997
                                              --------------------------------------          --------------------------------------
                                                Direct                                        Direct                       
                                                 Owned         Mays        Total               Owned         Mays        Total

<S>                                             <C>            <C>        <C>              <C>            <C>        <C>  
Gas production (mcf)                               6,044          617        6,661            4,829          645        5,474
Oil production (bbl)                                 365           28          393              350           38          388

Average gas price (per mcf)                     $   2.02     $   2.50     $   2.06         $   2.19     $   2.87     $   2.27
Average oil price (per bbl)                      $ 14.61      $ 14.21      $ 14.58          $ 19.37      $ 21.39      $ 19.57

Gas revenue                                      $12,196      $ 1,542      $13,738          $10,580      $ 1,854      $12,434
Oil revenue                                        5,332          398        5,730            6,780          813        7,593
Pipeline, facilities and other revenue             1,676                     1,676            1,549                     1,549
Interest income                                      291           35          326              219           40          259
                                                --------     --------     --------         --------    ---------     --------

   Total revenue                                  19,495        1,975       21,470           19,128        2,707       21,835
                                                  ------       ------       ------           ------       ------       ------

 Production operating expense                      6,067          239        6,306            5,412          283        5,695
 General and administrative expense                2,059          190        2,249            2,056          198        2,254
 Depreciation, depletion, and amortization         6,042          575        6,617            4,878          614        5,492
 Impairment of oil and gas properties              2,600                     2,600
 Interest expense                                  1,193                     1,193            1,599                     1,599
 Equity in (income) loss of HCRC                   2,323                     2,323           (1,246)                   (1,246)
 Minority interest                                                584          584                           892          892
 Litigation settlement                               555                       555             (243)         (30)        (273)
                                                 -------   ----------     --------         --------     --------     --------

   Total expense                                  20,839        1,588       22,427           12,456        1,957       14,413
                                                  ------       ------       ------           ------       ------       ------

     Net income (loss)                          $ (1,344)    $    387     $   (957)        $  6,672     $    750     $  7,422
                                                 =======      =======      =======          =======      =======      =======
</TABLE>



<PAGE>


Second Quarter of 1998 Compared to Second Quarter of 1997

Gas Revenue

Gas revenue  increased  $2,033,000 during the second quarter of 1998 as compared
with the second  quarter of 1997.  The  increase is the result of an increase in
the average gas price from $1.98 per mcf in 1997 to $2.06 per mcf in 1998 and an
increase in production  from 2,506,000 mcf in 1997 to 3,396,000 mcf in 1998. The
increase in production  is primarily  due to the temporary  shut-in of two wells
during the second quarter of 1997 while workover procedures were performed.

The effect of HEP's  hedging  transactions  as described  under  "Inflation  and
Changing  Prices,"  during the second  quarter of 1998,  was to  decrease  HEP's
average  gas price from $2.08 per mcf to $2.06 per mcf,  representing  a $68,000
reduction in revenue from hedging transactions.

Oil Revenue

Oil revenue  decreased  $442,000  during the second  quarter of 1998 as compared
with the second quarter of 1997. The decrease is the result of a decrease in the
average  oil price from  $17.71 per barrel in 1997 to $13.82 in 1998,  partially
offset by an  increase in  production  from  174,000  barrels in 1997 to 191,000
barrels  in  1998.  The  increase  in oil  production  is  primarily  due to the
temporary  shut-in of two wells during the second quarter of 1997 while workover
procedures were performed.

The effect of HEP's hedging  transactions during the second quarter of 1998, was
to increase HEP's average oil price from $13.03 per barrel to $13.82 per barrel,
resulting in a $151,000 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 increased $190,000
during the second  quarter of 1998 as compared  with the second  quarter of 1997
primarily due to an increase in saltwater  disposal  income  resulting  from the
increased production discussed above.

Interest Income

Interest income increased  $50,000 during the second quarter of 1998 as compared
with the second  quarter of 1997 due to a higher  average  cash  balance  during
1998.

Production Operating Expense

Production  operating  expense  increased  $365,000 during the second quarter of
1998 as compared  with the second  quarter of 1997,  primarily  due to increased
maintenance  activity and increased production taxes resulting from the increase
in gas production discussed above.

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 increased $54,000 during the second quarter of 1998 primarily due
to  a  net  increase  in  numerous   miscellaneous  items,  none  of  which  are
individually significant.




                                     - 20 -


<PAGE>


Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense increased $538,000 during the
second quarter of 1998 as compared with the second quarter of 1997. The increase
is primarily the result of a higher  depletion  rate in 1998 due to the increase
in production previously discussed.

Impairment of Oil and Gas Properties

Impairment  of oil  and  gas  properties  during  the  second  quarter  of  1998
represents the impairment  recorded because  capitalized  costs at June 30, 1998
exceeded the present value  (discounted at 10%) of estimated future net revenues
from proved oil and gas reserves, based on prices at that date of $13.00 per bbl
of oil and $2.00 per mcf of gas.

Interest Expense

Interest  expense  decreased  $199,000  during  the  second  quarter  of 1998 as
compared  with the  second  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 $2,495,000 during the second quarter
of 1998 as compared with the second  quarter of 1997.  The decrease is primarily
due to a property impairment recorded by HCRC during the second quarter of 1998.

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 $61,000 is
due to a decrease in the net income of the May Partnerships  resulting primarily
from lower oil prices received on their properties.

Litigation Settlement

Litigation  settlement  expense during the second quarter of 1998 represents the
amount accrued for the settlement of the Ellender lawsuit described in Note 8 of
the accompanying  financial statements.  Litigation settlement income during the
second  quarter of 1997  represents  the  settlement of a  take-or-pay  contract
claim.

First Six Months of 1998 Compared to the First Six Months of 1997

The  comparisons  for the first six  months of 1998 and the first six  months of
1997 are consistent  with those discussed in the second quarter of 1998 compared
to the second quarter 1997 except for the following:

Gas Revenue

Gas revenue increased $1,304,000 during the first six months of 1998 as compared
with the first six months of 1997.  The increase is the result of an increase in
production from 5,474,000 mcf in 1997 to 6,661,000 mcf in 1998 partially  offset
by a decrease in price from $2.27 per mcf in 1997 to $2.06 per mcf in 1998.  The
increase in production  is due to the temporary  shut-in of two wells during the
second quarter of 1997 while workover procedures were performed.

The effect of HEP's hedging transactions during the first six months of 1998 was
to  decrease  HEP's  average  gas  price  from  $2.10  per mcf to $2.06  per mcf
representing a $266,000 reduction in revenue from hedging transactions.



<PAGE>


Oil Revenue

Oil revenue decreased $1,863,000 during the first six months of 1998 as compared
with the first six months of 1997.  The  decrease is the result of a decrease in
the  average  oil price  from  $19.57 per barrel in 1997 to $14.58 per barrel in
1998 partially  offset by an increase in production from 388,000 barrels in 1997
to  393,000  barrels  in 1998.  The  increase  in oil  production  is due to the
temporary  shut-in of two wells during the second quarter of 1997 while workover
procedures were performed.

The effect of HEP's hedging transactions during the first six months of 1998 was
to increase HEP's average oil price from $13.94 per barrel to $14.58 per barrel,
representing an in increase in revenue from hedging transactions of $252,000.


<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 8 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

              a)    Exhibit

                    10.17 1998 Class C Unit  Option  Plan dated May 5, 1998
                    10.18 1998 Class C UnitOption Loan Program dated May 5, 1998
                    10.19 Class A Unit Option letter to Thomas Jung dated
                           May 5, 1998
                    10.20 Extension of Management  Agreement between Hallwood
                           Petroleum, Inc. and HEP dated May 5, 1998
                    27    Financial Data Schedule

              b)    Reports on Form 8-K

                     None.



<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:   August 14, 1998                       By:  /s/Thomas J. Jung
                                                  Thomas J. Jung, Vice President
                                                  (Chief Financial Officer)